-----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, FUmZzMN0FE3uYU85n9h9nEoWvc2wUFoDghHpngeNRsKCaJWyD2YytjR+zF8rlkoI FWPs6zH0NuQP4kK2GOiMLQ== 0000950123-97-008287.txt : 19971006 0000950123-97-008287.hdr.sgml : 19971006 ACCESSION NUMBER: 0000950123-97-008287 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19971003 SROS: NONE 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: 10KSB/A SEC ACT: SEC FILE NUMBER: 000-20190 FILM NUMBER: 97690302 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 10KSB/A 1 AMENDMENT #1 TO FORM 10KSB 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-KSB/A AMENDMENT NO. 1 (Mark One) / X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended June 30, 1997 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission File No. 0-20190 BITWISE DESIGNS, INC. (Name of Small Business Issuer in its charter) Delaware 14-1673067 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Building 50, Rotterdam Industrial Park Schenectady, N.Y. 12306 (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code (518) 356-9741 Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange on Title of Each Class Which Registered ------------------- ------------------------ Common Stock, $.001 par value Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Exchange Act: NONE (Title of class) - -------------------------------------------------------------------------------- (Title of class) [Cover Page 1 of 2 Pages] 2 Check whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The Issuer's revenues for its most recent fiscal ended June 30, 1997 were $53,109,469. On September 22, 1997, the aggregate market value of the voting stock of Bitwise Designs, Inc. (consisting of Common Stock, $.001 par value) held by non-affiliates of the Registrant (approximately 6,610,009 shares) was approximately $24,374,408 based on the closing price for such Common Stock ($3.6875) on said date as reported by the Nasdaq SmallCap Market. APPLICABLE ONLY TO CORPORATE REGISTRANTS On September 22, 1997, there were 7,367,720 shares of Common Stock, $.001 par value, issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE None -------------------------- [Cover Page 2 of 2 Pages] 3 ITEM 7. FINANCIAL STATEMENTS See attached Financial Statements and Notes annexed hereto. ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statement Schedules None (b) Reports on Form 8-K During the quarter ended June 30, 1997 the Company filed the following reports: Form 8K/A dated June 27, 1997, relating to the termination of KPMG Peat Marwick, LLP as its independent auditor. (c) Exhibits The following exhibits, designated by an asterisk (*), have been previously filed with the Commission and, pursuant to 17 C.F.R. Section 230.411, are incorporated by reference to the document referenced in brackets following the descriptions of such exhibits. Those exhibits designated by a double asterisk (**) were filed with the original Form 10KSB filing filed on September 29, 1997. Exhibit No. Description 2.1* Agreement and Plan of Merger between Bitwise Designs, Inc. and Electrograph Systems, Inc. dated February 7, 1994 2.2* Agreement and Plan of Merger between Bitwise Designs, Inc. and Systems Solutions, Inc. dated April 29, 1994 3.1* Certificate of Incorporation of Bitwise Designs, Inc.- Delaware (Exhibit 3.3.1 to Registration Statement on Form S-18, File No. 33-46246-NY) 3.1.1* Certificate of Designation of Series B Preferred Stock 3.2* By-Laws (Exhibit 3.2 to Registration Statement on Form S-18, File No. 33-46246-NY) 4.1* Form of Common Stock Certificate (Exhibit 4.1 to Registration Statement on Form S-18, File No. 33-46246-NY) 3 4 4.2* Form of Series A Preferred Stock Certificate (Exhibit 4.2 to Registration Statement on Form S-18, File No. 33-46246-NY) 4.3* Form of Warrant issued to Berkeley Securities Corp. (Exhibit 4.3 to Registration Statement on Form S-18, File No. 33-46246-NY) 4.4* Form of Warrant issued to certain individuals in April, 1992 (Exhibit 4.4 to Registration Statement on Form S-18, File No. 33-46246-NY) 4.5* Form of Series B Preferred Stock Certificates (Exhibit 4.5 to the Registration Statement on form SB-2, File No. 33-76494) 4.6* Form of Warrant to be issued to Berkeley Securities Corp.(Exhibit 4.6 to the Registration Statement on form SB-2, File No. 33-76494) 4.7** Form of Note and Warrant Purchase, Paying and Conversion/Exercise agency agreement dated as of August 8, 1997 between the Company and Banca del Gottardo. 4.8** Terms of 8% Convertible Notes due August 11, 2002. 4.9** Terms of Warrants and Global Warrant expiring August 11, 2002. 10.1* Lease agreement with Rotterdam Industrial Park, dated August 7, 1991 (Exhibit 10.1 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.1.1* Lease warrant waiver agreement (Exhibit 10.1.1 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.2* Lease with Siemens Credit Corporation for telephone system dated November 25, 1991 (Exhibit 10.2 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.3* Lease agreement with Apple Commercial Credit for laser printer, dated June 23, 1987 (Exhibit 10.3 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.4* Leases with Adirondack Leasing Associates, Ltd. (Exhibit 10.4 to Registration Statement on Form S-18, File No. 33-46246-NY) 4 5 10.5* Loan agreement with U.S. Small Business Administration and Norstar Bank, dated April 4, 1991 (Exhibit 10.5 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.6* Loan agreement with Schenectady Economic Development Corporation, dated August 7, 1991 (Exhibit 10.6 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.8* Employment agreement with John T. Botti, dated April, 1992 (Exhibit 10.8 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.9* Employment agreement with Ira C. Whitman, dated April, 1992 (Exhibit 10.9 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.10* 1992 Employee stock option plan (Exhibit 10.10 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.11* 1992 Nonexecutive Directors stock option plan (Exhibit 10.11 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.13* Loan agreement with Norstar Bank dated February 6, 1992 (Exhibit 10.13 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.13.1* Norstar Bank waiver agreement (Exhibit 10.13.1 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.14* Agreement with Prime Computer, Inc. (Exhibit 10.14 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.15* Agreement with Mentor Computer Graphics Ltd. (Exhibit 10.15 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.16* Agreement with Robert W. Schwartz, Inc. dated February 10, 1992 (Exhibit 10.16 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.17* Form of Financial Consulting Agreement with the Underwriter (Exhibit 10.17 to the Registration Statement on form SB-2, File No. 33-76494) 10.18* Financing Agreement by and among Maryland Industrial Development Financing Authority, JED Associates, State 5 6 National Bank of Maryland, Electronic Marketing Associates, Inc. (name was changed to System Solutions Technology, Inc.), Trimarc Systems Incorporated and Intermec Mid-Atlantic Corporation dated December 11, 1985 (Exhibit 10.18 to the Registration Statement on form SB-2, File No. 33-76494) 10.19* Maryland Industrial Development Financing Authority Limited Obligation Economic Development Revenue Bond (Exhibit 10.19 to the Registration Statement on form SB-2, File No. 33-76494) 10.20* Cross-Collateral Security Agreement between NationsCredit Corporation, Bitwise Designs, Electrograph Systems, Inc. and System Solutions Technology, Inc. dated July 18, 1995. 10.21* Subcontract dated September 28, 1995 between PRC, Inc. and System Solutions Technology, Inc. 10.22* Financial Consulting Agreement dated July 17, 1995 between the Company and Whale Securities, Co. 10.23* Agreement and Plan of Merger by and among Bitwise Designs, Inc., Bitwise DJS, Inc., certain individuals and DJS Marketing Group, Inc. dated March 6, 1996 (Exhibit 2 to Form 8-K dated March 22, 1996) 10.24** Form of Conversion Agency Agreement between the Company and Banca del Gottardo dated as of August 8, 1997. 10.25** Form of Warrant Agency Agreement between the Company and Banca del Gottardo dated as of August 8, 1997. 11** Statement re: Computation of Per Share Earnings 21** Subsidiaries of Registrant 23 Consent of KPMG PEAT MARWICK LLP 23.1** Consent of Coopers & Lybrand LLP 27** Financial Data Schedule 6 7 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, as amended, the Registrant has duly caused this Report on Form 10KSB Amendment No. 1 to be signed on its behalf by the undersigned, thereunto duly authorized. BITWISE DESIGNS, INC. By: /s/John T. Botti ------------------------------------- John T. Botti President, Chairman of the Board and Chief Executive Officer Dated: October 3, 1997 Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended this Report on Form 10KSB Amendment No. 1 has been signed below by the following persons in the capacities and on the dates indicated:
