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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
/X/ SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1998
______________
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
/ / THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to ______________________________
Commission File No. 0-20190
BITWISE DESIGNS, INC.
________________________________________________________________________________
(Exact Name of Issuer as Specified in its Charter)
Delaware 14-1673067
_______________________________ ___________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
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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]
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Check whether Issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
__ __
Check if there is no disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained in this form, and no disclosure
will be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10- K
or any amendment to this Form 10-K. [ ]
The Issuer's revenues for its most recent fiscal ended June
30, 1998 were $33,755,625.
On September 21, 1998, 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 6,914,228 shares)
was approximately $7,346,367 based on the closing price for such Common Stock
($1.0625) on said date as reported by the Nasdaq SmallCap Market.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
On September 21, 1998, there were 7,382,663 shares of Common
Stock, $.001 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
_________________________
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[Cover Page 2 of 2 Pages]
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Table of Contents
PART I PAGE
Item 1. Business 6
Item 2. Properties 19
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5. Market For the Company's Common Equity and Related Stockholder
Matters 20
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 22
Item 8. Financial Statements and Supplemental Data 32
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 32
PART III
Item 10. Directors and Executive Officers of the Company 33
Item 11. Executive Compensation 38
Item 12. Security Ownership of Certain Beneficial Owners and Management 44
Item 13. Certain Relationships and Related Transactions 46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 47
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PART I
THIS ANNUAL REPORT ON FORM 10-K, INCLUDING ITEM 1("BUSINESS") AND ITEM 7
("MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS"), CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. WHEN USED IN THIS REPORT, THE WORDS "BELIEVE,"
"ANTICIPATE," "THINK," "INTEND," "PLAN," "WILL BE," "EXPECT", AND SIMILAR
EXPRESSIONS IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REGARDING
FUTURE EVENTS AND/OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY ARE SUBJECT
TO CERTAIN RISKS AND UNCERTAINTIES, WHICH COULD CAUSE ACTUAL EVENTS OR THE
ACTUAL FUTURE RESULTS OF THE COMPANY TO DIFFER MATERIALLY FROM ANY
FORWARD-LOOKING STATEMENT. SUCH RISKS AND UNCERTAINTIES INCLUDE AMONG OTHER
THINGS, THE AVAILABILITY OF ANY NEEDED FINANCING, THE COMPANY'S ABILITY TO
IMPLEMENT ITS BUSINESS PLAN FOR VARIOUS APPLICATIONS OF ITS TECHNOLOGIES, THE
IMPACT OF COMPETITION, THE MANAGEMENT OF GROWTH, AND OTHER RISKS AND
UNCERTAINTIES THAT MAY BE DETAILED FROM TIME TO TIME IN THE COMPANY'S REPORTS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. IN LIGHT OF THE SIGNIFICANT
RISKS AND UNCERTAINTIES INHERENT IN THE FORWARD-LOOKING STATEMENTS INCLUDED
HEREIN, THE INCLUSION OF SUCH STATEMENTS SHOULD NOT BE REGARDED AS A
REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON THAT THE OBJECTIVES AND PLANS
OF THE COMPANY WILL BE ACHIEVED.
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
Bitwise Designs, Inc. ("Bitwise"), and its 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.
In June 1998, the Company sold a subsidiary, System Solutions
Technology, Inc. ("SST")which had been acquired by the Company in
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August 1994. SST is a value added distributor of advanced technology industrial
computers and computer peripheral. In April 1997, the Company sold a subsidiary,
Electrograph Systems, Inc. ("ESI"). ESI was acquired in August 1994 and is a
value-added distributor of monitors and other microcomputer peripherals,
components and accessories. The Company's 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, 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. The Company is considering
selling DJS so that it can concentrate its resources on the document imaging
business. No agreements have been entered into by the Company and there can be
no assurance that the Company's efforts to sell DJS will be successful or
consummated.
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 Technology Center, Rotterdam Industrial Park, Schenectady, New York
12306, and its telephone
number is (518) 356-9741.
GENERAL BUSINESS DEVELOPMENTS DURING THE LAST FISCAL YEAR
In June 1998, the Company sold SST to United Strategies, Inc. ("USI")
for $4,000,000. The Company received $3,600,000 in cash and $400,000 worth of
SST inventory and receivables. The transaction was in the form of a stock
purchase. The Company realized a loss of approximately $256,000 on the sale.
In April 1997, the Company sold ESI for $2,522,361. The sale was
structured as an asset sale with all liabilities assumed by the purchaser. The
Company also received $646,912 as satisfaction of an intercompany receivable
from ESI. The Company realized a gain of approximately $215,000 on the sale.