Signature Capacity Date --------- -------- ---- /s/John T. Botti President, October 3, 1997 - ------------------------ Chairman of the John T. Botti Board and Chief Executive Officer /s/Dennis H. Bunt Chief Financial October 3, 1997 - ------------------------ Officer and Principal Dennis H. Bunt Accounting Officer
7 8 BITWISE DESIGNS, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS (AND REPORTS OF INDEPENDENT ACCOUNTANTS) FOR THE YEARS ENDED JUNE 30, 1997 AND 1996 9 TABLE OF CONTENTS Page ---- REPORTS OF INDEPENDENT ACCOUNTANTS 1-2 CONSOLIDATED FINANCIAL STATEMENTS Balance sheets 3 Statements of operations 4 Statements of shareholders' equity 5 Statements of cash flows 6 Notes to consolidated financial statements 7-21 10 REPORT OF INDEPENDENT ACCOUNTANTS The Shareholders and Board of Directors Bitwise Designs, Inc. We have audited the accompanying consolidated balance sheet of Bitwise Designs, Inc. and Subsidiaries as of June 30, 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bitwise Designs, Inc. and Subsidiaries as of June 30, 1997, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Albany, New York September 4, 1997 1 11 [KPMG PEAT MARWICK LLP LETTERHEAD] INDEPENDENT AUDITORS' REPORT To Shareholders and Board of Directors Bitwise Designs, Inc.: We have audited the accompanying consolidated balance sheet of Bitwise, Inc. and subsidiaries as of June 30, 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bitwise Designs, Inc. and subsidiaries as of June 30, 1996, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP Albany, New York September 6, 1996 2 12 BITWISE DESIGNS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 1997 and 1996
1997 1996 ASSETS Current assets: Cash and cash equivalents $ 2,863,847 $ 3,377,305 Accounts receivable, net of allowance for doubtful accounts of $189,126 in 1997 and $215,000 in 1996 7,219,539 5,271,933 Due from related parties (Note 12) 216,465 124,136 Inventories (Note 2) 3,137,332 4,061,645 Income taxes receivable 8,650 16,810 Prepaid expenses and other current assets 176,338 249,893 ------------ ------------ Total current assets 13,622,171 13,101,722 Property and equipment, net (Notes 3 and 4) 998,781 946,931 Other assets: Due from related parties (Note 12) 128,123 Software development costs, net of accumulated amortization of $115,758 in 1997 and $50,153 in 1996 81,059 36,275 Excess of cost over net assets of companies acquired, net 4,182,932 5,609,055 Other assets 39,822 57,931 ------------ ------------ Total assets (Notes 4 and 5) $ 18,924,765 $ 19,880,037 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Borrowings under lines of credit (Note 4) $ 4,219,877 $ 2,815,942 Accounts payable 2,956,270 3,968,248 Current portion of long-term debt (Note 5) 1,601 20,205 Current portion of obligations under capital leases (Note 7) 10,200 26,885 Accrued expenses and other current liabilities 542,550 403,569 ------------ ------------ Total current liabilities 7,730,498 7,234,849 Long-term debt, net of current portion (Note 5) 1,905 Obligations under capital leases, net of current portion (Note 7) 1,297 9,268 Other liabilities 6,776 ------------ ------------ Total liabilities 7,731,795 7,252,798 ------------ ------------ Commitments (Notes 7 and 10) Shareholders' equity (Notes 8 and 9): Preferred stock - $.10 par value, 5,000,000 shares authorized: Series A - 200 shares issued and outstanding ($1.00 liquidation value) 20 20 Series B convertible preferred - 0 and 112,003 shares issued and outstanding in 1997 and 1996, respectively 11,200 Common stock, $.001 par value; authorized 20,000,000 shares; issued 7,367,720 and 6,754,606 shares in 1997 and 1996, respectively 7,368 6,755 Additional paid-in capital 18,996,591 18,277,114 Accumulated deficit (7,810,586) (5,667,427) ------------ ------------ 11,193,393 12,627,662 Less cost of common shares in treasury (338 shares) (423) (423) ------------ ------------ Total shareholders' equity 11,192,970 12,627,239 ------------ ------------ Total liabilities and shareholders' equity $ 18,924,765 $ 19,880,037 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 3 13 BITWISE DESIGNS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended June 30, 1997 and 1996
1997 1996 Net sales $ 53,109,469 $ 30,611,258 Cost of goods sold 43,102,733 25,784,565 ------------ ------------ Gross profit 10,006,736 4,826,693 ------------ ------------ Selling, general and administrative expenses 11,834,173 7,564,946 Product development expenses 176,539 129,075 ------------ ------------ Total operating expenses 12,010,712 7,694,021 ------------ ------------ Loss from operations (2,003,976) (2,867,328) ------------ ------------ Other income (expense): Interest and other income 116,565 157,218 Gain on sale of subsidiary 214,989 Interest expense (444,918) (232,678) ------------ ------------ (113,364) (75,460) ------------ ------------ Loss before income taxes (2,117,340) (2,942,788) Income tax expense (Note 6) 25,819 18,251 ------------ ------------ Net loss $ (2,143,159) $ (2,961,039) ============ ============ Per share amounts: Net loss per common share $ (.30) $ (.55) ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 4 14 BITWISE DESIGNS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years Ended June 30, 1997 and 1996
PREFERRED STOCK COMMON STOCK ------------------------ ------------------------- NUMBER OF $.10 PAR NUMBER OF $.001 PAR PAID-IN SHARES VALUE SHARES VALUE CAPITAL ----------- ----------- ------------ ----------- ------------- Balances at June 30, 1995 112,203 $ 11,220 4,473,661 $ 4,473 $ 11,537,690 Issuance of common stock pursuant to private placement under Regulation D, net (Note 9) 1,428,565 1,429 4,242,218 Issuance of stock pursuant to acquisition, net 200,000 200 1,049,800 (Note 14) Compensation expense 25,000 Stock warrants exercised (Note 9) 652,380 653 1,452,847 Preferred stock dividends 7% Class B shares ($.25 per share) (20,441) 10% Class B shares ($.35 per share) (10,000) Net loss - 1996 ----------- ----------- ------------ ----------- ------------- Balances at June 30, 1996 112,203 11,220 6,754,606 6,755 18,277,114 Stock options exercised (Note 9) 30,527 30 26,532 Stock warrants exercised (Note 9) 358,142 358 724,969 Conversion of preferred shares to common (Note 8) (112,003) (11,200) 112,003 112 11,088 Issuance of shares pursuant to dissolution of subsidiary Employee Stock Ownership Plan (Note 112,442 113 (113) 12) Cost of filing stock registration statement (35,389) Preferred stock dividends 7% Class B shares ($.25 per share) (5,110) 10% Class B shares ($.35 per share) (2,500) Net loss - 1997 ----------- ----------- ------------ ----------- ------------- Balances at June 30, 1997 200 $ 20 7,367,720 $ 7,368 $ 18,996,591 =========== =========== ============ =========== =============
TOTAL ACCUMULATED TREASURY SHAREHOLDERS' DEFICIT STOCK EQUITY ------------- ----------- ------------- Balances at June 30, 1995 $ (2,706,388) $ (423) $ 8,846,572 Issuance of common stock pursuant to private placement under Regulation D, net (Note 9) 4,243,647 Issuance of stock pursuant to acquisition, net 1,050,000 (Note 14) Compensation expense 25,000 Stock warrants exercised (Note 9) 1,453,500 Preferred stock dividends 7% Class B shares ($.25 per share) (20,441) 10% Class B shares ($.35 per share) (10,000) Net loss - 1996 (2,961,039) (2,961,039) ------------- ----------- ------------- Balances at June 30, 1996 (5,667,427) (423) 12,627,239 Stock options exercised (Note 9) 26,562 Stock warrants exercised (Note 9) 725,327 Conversion of preferred shares to common (Note 8) Issuance of shares pursuant to dissolution of subsidiary Employee Stock Ownership Plan (Note 12) Cost of filing stock registration statement (35,389) Preferred stock dividends 7% Class B shares ($.25 per share) (5,110) 10% Class B shares ($.35 per share) (2,500) Net loss - 1997 (2,143,159) (2,143,159) ------------- ----------- ------------- Balances at June 30, 1997 $ (7,810,586) $ (423) $ 11,192,970 ============= =========== =============
The accompanying notes are an integral part of the consolidated financial statements. 5 15 BITWISE DESIGNS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended June 30, 1997 and 1996