INDUSTRY OVERVIEW
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The market for the Company's products is highly competitive and rapidly
changing. A primary focus of the Company is the manufacturing and distribution
market for document imaging systems, personal computers, workstations and
portable personal computers as well as microcomputer peripherals, networks,
components accessories, and Internet/Intranet development. These markets have
experienced significant growth over the last decade, and the Company believes
such growth will continue, particularly in the document imaging market.
.....Document Imaging and Management
In January, 1996, the Company, on a national level, introduced its
document imaging system called DocStar ("DocStar"). The Company designs and
manufactures DocStar which enables a user to scan paper documents onto an
optical disk, hard disk drive or other storage medium. The Company's DocStar
product line consists of a personal computer, proprietary software and a
scanner. This system can be utilized as a "stand-alone" system or as part of a
network installation.
The Company believes that the 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.
.....Personal Computers
Another principal product offered by the Company through its DJS
subsidiary, is the personal computer ("PC's"). Although DJS primarily
distributes PC's from major manufacturers it also offers "Clone PC's".
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.....Peripheral Computer Products
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. Peripheral products are offered in a variety of performance
speeds, capabilities, features and prices. The market for peripheral computer
products is directly related to the computer market, for example, because
customers frequently add peripheral products after the initial computer
purchase, there is a significant "after market" opportunity for such products. A
value added distributor, such as DJS, configures various computer hardware and
peripheral products such as software together, to satisfy a customer's
individual needs. The Company believes a significant portion of DJS's business
will continue to be sales of peripheral computer products.
.....Notebooks/Laptops
DJS also sells notebook computers which use battery power and are
smaller in size and weight than desktop designs. The size of a notebook computer
is the equivalent of a narrow three-ring notebook binder to a small briefcase
and the weight ranges from approximately six pounds to approximately fifteen
pounds. Notebook computers provide the same power and speed as desktop systems,
but at a higher cost.
.....Networks
DJS also designs and installs network systems which involves network
software being installed on a fileserver computer with less powerful computers
sharing information from the fileserver. Applications that the network system
provides include E-mail, accounting systems, word processing, communication and
any other applications that require the sharing of information. Although
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.
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.....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.
BITWISE
PRODUCTS
Document Imaging and Management
In January 1996, Bitwise, on a national level, introduced its document
imaging management system under the tradename DocStar which enables users to
scan paper documents onto an optical disk, hard drive or other storage medium
from which they can be retrieved in seconds. This system allows users to
eliminate or significantly reduce paper filing systems. The Company believes
that a broad spectrum of businesses and governmental agencies experience the
problem of storage, management and security of paper documents. The DocStar
product line is intended to provide a cost effective method of reducing the
space necessary to store documents while granting a user the ability to
instantly retrieve documents.
The operation of a document management system is similar to the
operation of a facsimile machine. Documents are fed into an optical scanner that
reads the documents and stores the information on one of several alternative
mass storage devices. Documents can also be transmitted from or to the system
via facsimile machine or modem. Documents can be retrieved almost
instantaneously for viewing, printing or faxing thereby offering a significant
timesaving tool to the modern office.
The main components of a document management system are a personal
computer, a high speed electronic document scanner, a laser printer capable of
reproducing documents quickly, and a software package which controls scanning,
indexing, storage and reproduction. Bitwise purchases scanners, laser printers
and other essential hardware from unaffiliated third parties and manufactures
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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. The Company offers the DocStar System in three models:
System 10X, System 20X, System 20FSX and System 25X. The DocStar System 10X is
the base model. The Systems 20X, 20FSX and 25X 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 Company markets the document management system under the tradename
DocStar through a national dealer network. The Company owns one dealership in
the Albany, New York region, which also serves as a test market for new
applications and software.
BACKLOG
The Company normally ships products within 5 days after receipt of an
order and typically has no more than two weeks of sales in backlog at any time.
The amount of backlog fluctuates but usually is not material.
RESEARCH AND DEVELOPMENT
The market for the Company's products is characterized by rapid
technological change involving the application of a number of advanced
technologies, including those relating to computer hardware and software, mass
storage devices, and other peripheral components. The Company's ability to be
competitive depends upon its ability to anticipate and effectively react to
technological change, as well as the application requirements of its customers.
Since inception, the Company has devoted efforts to research and
development activities in an effort to improve its current products and
introduce new products. Current development efforts are directed toward
improving ease of use, adding system enhancements and increasing performance.
Product development expense was $230,652 and $176,539 for fiscal years 1998 and
1997, respectively. The Company will continue to improve its document imaging
products in an effort to satisfy the needs of an ever changing marketplace.
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QUALITY CONTROL AND SERVICE
Quality control by the Company is administered at each of the three
levels of the production process. First, components considered for use in
standard systems are tested for compatibility by the research staff. Second,
incoming components receive a physical damage inspection on receipt and again at
the start of the production process. Each memory module is electronically tested
prior to assembly. Each complete unit is then functionally tested at the end of
the assembly process to demonstrate that all components are engaged and fully
operational.
Third, each complete unit is "burned-in" from eight to twelve hours.
This process involves running a component test program which sequentially tests
each memory bit, processor circuit, and drive memory track to verify correct
operation in a temperature-controlled chamber. This test is repeated
continuously over the burn-in period. Since electronic components have their
greatest failure risk during the first few hours of active operation, management
believes that the burn-in process reveals nearly all faulty components before
they reach the end user.
The Company's dealers provide service to the end users. All dealers
receive service training from the national service staff. The Company provides
the dealer with replacement parts free of charge for 13 months after date of
shipment. The Company's vendors provide a similar warranty for failed
components. The Company offers liberal telephone support service to its dealers.
MANUFACTURING AND SUPPLIERS
The Company's products have been designed to enable a variety of system
configurations to be assembled from a few basic modules. The Company's
manufacturing operations consist primarily of the assembly, test and quality
control of all parts, components, subassemblies and systems.
The Company uses standard parts and components in its existing product
lines which it purchases from unaffiliated third party suppliers. The Company,
however, does not have any contractual arrangements with its current suppliers.
Although the Company has never experienced material delays in deliveries from
its suppliers,
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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 which is part of the DocStar system.
PATENTS AND TRADEMARKS
The Company has no patents but has registered the logo "BitWise
Designs" and Bitwise's associated trademark, "DocStar". No assurance can be
given that registration will be effective to protect the Company's trademarks.
The Company believes the tradenames "BitWise Designs" and DocStar are material
to its business.
SALES AND MARKETING
The Company's products are currently 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 seven regional sales directors and two
district sales managers in each region, who report to each sales director, to
cover the significant markets in their region.
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COMPETITION
The market for the Company's products is rapidly changing and highly
competitive. The competition is direct (i.e., companies that make similar
products) and indirect (i.e., companies that participate in the market, but are
not direct competitors of the Company). The Company competes with major document
imaging manufacturers such as Panasonic, Sharp and Mita. Many of the Company's
current and prospective competitors have significantly greater financial,
technical, manufacturing and marketing resources, as well as a larger installed
base, than the Company.
EMPLOYEES
Bitwise employs 58 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.
DJS MARKETING GROUP, INC.
DJS (d/b/a "Computer Professionals") is a network and systems
integrator of computer and peripheral products to a variety of customers,
including individuals, schools, government agencies, large manufacturers and
distributors. DJS is the largest systems integrator in the Albany, New York
region.
DJS also produces Bitwise PC's at their Albany, New York production
facility. Also contained within this facility is the DJS Service Department
where factory trained computer technicians diagnose, service and upgrade all
major brands of computer equipment.
DJS provides network integration, Internet/Intranet development,
accounting solutions, service, consultation, document management and video
conferences.
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PRODUCTS
Network Integration.
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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 and Macola to
various end-users such as distributors, manufacturers and wholesalers. DJS
analyzes each particular client's needs and custom designs an accounting system
to satisfy these needs.
Service and Consultation.
DJS's service department is authorized to repair and maintain all major
brand products sold by DJS, including warranty and post-warranty equipment. DJS
generally guarantees a four (4) hour response time for all service calls, with
an average resolution time of next day.
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
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fraction of the time with complete access to the network and quality control
features. Among other product lines, DJS offers customers the Company's DocStar
line.
SALES AND MARKETING.
DJS markets its products and services throughout New York State, parts
of Vermont and Massachusetts. DJS intends to expand its national and
international sales and marketing departments. Clients include individuals,
small office/home office owners, schools, government agencies, large
corporations, 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 31 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.
CAUTIONARY STATEMENTS
As provided for under the Private Securities Litigation Reform Act of
1995, the Company wishes to caution stockholders and investors that the
following important factors, among others discussed throughout this report, in
some cases have affected and in some cases could affect the Company's actual
results of operations and cause such results to differ materially from those
anticipated in forward looking statements made herein.
SIGNIFICANT LOSSES
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The Company has incurred losses of $5,464,059; $2,143,159 and
$2,961,039, respectively, for its fiscal years ended June 30, 1998, 1997 and
1996. The Company began marketing its DocStar line of document imaging systems
on a national basis in January 1996 which has led to increased costs associated
with the product line. The Company will continue to incur these costs in future
as it attempts to increase market awareness and sales. Moreover, 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.
UNCERTAINTY OF WIDESPREAD MARKET ACCEPTANCE OF NEW PRODUCTS
The Company introduced the DocStar system on a national level in
January, 1996. As expected with new products, demand and market acceptance for
the DocStar imaging system is subject to a high level of uncertainty. Achieving
widespread acceptance of this product line will 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.