1997 1996 Cash flows from operating activities: Net income (loss) $ (2,143,159) $ (2,961,039) Adjustments to reconcile net (loss) to net cash used in operating activities: Depreciation and amortization 671,440 549,547 Provision for doubtful accounts receivable 118,710 93,721 Gain on sale of subsidiary (214,989) Non-cash compensation expense 25,000 Loss on disposals of equipment 87,235 Changes in operating assets and liabilities: Accounts receivable and due from related parties (3,801,719) (1,817,346) Inventories (785,305) (1,137,804) Prepaid expenses and other current assets 69,234 31,694 Accounts payable and accrued expenses 956,948 103,110 Other (11,476) Income taxes receivable 8,160 (760) --------------- ---------------- Net cash used in operating activities (5,132,156) (5,026,642) --------------- ---------------- Cash flows from investing activities: Purchases of property and equipment (425,739) (565,753) Trademarks acquired (25,000) Proceeds from sale of equipment 6,000 Deferred licensing costs (6,190) Software development costs (110,390) (29,957) Increase in notes receivable (175,000) Proceeds from sale of business (Note 14) 1,855,636 Acquisition of business, net of cash acquired (Note 14) (34,179) Other (7,187) --------------- ---------------- Net cash provided by (used in) investing activities 1,287,320 (805,079) --------------- ---------------- Cash flows from financing activities: Increase in borrowings under line of credit, net (Note 4) 2,667,653 1,650,267 Principal payments on long-term debt (Note 5) (20,509) (134,664) Principal payments on capital lease obligations (Note 7) (24,656) (31,781) Dividends paid (7,610) (30,441) Stock options exercised 26,562 Stock warrants exercised 725,327 1,453,500 Proceeds from issuance of common stock, net 4,243,647 Payment of deferred offering costs (35,389) --------------- ---------------- Net cash provided by financing activities 3,331,378 7,150,528 --------------- ---------------- Net (decrease) increase in cash and cash equivalents (513,458) 1,318,807 Cash and cash equivalents, beginning of year 3,377,305 2,058,498 --------------- ---------------- Cash and cash equivalents, end of year $ 2,863,847 $ 3,377,305 =============== ================
The accompanying notes are an integral part of the consolidated financial statements. 6 16 BITWISE DESIGNS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of business: Bitwise Designs, Inc. (Bitwise) and its subsidiaries, System Solutions Technology, Inc. (SST) and DJS Marketing Group, Inc. (DJS), collectively referred to as the "Company", are engaged in the manufacture and distribution of document imaging systems, personal computers and related peripheral equipment, components and accessories as well as network and Internet services. Bitwise has introduced a line of document imaging systems which it markets under the tradename "DocStar" on a national level. In August 1994, Bitwise acquired Electrograph, a value-added distributor of microcomputer peripherals, components and accessories throughout the East Coast of the United States. In April 1997, Bitwise sold Electrograph, which was structured as an asset sale with all liabilities assumed by the purchaser. Simultaneously with its acquisition of Electrograph in 1994, Bitwise acquired SST, a value-added distributor of advanced technology industrial computers and computer peripherals (see also Note 14). In March 1996, Bitwise acquired DJS Marketing Group, Inc. DJS distributes personal computer systems, workstations and peripheral equipment. In addition, DJS offers training programs for the use of computer software, as well as systems integration, network, Internet and hardware repair services. Subsequent to the acquisition of DJS, Bitwise transferred its personal computer division to DJS. During the fiscal year ended June 30, 1997 the Company incurred a net loss of $2,143,159, and cash used by operating activities totaled $5,132,156. The Company's available cash balance at June 30, 1997 totaled approximately $3 million, and it has available approximately $1 million under existing lines of credit. To date, the Company has been largely dependent on its ability to sell additional shares of its common stock to fund its operating deficits. Under its current operating plan to obtain a national acceptance of the DocStar product line, the Company's ability to improve operating cash flow is highly dependent on the market acceptance of its DocStar document imaging system. If the Company is unable to attain projected sales levels for its DocStar systems, it may be necessary to raise additional capital to fund operations and meet its obligations. There is no assurance that such funding will be available, if needed. Principles of consolidation: The consolidated financial statements include the accounts of Bitwise Designs, Inc. and its subsidiaries, all of which are wholly-owned. The accounts of the subsidiaries have been consolidated since their respective acquisition dates. All intercompany balances and transactions have been eliminated in consolidation. Cash equivalents: The Company considers all highly liquid debt instruments with original maturities not exceeding three months to be cash equivalents. At June 30, 1997 and 1996, cash equivalents were composed primarily of investments in commercial paper and overnight deposits (see also Note 16). Inventories: Inventories are stated at the lower of average cost or market. 7 17 BITWISE DESIGNS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED Property and equipment: Property and equipment are stated at cost. Depreciation and amortization are determined using the straight-line method. Estimated useful lives of the assets range from three to seven years. Repairs and maintenance are charged to expense as incurred. Renewals and betterments are capitalized. When assets are sold, retired or otherwise disposed of, the applicable costs and accumulated depreciation or amortization are removed from the accounts and the resulting gain or loss, if any, is recognized. Deferred licensing costs: Costs incurred in connection with the licensing of the Company's products by the Federal Communications Commission are reported net of accumulated amortization and are amortized using the straight-line method over the products' estimated life of three years. Software development costs: Software development and modification costs incurred subsequent to establishing technological feasibility are capitalized and amortized based on anticipated revenue for the related product with an annual minimum equal to the straight-line amortization over the remaining economic life of the related products (generally three years). Software development costs capitalized during 1997 and 1996 amounted to $110,390 and $29,957, respectively. Amortization expense related to software development costs for the years ended June 30, 1997 and 1996 was $65,606 and $28,810, respectively. Excess of cost over net assets of companies acquired: Excess of cost over net assets of companies acquired (goodwill) is being amortized on a straight-line basis over 20 years. The Company periodically reviews goodwill to assess recoverability, and impairments would be recognized in operating results if a permanent diminution in value were to occur. The amortization charged against earnings in 1997 and 1996 was $282,520 and $256,551, respectively. Accumulated amortization at June 30, 1997 and 1996 was $502,159 and $365,514, respectively. Income taxes: Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Revenue recognition and warranty provisions: Revenue from the sale of products is recognized when the products are shipped to customers. The Company provides a one year warranty on products it manufactures. On products distributed for other manufacturers, the original manufacturer warranties the product. Warranty expense was not significant to any of the years presented. 8 18 BITWISE DESIGNS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED Advertising expenses: The Company recognizes advertising expenses as incurred. Advertising and promotion expense for 1997 and 1996 was approximately $1,361,000 and $968,000, respectively. Earnings per common share: Earnings per share of common stock are based on the weighted average number of common shares outstanding during each year. There were no dilutive common equivalent shares for the years ended June 30, 1997 and 1996. The weighted average number of common shares outstanding was 7,194,096 and 5,479,237 for the years ended June 30, 1997 and 1996, respectively. Use of estimates: Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. New Accounting Pronouncements: In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share." SFAS No. 128 amends the requirements of APB Opinion No. 15, "Earnings per Share" by replacing the presentation of primary earnings per share with basic earnings per share. It also requires dual presentation of basic and diluted earnings per share on the face of the income statement and requires a reconciliation of the numerator and the denominator of the diluted earnings per share computation. This statement will be effective for the interim periods of and the fiscal year ended June 30, 1998, and will require restatement of previously issued per share data. The adoption of this standard is not expected to have a significant impact on the Company's consolidated financial statements. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general purpose financial statements. This statement will be effective for annual and interim financial statements beginning the fiscal year ending 1999, and will require reclassifications of prior periods. The adoption of this standard is not expected to have a significant impact on the Company's consolidated financial statements. In June 1997, the Financial Accounting Standards Board also issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 requires expanded reporting of information about operating segments in interim and annual financial statements, including certain descriptive information about products and services, geographic areas, and major customers. This statement will be effective for annual financial statements beginning the fiscal year ending 1999, and for interim periods beginning the fiscal year ending 1999. The adoption of this standard is not expected to have a significant impact on the Company's consolidated financial statements. Reclassifications: It is the Company's policy to reclassify, where appropriate, prior year financial statements to conform to the current year presentation. 9 19 BITWISE DESIGNS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 2. INVENTORIES Inventories at June 30, 1997 and 1996 consist of:
1997 1996 ---------- ---------- Purchased components and raw materials $1,301,871 $1,175,088 Finished goods 1,835,461 2,886,557 ---------- ---------- $3,137,332 $4,061,645 ========== ==========
Inventories are pledged as collateral for borrowings under the lines of credit, long-term debt and to certain suppliers as described in Notes 4 and 5. 3. PROPERTY AND EQUIPMENT Property and equipment at June 30, 1997 and 1996 consists of the following:
ESTIMATED USEFUL LIFE 1997 1996 IN YEARS ---- ---- ----------- Machinery and equipment $ 1,245,668 $ 965,535 3-6 Demonstration and rental computers 293,336 183,123 5-6 Furniture and fixtures 241,907 242,513 5-7 Leasehold improvements 80,699 76,182 6 Vehicles 7,804 28,162 5 -------------- -------------- 1,869,414 1,495,515 Less accumulated depreciation and amortization (870,633) (548,584) -------------- -------------- $ 998,781 $ 946,931 ============== ==============
Depreciation and amortization expense on property and equipment for the years ended June 30, 1997 and 1996 was $319,543 and $258,043, respectively. Assets under capital lease arrangements included in the above amounts are $28,938 and $123,550 of machinery and equipment, and $7,172 and $76,638 of furniture and fixtures, before related accumulated amortization totaling $18,053 and $103,627, at June 30, 1997 and 1996, respectively. Property and equipment are pledged as collateral for borrowings under the lines of credit and long-term debt as described in Notes 4 and 5. 4. CREDIT FACILITIES Lines of credit: The Company has two lines of credit totaling $5,300,000, as described further below, of which $1,080,123 was available at June 30, 1997. One line of credit may be utilized by SST and Bitwise for $3 million ($2.7 and $1.6 million outstanding in 1997 and 1996) and is collateralized by acounts receivable, inventory and all other assets. The interest rate on this line of credit is based on the prime rate plus 2% per annum (10.25% at June 30, 1997). The line of credit agreement includes covenants which require the Company to maintain a minimum tangible net worth, a maximum debt-to-tangible net worth and a certain profitability level on a consolidated basis, as well as requiring delivery of periodic financial information and quarterly audits conducted by the lender. Bitwise was not in compliance with the minimum profitability level for the fiscal year ended June 30, 1997 and subsequent to June 30, 1997, the Company received a waiver of the covenant violation. 10 20 BITWISE DESIGNS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 4. CREDIT FACILITIES, CONTINUED Lines of credit, continued: DJS has a $2.3 million credit facility ($1.5 and $1.2 million outstanding in 1997 and 1996) from a financial institution. Under the revolving accounts receivable credit line portion of this agreement, DJS may receive advances of up to $1.0 million based on 85% of eligible accounts receivable. In addition, DJS may receive up to $1.3 million for vendor-subsidized inventory purchases. The revolving accounts receivable credit line bears interest at prime plus 1.75% (10% at June 30, 1997), subject to a minimum prime rate of 6%, and transaction fees of .10% on each advance. No finance charges are assessed on borrowings for vendor-subsidized inventory purchases if repayment complies with vendor specified criteria. The $2.3 million credit facility is collateralized by a first priority lien on accounts receivable, inventory, fixed assets, other assets and general intangibles of DJS. The $2.3 million credit facility includes covenants which require DJS to maintain a minimum tangible net worth, maximum debt-to-tangible net worth and a minimum tangible current ratio. Subsequent to June 30, 1997, the total credit facility for DJS was increased to $3.5 million. 5. LONG-TERM DEBT Long-term debt at June 30, 1997 and 1996 consists of the following:
1997 1996 Notes payable, Schenectady Economic Development Corporation and Schenectady Employment Training Development Corporation, interest accrues at 9% per annum. Monthly payments of interest and principal of $2,716 are due through January 1997. Collateralized by all assets of the Company subject to the rights of the holders of the line of credit as described in Note 4. $ $ 18,474 Other 1,601 3,636 ---------------- ---------------- 1,601 22,110 Less current portion 1,601 20,205 ---------------- ---------------- Long-term debt, net of current portion $ -0- $ 1,905 ================ ================
Subsequent to year end in August 1997 the Company completed a financing with an offshore bank with gross proceeds of $4,000,000 (net proceeds of about $3,600,000 after expenses) in the form of unsecured, convertible, bearer notes with 400,000 detachable Common Stock purchase warrants. The notes accrue interest at 8%, payable semiannually in arrears. Each note is in the denomination of $5,000. The holder of 10 or more notes may convert the notes into common stock commencing November 1, 1997 until August 11, 2002 at the rate of $3.25 per share. The warrants may be exercised at $3.25 per share of common stock from November 1, 1997 until August 11, 2002. 11 21 BITWISE DESIGNS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 6. INCOME TAXES Income tax expense (benefit) for the years ended June 30, 1997 and 1996 consists of:
CURRENT DEFERRED TOTAL -------------- --------------- --------------- Year ended June 30, 1997 Federal $ $ $ State and local 25,819 25,819 -------------- --------------- --------------- $ 25,819 $ $ 25,819 ============== =============== =============== Year ended June 30, 1996 Federal $ $ $ State and local 18,251 18,251 -------------- --------------- --------------- $ 18,251 $ $ 18,251 ============== =============== ===============
At June 30, 1997, the Company has federal net operating loss carryforwards for tax purposes approximating $7,997,000. The years in which the net operating loss carryforwards expire are as follows: 2000-$224,000; 2001-$684,000; 2002-$48,000; 2003-$3,000; 2004-$6,000; 2005-$48,000; 2006-$32,000; 2007-$430,000; 2008-$1,557,000; 2009-$1,740,000; 2010-$10,000; 2011-$2,665,000; and 2012-$550,000. Through the acquisitions of Electrograph and SST, the Company acquired approximately $1,066,000 and $1,544,000 of federal net operating loss carryforwards for tax purposes, subject to certain annual limitations on the use of the net operating loss carryforwards arising prior to the acquisition in accordance with Internal Revenue Code Section 382. At June 30, 1997, the remaining federal net operating loss carryforwards were $966,000 and $1,383,000 for Electrograph and SST, respectively. The following table reconciles the expected tax benefit at the federal statutory rate of 34% to the effective tax rate.