COMPETITION
The Company and its subsidiaries 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 businesses.
The document imaging business is competitive and the Company competes 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 those of the Company. The Company also competes with
many independent imaging software companies, smaller than those mentioned, many
of which also have substantially greater sales, financial resources and
experience than those of the Company. The most significant aspects of
competition are the quality of products, including
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advanced capabilities, and price. There can be no assurance the Company can
effectively continue to compete in the future.
The Company's 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.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's executive offices and production facilities are located
at Technology Center, Rotterdam Industrial Park, Schenectady, New York 12306.
The Company leases approximately 15,080 square feet of office space pursuant to
six month lease at an annual rent of approximately $116,000 plus utilities,
maintenance and escalation charges. The lease expires March 31, 1999.
Management is considering relocating the Company to a larger facility
in the beginning of 1999 to alleviate the space constraints in manufacturing and
shipping. New York State (the "State") has tentatively awarded the Company a
$1,000,000 grant to build a 26,000 square foot facility in Schenectady, New
York. The Company will not commit to a new location until the grant is formally
issued by the state. If the grant is not issued by the State, the Company will
not build a larger facility. The Company has several other options available
including expanding the present facility or leasing other existing buildings.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings which could have a
material adverse effect on its operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Upon the effectiveness of the Company's public offering on May 13,
1992, its Common Stock commenced trading in the over-the-counter market and was
listed on the SmallCap Market of the Nasdaq Stock Market ("NASDAQ") under the
symbol "BTWS." On August 11, 1994, the Common Stock commenced trading on the
Boston Stock Exchange under the symbol BTW. On June 25, 1996, the Company
withdrew its listing on the Boston Stock Exchange. On April 24, 1996, the
Company's Common Stock commenced trading on the Pacific Stock Exchange.
The following is the range of high and low closing prices for the
Company's Common Stock on the Nasdaq SmallCap Market for the periods indicated
below:
High Low
---- ---
Common Stock
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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
Fiscal Year 1996
1st Quarter............................................... 5-1/4 1-9/16
2nd Quarter............................................... 7-3/8 4-3/8
3rd Quarter............................................... 7-15/16 5-3/8
4th Quarter............................................... 6-7/8 4-5/8
The above quotations represent prices between dealers and do not
include retail mark-ups, mark-downs, or commissions, and do not necessarily
represent actual transactions.
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As of September 21, 1998, there were approximately 364 holders of
record of the Company's Common Stock. The Company believes there are more than
500 beneficial holders of the Company's Common Stock.
The Company has not paid any dividends upon its Common Stock since its
inception. The Company does not expect to pay any dividends upon its Common
Stock in the foreseeable future and plans to retain earnings, if any, to finance
the development and expansion of its business. Further, the Company's
Certificate of Incorporation authorizes the Company's Board of Directors to
issue Preferred Stock with a preferential right to dividends. There are no
outstanding shares of Preferred Stock with dividend rights.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in
conjunction with the Consolidated Financial Statements, including the related
notes, and "Managements's Discussion and Analysis of Financial Condition and
Results of Operations."
YEAR ENDED JUNE 30,
1998 1997 1996 1995 1994
STATEMENT OF OPERATIONS DATA:
Net Sales 33,755,625 53,109,469 30,611,258 23,949,368 4,661,377
Gross Profit 8,092,566 10,006,736 4,826,693 3,956,846 663,450
Net (Loss)/Net Income (5,464,059) (2,143,159) (2,961,039) 3,681 (813,380)
Basic and Diluted Net (Loss)
/Net Income Per
Common Share (0.74) (0.30) (0.55) 0.00 (0.32)
Balance Sheet Data:
Current Assets 12,138,995 13,622,171 13,101,722 8,216,505 1,621,468
Current Liabilities 4,789,896 7,730,498 7,234,849 4,189,083 783,879
Working Capital 7,349,099 5,891,673 5,866,873 4,027,422 837,589
Total Assets 14,708,454 18,924,765 19,880,037 13,095,479 2,092,568
Total Long Term
Liabilities 3,975,000(1) 1,297 17,949 59,824 205,397
Stockholders' Equity 6,478,226 11,192,970 12,627,239 8,846,572 1,103,292
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The following analysis of the results of operations and
financial condition of the Company should be read in conjunction
with the Company's financial statements, including the notes thereto, contained
elsewhere in this report.
- --------
1 Long-term liabilities excluding discount of $534,668
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RESULTS OF OPERATIONS
Fiscal Year 1998 Compared to Fiscal Year 1997
Fourth Quarter Adjustments
The Company 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, the Company 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 the Company's 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 (which is defined as gross profit as a percentage of sales) increased in
fiscal 1998 compared to the prior year due to the growth of the Company's
DocStar product line which has significantly higher margins than other product
lines of the Company. Additionally, the sale of ESI resulted in a lower gross
profit.