1997 1996 Computed expected tax benefit $ (719,896) $(1,000,548) Increase in valuation allowance 210,211 914,153 Additional tax gain on sale of assets 381,464 Nondeductible goodwill amortization 96,057 87,227 Adjustment to prior years' taxes (17,911) State income taxes, net of federal benefit 25,819 18,251 Other nondeductible expenses 32,164 17,079 ----------- ----------- $ 25,819 $ 18,251 =========== ===========
12 22 BITWISE DESIGNS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 6. INCOME TAXES, CONTINUED The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities as of June 30, 1997 and 1996 are presented below:
1997 1996 Deferred income taxes: Allowance for doubtful accounts $ 70,136 $ 73,209 Inventories, principally due to additional costs inventoried for tax purposes pursuant to the Tax Reform Act of 1986 and inventory reserves 177,206 186,198 Deferred rent and other liabilities 134,120 82,864 Net operating loss carryforward 2,719,117 2,532,117 --------------- --------------- Total gross deferred tax assets 3,100,579 2,874,388 Less valuation allowance (3,029,021) (2,818,810) --------------- --------------- Net deferred tax asset 71,558 55,578 Deferred income tax liability: Equipment, principally due to differences in depreciation methods (71,558) (55,578) --------------- --------------- Net deferred income taxes $ -0- $ -0- =============== ===============
The valuation allowance for deferred tax assets as of July 1, 1996 and 1995 was $2,818,810 and $1,946,505, respectively. The net change in the total valuation allowance for the years ended June 30, 1997 and 1996 was an increase of $210,211 and $872,305, respectively. 7. LEASE COMMITMENTS The Company is obligated under operating and capital leases for certain equipment and facilities expiring at various dates through the year 2001. As of June 30, 1997, future minimum payments by year, and in the aggregate, under capital and noncancelable operating leases with initial terms of one year or more consist of the following:
OPERATING CAPITAL LEASES LEASES RELATED PARTY OTHER ------------- --------------- ------------- Fiscal year ending June 30: 1998 $ 11,055 $ 147,200 $ 148,632 1999 1,333 147,200 71,469 2000 24,533 64,299 2001 58,593 2002 ------------ ------------ ------------- 12,388 $ 318,933 $ 342,993 ============ ============= Amount representing interest (891) ------------ Present value of net minimum lease payments 11,497 Less current portion (10,200) ------------ Long-term portion $ 1,297 ============
Rental expense was approximately $277,000 and $317,000 for the years ended June 30, 1997 and 1996, respectively (see also Note 12). 13 23 BITWISE DESIGNS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 8. PREFERRED STOCK The Board of Directors is authorized to issue shares of preferred stock, $.10 par value per share, from time to time in one or more series. The Board may issue a series of preferred stock having the right to vote on any matter submitted to shareholders including, without limitation, the right to vote by itself as a series, or as a class together with any other or all series of preferred stock. The Board of Directors may determine that the holders of preferred stock voting as a class will have the right to elect one or more additional members of the Board of Directors, or the majority of the members of the Board of Directors. The Board of Directors has designated a series of preferred stock which has the right to elect a majority of the Board of Directors. The holders of preferred stock which have the right to elect a majority of the Board of Directors are therefore able to control the Company's policies and affairs. The Board of Directors may also grant to holders of any series of preferred stock, preferential rights to dividends and amounts payable in liquidation. Furthermore, the Board of Directors may determine whether the shares of any series of preferred stock may be convertible into common stock or any other series of preferred stock of the Company at a specified conversion price or rate, and upon other terms and conditions as determined by the Board of Directors. The Board of Directors has designated 200 shares of preferred stock as Series A Preferred stock, of which 100 shares have been issued to each of the chairman/chief executive officer and senior vice president of the Company. The holders of the Series A Preferred Stock have the right to elect a majority of the Board of Directors as long as each holder remains, subject to certain conditions, an officer, director and at least 5% shareholder of the Company. During such time as the Series A Preferred Stock is outstanding, the holders have the right to elect a majority of the Board of Directors. To date, the holders of the Series A Preferred Stock have not exercised such right. The Series A Preferred Stock is entitled to vote as a group. The holders of the Series A Preferred Stock have a preference on liquidation of $1.00 per share and no dividend or conversion rights. In connection with the Company's acquisition of SST, 112,003 shares of preferred stock designated as Series B Convertible Preferred Stock were issued. The holders of the Series B Convertible Stock were entitled to quarterly dividends at 7% and 10%. The Series B Convertible Preferred Stock was convertible into common stock at the rate of $3.50 per share. In August 1996, all of the Series B shareholders elected to convert their shares into common stock (see also Note 14). 9. STOCK OPTION PLANS AND STOCK WARRANTS A) 1992 Employees Stock Option Plan: In May 1992, the shareholders approved the 1992 Employees Stock Option Plan (the "1992 Plan"). The Plan provided for the grant of options to purchase 600,000 shares of the Company's common stock. In January 1995, the shareholders approved an amendment to the Plan to increase the number of shares of common stock available under the Plan to 3,000,000 shares. Under the terms of the 1992 Plan, options granted thereunder may be designated as options which qualify for incentive stock option treatment ("ISO") under Section 422A of the Internal Revenue Code, or options which do not so qualify ("non-ISOs"). In 1997, the Company filed a registration statement with the SEC to register the shares issued under the 1992 Plan. 14 24 BITWISE DESIGNS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 9. STOCK OPTION PLANS AND STOCK WARRANTS, CONTINUED A) 1992 Employees Stock Option Plan, Continued: The 1992 Plan is administered by a Compensation Committee designated by the Board of Directors. The Board or the Committee, as the case may be, has the discretion to determine eligible employees and the times and the prices at which options will be granted, whether such options shall be ISOs or non-ISOs, the period during which each option will be exercisable and the number of shares subject to each option. Options generally vest one year after the date of grant. The Board or the Committee has full authority to interpret the 1992 Plan and to establish and amend rules and regulations relating thereto. Under the 1992 Plan, the exercise price of an option designated as an ISO may not be less than the fair market value of the Company's common stock on the date the option is granted. However, in the event an option designated as an ISO is granted to a ten percent shareholder, the exercise price shall be at least 110% of such fair market value. The aggregate fair market value of shares subject to options which are designated as ISOs which become exercisable in any calendar year shall not exceed $100,000. The Board or the Committee may in its sole discretion grant bonuses or authorize loans to or guarantee loans obtained by an optionee to enable such optionee to pay any taxes that may arise in connection with the exercise or cancellation of an option. Unless sooner terminated, the 1992 Plan will expire in the year 2002.