Selling, general and administrative expenses ("S,G&A") consist of all
other Company expenses except product development costs and interest. S,G&A
expenses amounted to $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
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somewhat by the sale of ESI. There were also increases in S,G&A
expenses in the Company's 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. The Company's 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 the Company's lines of credit during the
year. Interest rates increased slightly compared to the prior year.
Product development expenses relate primarily to software development
of the Company's DocStar product line and increased from $176,539 to $230,652
for the year ended June 30, 1998 compared to the prior year. The Company has a
policy of capitalizing software development costs and amortizing those costs
over three years as product development expense.
Fiscal Year 1997 Compared to Fiscal Year 1996
The Company realized a consolidated net loss of $2,143,159, ($.30 per
share) compared to $2,961,039 ($.55 per share) for the years ended June 30, 1997
and 1996, respectively. Consolidated net sales totaled $53,109,469 and
$30,611,258 for the years ended June 30, 1997 and 1996, respectively.
The sales increase is due in part to the acquisition of DJS on
March 8, 1996. DJS had sales of $16,560,884 for the year ended June 30,
1997 compared to $3,023,648 for the period March 8, 1996 to June 30, 1996. The
sales increase is also due to the growth in the Company's DocStar product line.
DocStar sales totaled $7,792,125 for the year ended June 30, 1997 compared to
$1,650,921 for the prior year. All other businesses also experienced sales
growth in fiscal 1997 compared to fiscal 1996. The sales results also include
sales from ESI for all but two months of the 1997 fiscal year until its sale by
the Company in April 1997.
The Company's loss for the year is due to losses incurred by the
Company's Imaging Division, which markets the DocStar product
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line. DocStar was introduced to the national marketplace in January 1996.
Previously it was only test marketed in the Albany, NY region. The DocStar
product line has not yet achieved sufficient sales volume to generate a profit.
Gross profit for the fiscal year ended June 30, 1997 was $10,006,736
compared to $4,826,693 for the prior year. The gross profit margin was 18.8% and
15.8% for years ended June 30, 1997 and 1996, respectively. The gross profit
margin (which is defined as gross profit as a percentage of sales) increased in
fiscal 1997 compared to the prior year due to the growth of the Company's
DocStar product line which has significantly higher margins than other product
lines of the Company.
Selling, general and administrative expenses (SG&A) consist of all
other Company expenses except product development costs and interest. SG&A
expenses amounted to $11,834,173 and $7,564,946 for the years ended June 30,
1997 and 1996, respectively. SG&A expenses increased due to the addition of DJS
in March 1996, which incurred SG&A expenses of $1,631,791 for the year ended
June 30, 1997 compared to $472,432 for the period March 8, 1996 to June 30,
1996. In addition, the Company incurred significant expenses related to the
DocStar product line. SG&A expenses related to the DocStar product line amounted
to $5,636,151 and $2,649,203 for the years ended June 30, 1997 and 1996,
respectively.
As a percentage of sales, SG&A costs decreased from 24.7% to 22.3% from
fiscal 1996 to fiscal 1997. The decrease is due to the sales growth in all
Company businesses and the fact that sales have grown at a faster rate than SG&A
costs, so that as a percentage of sales SG&A costs have decreased.
Product development expenses relate primarily to software development
of the Company's DocStar product line and increased from $129,075 to $176,539
for the years ended June 30, 1996 and 1997, respectively. The Company has a
policy of capitalizing software development costs and generally amortizing those
costs over three years as product development expense.
Interest expense totaled $444,918 and $232,678 for the years ended June
30,1997 and 1996, respectively. The increase in interest cost is due to the
acquisition of DJS which incurred interest on its line of credit. It is also due
to increase in the amount borrowed by all other operations of the Company under
an
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existing line of credit caused by an increase in sales and related increases in
inventory and accounts receivable. Interest rates decreased slightly during
fiscal 1997 compared to fiscal 1996.
In the last fiscal year the Company incurred significant costs to
introduce, market and sell the DocStar product line, as well as continued
research and development expenditures. The Docstar product line is sold
nationally through office equipment dealer channels. The Company continues to
recruit new dealers across the country which results in significant personnel,
advertising, marketing and travel expenditures.
Fiscal Year 1996 Compared to Fiscal Year 1995
The Company realized a consolidated net loss of $2,961,039 or $.55 per
share, for the fiscal year ended June 30, 1996 compared to a net profit of
$3,681, or $.00 per share, for the fiscal year ended June 30, 1995. Consolidated
net sales totaled $30,611,258 for fiscal year 1996 compared to $23,949,368 for
fiscal year 1995.
The sales increase is partially attributed to the acquisition of DJS in
March 1996. Sales increases also reflect the inclusion of ESI and SST as
wholly-owned subsidiaries of the Company for the entire fiscal year 1996
compared to inclusion for only approximately 10 1/2 months in fiscal year 1995.
The Company also experienced significant sales growth in its document imaging
product line known as DocStar. Additionally, ESI and SST also experienced sales
growth.
Gross profit for fiscal year 1996 was $4,826,693 compared to $3,956,846
for the 1995 fiscal year. The gross profit margin was 15.8% for fiscal 1996
compared to 16.5% for fiscal 1995. The Company's gross profit margin (which is
defined as gross profit as a percentage of sales) decreased slightly due to
aggressive pricing of certain Company products such as personal computers and
peripheral computer products. This was partially offset by the growth in sales
of the Company's DocStar product line which has significantly higher gross
margins than other product lines of the Company. Increases in gross profit also
resulted from inclusion of SST and ESI for a full fiscal year as compared to the
previous fiscal year, as well as the acquisition of DJS, as described above.
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Selling, general and administrative expenses consist of all other
Company expenses, except product development and interest. These costs increased
from $3,993,861 in fiscal 1995 to $7,564,946 in fiscal 1996. The increase in
such expenses is due to the acquisition of DJS as well as the growth of SST and
ESI. Additionally, these increased expenses resulted from inclusion of SST and
ESI for the full fiscal year 1996. In addition, the Company incurred significant
selling, general and administrative costs related to the DocStar product line in
fiscal 1996, including costs associated with the hiring of a national dealer
sales force and related expenses such as salaries, travel and living expenses,
moving expenses, communication costs, equipment costs and benefits as well as
advertising, promotion, sales training, service training, technical support,
production overhead and office overhead. The Company is continuing to recruit
sales, marketing and service personnel for the DocStar line, and therefore
additional costs will be incurred during the next fiscal year.
As a percentage of sales, selling, general and administrative costs
increased from 16.7% in fiscal 1995 to 24.7% in fiscal 1996. Management believes
that as the DocStar sales volume increases this percentage of selling, general
and administrative costs to sales will decrease. Recently the Company opened its
Central and Western United States dealership territories and expects significant
growth in the future. Prior to June 30, 1996 most sales were limited to dealers
in the Northeastern United States with some minor volume in the Southern United
States.
Product development expenses that relate primarily to development of
the Company's DocStar product line, increased from $29,384 in fiscal 1995 to
$129,075 in fiscal 1996. The Company has a policy of capitalizing qualifying
software development costs and amortizing those costs generally over three
years, the estimated economic life of the product. During fiscal year 1996, the
Company capitalized $29,957 in such costs as compared to $48,911 in fiscal 1995.
Interest costs totaled $232,678 in fiscal 1996 compared to $108,239 in
fiscal 1995. The increase in interest cost is related to the increase in sales
volume over the prior year. As sales increased the Company increased the amount
borrowed to fund inventory and receivables. Additionally, this increase reflects
interest costs associated with the $2.3 million credit facility
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obtained by the Company's recently acquired subsidiary, DJS. To a lesser extent
the increase is also due to an increase in interest rates compared to the prior
year.
The decrease in profits can be attributed to the introduction of the
DocStar product line. During fiscal year 1996, the Company incurred and expects
to continue to incur, significant costs to build a management and sales team,
significantly expand its distribution network and to advertise and promote
DocStar. As a result of these various costs, the Company has incurred a loss for
the year ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds to date have been the issuance
of equity and the incurrence of third party debt.
The Company has one working capital line of credit totaling $1,500,000
for Bitwise which is collateralized by all accounts receivable, inventory and
all other assets of Bitwise. At June 30, 1998 the total outstanding balance was
$637,210. In addition, DJS may utilize a wholesale inventory credit facility in
the amount of $625,000. This facility is supported by a guaranty furnished by
one of DJS's vendors and is expressly limited to purchases from this vendor.
This facility is non-interest bearing and is collaterized by all of the assets
of DJS. Effective June 30, 1998 DJS accounts receivable credit facility was
terminated. At June 30, 1998 the total outstanding balance was $1,036,065.
The Bitwise line of credit accrues interest at the rate of prime plus
2% per annum. This credit agreement includes various covenants which require the
Company to maintain a minimum tangible net worth, maximum debt to tangible net
worth and a minimum annual net profit on a consolidated basis. They also require
delivery of periodic financial information and quarterly audits conducted by the
lender. At June 30,1998 the Company was not in compliance with one of its debt
covenants which required the Company to report a profit for the year ended June
30, 1998. Subsequent to year end the agreement was amended to remove the
profitability requirement and to require minimum working capital thresholds (as
defined) to be met for each of the fiscal quarters of 1999. Management does not
anticipate that the company will be in violation of any covenants on a
prospective basis.