WEIGHTED AVERAGE NUMBER OF OPTION PRICE SHARES PER SHARE ------------ ------------ Outstanding at June 30, 1995 1,503,880 $ 1.98 Options granted: Equal to market price 692,500 5.78 Exceeding market price 75,000 7.13 Options canceled or surrendered (95,000) 2.29 ------------ --------- Outstanding at June 30, 1996 2,176,380 3.37 Options granted equal to market price 226,500 4.26 Options exercised (33,825) 1.37 Options canceled or surrendered (429,685) 3.10 ------------ Outstanding at June 30, 1997 1,939,370 3.53 ============
The following is a summary of the status of employee stock options at June 30, 1997:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS ------------------------------------- ------------------------ WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE CONTRACTUAL EXERCISE EXERCISE Exercise Price Range NUMBER LIFE PRICE NUMBER PRICE -------------------- ------- ----------- ---------- --------- ---------- $ .34 - 2.00 884,370 3.0 $ 1.53 563,037 $ 1.52 2.01 - 4.00 225,500 2.9 3.35 84,500 3.23 4.01 - 6.00 394,000 3.7 4.98 101,165 5.04 6.01 - 8.00 435,500 3.8 6.35 141,830 6.36
As of June 30, 1997 and 1996, 890,537 shares and 770,722 shares, respectively, were exercisable under the 1992 Employees Stock Option Plan. 15 25 BITWISE DESIGNS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 9. STOCK OPTION PLANS AND STOCK WARRANTS, CONTINUED B) Non-Executive Director Stock Option Plan: In April 1992, the Board of Directors adopted the Non-Executive Director Stock Option Plan (the "Director Plan") which was approved by the Company's shareholders on May 6, 1992. The Director Plan provides for issuance of a maximum of 400,000 shares of common stock upon the exercise of stock options granted under the Director Plan. Options can be granted under the Director Plan until April 2002 to (i) non-executive directors as defined and (ii) members of any advisory board established by the Company who are not full-time employees of the Company or any of its subsidiaries. The Director Plan provides that each non-executive director will automatically be granted an option to purchase 10,000 shares upon joining the Board of Directors and on each September 1 thereafter, provided such person has served as a director for the previous twelve-month period. Similarly, each eligible director of an advisory board will receive, upon joining the advisory board and on each September 1 thereafter, an option to purchase 5,000 shares of the Company's common stock, providing such person has served as a director of the advisory board for the previous twelve-month period. Options vest immediately on the date of grant. The exercise price for options granted under the Director Plan shall be 100% of the fair market value of the common stock on the date of grant. Until otherwise provided, the exercise price of options granted under the Director Plan must be paid at the time of exercise, either in cash, by delivery of shares of common stock of the Company or by a combination of each. The term of each option commences on the date it is granted and unless terminated sooner as provided in the Director Plan, expires five years from the date of grant. The Director Plan is administered by a committee of the Board of Directors composed of not fewer than three persons who are officers of the Company (the "Committee"). The Committee has no discretion to determine which non-executive director or advisory board member will receive options or the number of shares subject to the option, the term of the option or the exercisability of the option. However, the Committee will make all determinations of the interpretation of the Director Plan. Options granted under the Director Plan are not qualified for incentive stock option treatment. As of June 30, 1997, options to purchase up to 220,000 shares have been granted to non-executive directors. Options to purchase 40,000 and 50,000 shares were granted in 1997 and 1996, respectively, and 10,000 shares were canceled or surrendered in 1997. These options are exercisable at prices between $3.375 and $5.125 per share. During 1997 and 1996, none of the options were exercised or canceled. C) Common Stock Warrants: A schedule of common stock warrant activity is as follows:
WEIGHTED AVERAGE NUMBER WARRANT OF PRICE SHARES PER SHARE --------- --------- Outstanding June 30, 1995 1,312,000 $ 2.36 Warrants granted: Equal to market price 22,000 6.21 Less than market price 1,957,137 4.39 Warrants exercised (652,380) 2.23 Adjustments for antidilution 36,380 3.59 --------- Outstanding June 30, 1996 2,675,137 3.75 Warrants granted 10,000 4.44 Warrants exercised (358,142) 2.03 --------- Outstanding June 30, 1997 2,326,995 4.23 =========
16 26 BITWISE DESIGNS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 9. STOCK OPTION PLANS AND STOCK WARRANTS, CONTINUED C) Common Stock Warrants, Continued: In December 1995, the Company issued 1,528,569 redeemable common stock warrants in connection with the Company's private placement under Regulation D. Other warrants issued during 1997 and 1996 were to various firms providing services to the Company. The following is a summary of the status of common stock warrants at June 30, 1997:
OUTSTANDING WARRANTS EXERCISABLE WARRANTS ------------------------------------- ------------------------ WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE CONTRACTUAL EXERCISE EXERCISE Exercise Price Range NUMBER LIFE PRICE NUMBER PRICE -------------------- ----------- ----------- ----------- ----------- ----------- $1.50 - 2.00 250,000 3.00 $ 1.53 250,000 1.53 2.01 - 4.00 229,284 3.43 3.47 229,284 3.43 4.01 - 6.00 1,722,711 3.47 4.51 1,722,711 3.47 6.01 - 8.00 125,000 2.58 7.15 120,000 7.26
D) SFAS No. 123: The per share weighted average fair value of stock options and common stock warrants granted during fiscal 1997 and 1996 was $1.00 and $3.88, respectively. These amounts were determined using the Black Scholes option-pricing model which values options and warrants based on the stock price at the grant date, the expected life of the option or warrant, the estimated volatility of the stock, expected dividend payments and the risk-free interest rate over the expected life of the option or warrant. The dividend yield was calculated by dividing the current annualized dividend by the option or warrant price for each grant. The expected volatility was based on the stock prices for the period beginning in May 1992 when the Company completed its first public offering until June 30, 1997 and 1996, respectively. The risk-free interest rate was the rate available on zero coupon U.S. government issues with a term equal to the remaining term for each grant. The expected life of the option or warrant was estimated based on the exercise history from previous grants. The Company applies APB No. 25 in accounting for its stock option and stock warrant plans and, accordingly, no compensation cost has been recognized in the Company's financial statements for stock options or warrants granted under any of the stock or warrant plans. If under SFAS No. 123, the Company determined compensation cost based on the fair value at the grant date for its stock options and warrants, net loss and loss per share would have been increased to the pro forma amounts indicated below:
JUNE 30, JUNE 30, 1997 1996 Net loss As reported $ 2,143,159 $ 2,961,039 Pro forma 2,237,301 4,151,890 Loss per share As reported $ .30 $ .55 Pro forma .31 .76