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In August 1997, the Company concluded an offering with an offshore bank
for $4,000,000 in gross proceeds ($3,600,000 net proceeds after expenses) in the
form of unsecured, convertible, bearer notes, payable in its entirety on August
11, 2002, with 400,000 detachable Common Stock Purchase Warrants. The $650,411
value of the warrants has been recorded as discount on the debt and is being
amortized over the term of the debt. The Notes accrue interest at 8%, payable
semiannually in arrears. The holder of $25,000 principal amount or more may
convert the notes into common stock commencing November 1, 1997 until August 11,
2002 at the rate of $3.25 per share. As of June 30, 1998, 7,692 common shares
were issued pursuant to the conversion of $25,000 of convertible debt into
common stock. The principal balance of long-term debt at June 30, 1998 totaled
$3,440,332.
In June 1998, the Company sold SST for $4,000,000 in a stock sale. The
Company received approximately $3,600,000 in cash and approximately $400,000
worth of inventory and receivables resulting in a loss of approximately
$256,000.
Property, plant and equipment expenditures totaled $250,162 for the
year ended June 30,1998. There were no purchase commitments outstanding. The
Company is considering the construction of a new office/production facility for
approximately $2,500,000 in Schenectady, NY, pending the receipt of a grant from
New York State for $1,000,000 and pending a commitment on tax exempt bank
financing for approximately $1,400,000. This new facility would be approximately
75% larger than the current space leased by the Company and would relieve a
capacity bottleneck in production and shipping. In the event the Company decides
not to construct a new building the Company may expand its current facility or
lease a larger existing facility.
The Company anticipates that cash received from operations, the
proceeds from the sale of SST, and the money borrowed under its line of credit,
will be sufficient to satisfy normal operating obligations.
During the fiscal year ended June 30, 1998, the Company incurred a net
loss of $5,464,059, and cash used by operating activities totaled $4,940,419.
The Company's available cash balance at June 30, 1998 totaled approximately
$4,000,000 and it had available approximately $900,000 under an existing line of
credit. Under its current operating plan to obtain a national
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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 and the Company's ability to reduce overhead costs. If
the Company is unable to attain projected sales levels for its DocStar systems,
is unable to implement cost reduction strategies, or fails to comply with debt
covenant requirements, it may be necessary to raise additional capital to fund
operations and meet its obligations.
EFFECTS OF INFLATION AND CHANGING PRICES
The impact of general inflation on the Company's operations has not
been significant to date and the Company believes inflation will continue to
have an insignificant impact on the Company. However, price deflation in the
major categories of components purchased by the Company has been substantial and
is anticipated to continue through fiscal 1999. Typically, new components such
as new generations of microprocessors and new optical disk drive technologies
etc. are introduced at premium prices, and command high margins and high market
prices for the initial six to twelve months of their availability. During this
period, the Company is able to earn premium margins on its products. As the life
cycle progresses competitive pressures could force prices down and thus lower
the premium margins that existed. The Company does not believe price deflation
will have an impact on the Imaging Systems product line because it serves a
niche market although there can be no assurances that changing prices will not
have an impact in the future on this product line. The Company has actually
raised prices twice during the prior two years as new software and hardware
features were offered.
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 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.
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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 2000. The adoption of this standard is not expected to have a significant
impact on the Company's consolidated financial statements.
In June 1998, the Financial Accounting Standards Board (FASB or the
"Board") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133 or the "Statement") SFAS 133 establishes a new model for
accounting for derivatives and hedging activities. This statement is effective
for fiscal years beginning after June 15, 1999, but earlier application is
permitted as of the beginning of any fiscal quarter subsequent to June 15, 1998.
The adoption of this standard is not expected to have a significant impact on
the Company's consolidated financial statements.
YEAR 2000 COMPLIANCE
The Year 2000 creates risks for the Company if the computers, software
and other equipment utilizing microprocessors do not correctly recognize and
process date information beyond the year 1999. The Company is addressing this
issue by performing a survey on all of their desktops and servers to ensure Year
2000 compliance. The survey concluded that all of the Company's in-house work
systems use hardware that is that 100% Year 2000 compliant. Most of the
Company's software and operating systems are Microsoft(TM) based and are
believed to be Year 2000 compliant. The only software that may not be Year 2000
compliant is the Company's third-party accounting software. The Company is
currently communicating with the manufacturer who has a new version of the
software that can remedy the Year 2000 issue. The new version of accounting
system will be installed and tested at the end of the Company's fiscal year in
October, 1998. The Company's product's hardware is fully Year 2000 compliant and
the software will also be Year 2000 compliant in the latest version 2.30
scheduled for release in December, 1998. Because the DocStar System is a
relatively new system, it was designed to handle a four (4) digit
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year. In addition, the Company is in the process of surveying their critical
vendors for Year 2000 compliance. However, the Company does not believe there
would be significant difficulties finding alternate supply services should the
need arise.