17 27 BITWISE DESIGNS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 9. STOCK OPTION PLANS AND STOCK WARRANTS, CONTINUED D) SFAS No. 123, Continued: Under SFAS No. 123, stock options and warrants granted prior to fiscal 1996 are not required to be included as compensation in determining pro forma net earnings. To determine pro forma net earnings, reported net earnings have been adjusted for compensation costs calculated for vested stock options granted during fiscal 1997 and 1996. The effects of applying SFAS 123 on providing pro-forma disclosures are not necessarily likely to be representative of the effects on reported net income for future years. 10. COMMITMENTS Employment agreements: Effective July 1, 1995, the Company entered into a new employment agreement with its chief executive officer for a five-year term ending June 30, 2000. The employment agreement provides for (i) annual compensation of $100,000 for the first year of the agreement, increasing by 10% in each of the second and third years; (ii) a bonus of 3% of the Company's pre-tax income, with such additional bonuses as may be awarded at the discretion of the Board of Directors; (iii) the award of non-qualified stock options to purchase 600,000 shares of the Company's common stock at an exercise price of $1.5625 per share of which increments of 100,000 shares vested on June 30, 1995, and the remainder vests in increments of 125,000 shares on each of June 30, 1996, 1997, 1998 and 1999; (iv) certain insurance and severance benefits and (v) an automobile and expenses. In March 1996, the Company entered into employment agreement with the three principals of DJS Marketing Group, Inc. in connection with the acquisition of DJS as described in Note 14. The president and two vice presidents entered into two-year employment agreements each providing for a specified annual compensation, performance bonus payments and an aggregate of 375,000 employee stock options to purchase shares of the Company's common stock at exercise prices ranging from $6.125 to $7.125 per share. 11. CASH FLOWS - SUPPLEMENTAL INFORMATION Cash flows: The Company paid interest in the amounts of $424,843 and $207,684 for the years ended June 30, 1997 and 1996, respectively. Income taxes paid aggregated $40,446 and $19,011 during the years ended June 30, 1997 and 1996, respectively. Noncash investing and financing activities (see also Note 14): During the year ended June 30, 1997, the Company received a note of $296,912 in exchange for assets disposed of as part of the sale of Electrograph. During the year ended June 30, 1996, the Company entered into capital lease obligations for the purchase of equipment aggregating $12,555. 18 28 BITWISE DESIGNS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 12. RELATED PARTIES Employee receivables: At June 30, 1997 and 1996, "Due from related parties" included non-interest bearing advances of $25,056 and $74,136, respectively, from employees and officers of the Company. Notes receivable: During 1996, Bitwise entered into two promissory notes receivable with a director (hereinafter referred to as the Director Note) and the former shareholders of DJS Marketing Group, Inc. (hereinafter referred to as the DJS Note), included within "Due from related parties," in the amounts of $50,000 and $125,000. The director Note bears interest at the rate of 6% per annum. The note principal and accrued interest thereon was due and payable on May 10, 1997 and is secured by all of the borrowers issued and outstanding director stock options (options to purchase 40,000 shares at June 30, 1997). The due date has been extended to November 10, 1997. The DJS Note bears interest at the rate of 8% per annum. The note principal and accrued interest thereon is due on March 8, 1998 and is collateralized by 30,000 shares of Bitwise Designs, Inc. common stock. Other transactions: The Company's subsidiary, SST, conducts its primary operations from a building leased from its President and two other individuals. During 1997 and 1996, SST paid rent on this building of approximately $144,200 and $108,000, respectively. During 1997, the Company dissolved SST's Employee Stock Ownership Plan by converting the SST common stock shares to shares of Bitwise common stock. 13. EMPLOYEE BENEFIT PLAN Effective July 1, 1993, the Company implemented a qualified defined contribution 401(k) profit sharing plan for all eligible employees. The Company will make contributions in percentages of compensation, or amounts as determined by the Company. The Company contributed $1,341 and $1,750 during the years ended June 30, 1997 and 1996, respectively. 14. ACQUISITIONS AND SALES OF BUSINESSES On March 8, 1996, Bitwise completed its acquisition of DJS Marketing Group, Inc. The shareholders of DJS Marketing Group, Inc. received $80,000 in cash and 200,000 shares of restricted common stock of Bitwise in exchange for the 4,000 outstanding shares of DJS Marketing Group, Inc. common stock. The cost of the acquisition was approximately $1,140,000. Under the indemnification provisions of the merger, 25,000 common shares of Bitwise received by the former shareholders of DJS are held in escrow for a period of 18 months from the date of the acquisition. In addition, the common shares of Bitwise transferred in connection with the acquisition are restricted for a period of two years. Also, as a condition of the acquisition, the former shareholders of DJS Marketing Group, Inc. have entered into employment and non-competition agreements expiring on March 31, 1998 (see also Note 10). 19 29 BITWISE DESIGNS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 14. ACQUISITIONS AND SALES OF BUSINESSES, CONTINUED In April 1997, the Company sold Electrograph with the transaction structured as an asset sale. The Company realized a gain of $214,989. The Company received $2,522,361 in cash including an adjustment to the purchase price of $22,361 based on the final balance sheet. In addition the Company was owed $646,912 by Electrograph at the date of sale. The buyer paid $350,000 in cash and $296,912 with a nine-month note at 3% interest. 15. SECURITIES OFFERINGS In December 1995, the Company completed a private equity offering including common stock and redeemable common stock warrants of $5,000,000 exempt from registration under Regulation D of the Securities Act of 1933. Each redeemable common stock warrant entitles the holder thereof to purchase on or prior to the last business day of the sixtieth month following the date of the first closing of this offering one share of common stock of the Company at an exercise price of $4.50 per share, subject to adjustment in certain circumstances. The common stock purchase warrants are redeemable, in whole or in part, at the option of the Company, for $.10 per warrant on not less than thirty days prior written notice, at any time, commencing six months from the first closing of this offering, provided that (i) the closing bid quotation of the Company's common stock is at least 150% of the then exercise price of the warrants on each of the 20 trading days ending on the third trading day prior to the day on which notice of redemption is given; and (ii) the warrants have been registered under the Securities Act of 1933, as amended (registration completed in fiscal 1997). Proceeds from the offering of the 1,428,565 shares aggregated $5,000,000. The Company also incurred expenses associated with the offering in the amount of $756,353. In addition, the Company granted Whale Securities Co. L.P. (Whale), which acted as the placement agent in the December 1995 offering, warrants to purchase 428,568 shares of common stock, exercisable for a period of five years, at a price equal to the offering price. These warrants contain anti-dilution provisions and registration rights, including demand and "piggy back" registration rights, and shall not be redeemable by the Company. Also, the Company granted Whale a three-year right of first refusal with respect to certain future financings of the Company, the right to designate, at its option, a nominee for election as a member of the Board of Directors of the Company or as a non-voting advisor to the Board of Directors, and the Company will use its best efforts to cause such nominee to be elected and continued in office as a director of the Company or as such advisor for a period of three years from the first closing of the offering. The Company has also agreed to indemnify Whale against certain liabilities, including liabilities under the Securities Act of 1933, in connection with the offering. 20 30 BITWISE DESIGNS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 16. FINANCIAL INSTRUMENTS Concentrations of credit risk: Financial instruments which subject the Company to concentrations of credit risk consist of cash and cash equivalents and trade accounts receivable. To reduce credit risk, the Company places its temporary cash investments with high credit quality financial institutions. The Company's credit customers are not concentrated in any specific industry or business. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. Fair value: The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Cash and cash equivalents, accounts receivable, notes receivable, accounts payable and accrued expenses and other current liabilities. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and other current liabilities approximates fair value because of the short maturity of these instruments. The carrying amount of notes receivable, included within "Due from related parties," approximates fair value because the notes bear interest that approximates the market rate. Lines of credit and long-term debt. The interest rates on the Company's lines of credit are reset according to changes in the current market (see Note 4). The remaining balance of long-term debt approximates fair value because of its short maturity (see Note 5). Consequently, the carrying value of the borrowings under lines of credit and long-term debt approximates fair value. 21 31 EXHIBIT INDEX The following exhibits, designated by an asterisk (*), have been previously filed with the Commission and, pursuant to 17 C.F.R. Section 230.411, are incorporated by reference to the document referenced in brackets following the descriptions of such exhibits. Those exhibits designated by a double asterisk (**) were filed with the original Form 10KSB filing filed on September 29, 1997. Exhibit No. Description 2.1* Agreement and Plan of Merger between Bitwise Designs, Inc. and Electrograph Systems, Inc. dated February 7, 1994 2.2* Agreement and Plan of Merger between Bitwise Designs, Inc. and Systems Solutions, Inc. dated April 29, 1994 3.1* Certificate of Incorporation of Bitwise Designs, Inc.- Delaware (Exhibit 3.3.1 to Registration Statement on Form S-18, File No. 33-46246-NY) 3.1.1* Certificate of Designation of Series B Preferred Stock 3.2* By-Laws (Exhibit 3.2 to Registration Statement on Form S-18, File No. 33-46246-NY) 4.1* Form of Common Stock Certificate (Exhibit 4.1 to Registration Statement on Form S-18, File No. 33-46246-NY) 32 4.2* Form of Series A Preferred Stock Certificate (Exhibit 4.2 to Registration Statement on Form S-18, File No. 33-46246-NY) 4.3* Form of Warrant issued to Berkeley Securities Corp. (Exhibit 4.3 to Registration Statement on Form S-18, File No. 33-46246-NY) 4.4* Form of Warrant issued to certain individuals in April, 1992 (Exhibit 4.4 to Registration Statement on Form S-18, File No. 33-46246-NY) 4.5* Form of Series B Preferred Stock Certificates (Exhibit 4.5 to the Registration Statement on form SB-2, File No. 33-76494) 4.6* Form of Warrant to be issued to Berkeley Securities Corp.(Exhibit 4.6 to the Registration Statement on form SB-2, File No. 33-76494) 4.7** Form of Note and Warrant Purchase, Paying and Conversion/Exercise agency agreement dated as of August 8, 1997 between the Company and Banca del Gottardo. 4.8** Terms of 8% Convertible Notes due August 11, 2002. 4.9** Terms of Warrants and Global Warrant expiring August 11, 2002. 10.1* Lease agreement with Rotterdam Industrial Park, dated August 7, 1991 (Exhibit 10.1 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.1.1* Lease warrant waiver agreement (Exhibit 10.1.1 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.2* Lease with Siemens Credit Corporation for telephone system dated November 25, 1991 (Exhibit 10.2 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.3* Lease agreement with Apple Commercial Credit for laser printer, dated June 23, 1987 (Exhibit 10.3 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.4* Leases with Adirondack Leasing Associates, Ltd. (Exhibit 10.4 to Registration Statement on Form S-18, File No. 33-46246-NY) 33 10.5* Loan agreement with U.S. Small Business Administration and Norstar Bank, dated April 4, 1991 (Exhibit 10.5 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.6* Loan agreement with Schenectady Economic Development Corporation, dated August 7, 1991 (Exhibit 10.6 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.8* Employment agreement with John T. Botti, dated April, 1992 (Exhibit 10.8 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.9* Employment agreement with Ira C. Whitman, dated April, 1992 (Exhibit 10.9 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.10* 1992 Employee stock option plan (Exhibit 10.10 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.11* 1992 Nonexecutive Directors stock option plan (Exhibit 10.11 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.13* Loan agreement with Norstar Bank dated February 6, 1992 (Exhibit 10.13 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.13.1* Norstar Bank waiver agreement (Exhibit 10.13.1 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.14* Agreement with Prime Computer, Inc. (Exhibit 10.14 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.15* Agreement with Mentor Computer Graphics Ltd. (Exhibit 10.15 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.16* Agreement with Robert W. Schwartz, Inc. dated February 10, 1992 (Exhibit 10.16 to Registration Statement on Form S-18, File No. 33-46246-NY) 10.17* Form of Financial Consulting Agreement with the Underwriter (Exhibit 10.17 to the Registration Statement on form SB-2, File No. 33-76494) 10.18* Financing Agreement by and among Maryland Industrial Development Financing Authority, JED Associates, State 34 National Bank of Maryland, Electronic Marketing Associates, Inc. (name was changed to System Solutions Technology, Inc.), Trimarc Systems Incorporated and Intermec Mid-Atlantic Corporation dated December 11, 1985 (Exhibit 10.18 to the Registration Statement on form SB-2, File No. 33-76494) 10.19* Maryland Industrial Development Financing Authority Limited Obligation Economic Development Revenue Bond (Exhibit 10.19 to the Registration Statement on form SB-2, File No. 33-76494) 10.20* Cross-Collateral Security Agreement between NationsCredit Corporation, Bitwise Designs, Electrograph Systems, Inc. and System Solutions Technology, Inc. dated July 18, 1995. 10.21* Subcontract dated September 28, 1995 between PRC, Inc. and System Solutions Technology, Inc. 10.22* Financial Consulting Agreement dated July 17, 1995 between the Company and Whale Securities, Co. 10.23* Agreement and Plan of Merger by and among Bitwise Designs, Inc., Bitwise DJS, Inc., certain individuals and DJS Marketing Group, Inc. dated March 6, 1996 (Exhibit 2 to Form 8-K dated March 22, 1996) 10.24** Form of Conversion Agency Agreement between the Company and Banca del Gottardo dated as of August 8, 1997. 10.25** Form of Warrant Agency Agreement between the Company and Banca del Gottardo dated as of August 8, 1997. 11** Statement re: Computation of Per Share Earnings 21** Subsidiaries of Registrant 23 Consent of KPMG PEAT MARWICK LLP 23.1** Consent of Coopers & Lybrand LLP 27** Financial Data Schedule EX-23 2 CONSENT OF KPMG PEAT MARWICK LLP 1 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Bitwise Designs, Inc.: We consent to the incorporation by reference in the registration statements on Form S-3 (Nos. 33-80917 and 333-05445) and the registration statements on Form S-8 (No. 333-23933) of Bitwise Designs, Inc. of our report dated September 6, 1996, relating to the consolidated balance sheets of Bitwise Designs, Inc. and subsidiaries as of June 30, 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended, which report appears in the June 30, 1997 annual report on Form 10-KSB of Bitwise Designs, Inc. /s/ KPMG Peat Marwick LLP Albany, New York September 26, 1997 -----END PRIVACY-ENHANCED MESSAGE-----