Achieving Year 2000 compliance is dependant on many factors, some of
which are not completely within the Company's control. If the Company's internal
systems or the internal systems of the significant vendors or suppliers fail to
achieve Year 2000 compliance, the Company's business and its results of
operations could be adversely affected.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
THE FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SCHEDULE ARE ANNEXED HERETO
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
In June 1997, the Board of Directors of the Company determined that it
would be in the best interests of the Company to terminate the services of
independent accountant KPMG Peat Marwick LLP, which acted as its independent
accountant with respect to the fiscal years ended June 30, 1994 through June 30,
1996. The Board of Directors also decided to retain the firm of
PricewaterhouseCoopers, LLP to be its independent accountants for the fiscal
year ending June 30, 1998. The dismissal of KPMG Peat Marwick LLP was
recommended and approved by the Board of Directors of the Company and is not the
result of any disagreement with KPMG Peat Marwick LLP on any matter of
accounting principles or practice, financial statement disclosure or auditing
scope or procedure during fiscal periods ended June 30, 1996 and through the
date of dismissal. Management of the Company recommended the change in order to
significantly reduce the Company's audit and income tax preparation costs.
The audit reports issued by KPMG Peat Marwick LLP for the years ended
June 30, 1996 did not contain an adverse opinion or a disclaimer of opinion, nor
were they qualified or modified as to uncertainty, audit scope, or accounting
principles.
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
MANAGEMENT
The executive officers and directors of the Company are as follows:
NAME AGE OFFICE
John T. Botti 34 President, Chief Executive
Officer and Chairman of the
Board
Ira C. Whitman 35 Senior Vice-
President--Research and
Development, Secretary and
Director
Donald J. Payne 65 Chief Operating Officer and
Director
Steven A. Kriegsman 55 Director
J. Edward Sheridan 61 Director
Charles C. Johnston 62 Director
Edward N. Patrone 62 Director
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.
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34
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 ("RPM") 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.
Donald J. Payne joined the Board of Directors in June 1992. Mr. Payne
was hired by the Corporation in January 1996, as Chief Operating Officer of the
Corporation and as President of the DocStar Division. Prior to that, Mr. Payne
was President of Federal Armored Express Air Courier Division since 1993. From
1990 to 1993 he was the President and Chief Executive Officer of Enable
Software, Inc. From 1983 to 1990, he was President of Federal Armored Express,
Inc. From 1977 to 1983, Mr. Payne was Executive Vice President, North American
Operations for Brinks, Inc. For approximately 22 years prior to 1977, Mr. Payne
served in various sales and marketing capacities in the computer and office
product industries, 17 of which were with International Business Machines
Corporation. Mr. Payne holds a B.B.A. degree from Adelphi University.
J. Edward Sheridan joined the Board of Directors in June, 1992. From
1985 to the present, Mr. Sheridan served as the President of Sheridan Management
Corp. From 1975 to 1985, Mr. Sheridan served as the Vice President of Finance
and Chief Financial Officer of AMF. From 1973 to 1975, he was Vice President and
Chief Financial Officer of Fairchild Industries. From 1970 to 1973 he was the
Vice President, Corporate Finance of F.S. Smithers. From 1967 to 1970 Mr.
Sheridan was the Director of Acquisitions of Westinghouse Electric. From 1964 to
1967 he was employed by Corporate Equities, Inc., a venture capital firm,
Mr.Sheridan holds an M.B.A. from Harvard University and a B.A. from Dartmouth
College.
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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.
Edward N. Patrone joined the Board of Directors in December, 1997. From
May 1991 to December 1996, Mr. Patrone was a senior consultant to Alco Standard
Corporation, a company formerly listed on the New York Stock Exchange and which
was engaged in the marketing and distribution of paper and office products. Alco
Standard has since then been restructured into two separate New York Stock
Exchange companies, Ikon Office Solutions and the Unisource Corporation. From
1979 through 1991 Mr. Patrone served as a member of Alco Standard's Board of
Directors and its Executive Committee of the Board of Directors. From 1967
through 1991, Mr. Patrone served in various management capacities of Alco
Standard, including President and Chief Executive Officer of one of it
subsidiaries from 1988 to 1991. Mr. Patrone also serves as a director of Global
Imaging, Primesource Corp. and Compucon Corp.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has three (3) Committees: Audit,
Compensation and Executive Committee.
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Audit Committee. The members of the Audit Committee are J. Edward
Sheridan, Edward Patrone, and Charles Johnston. The Audit Committee acts to: (i)
acquire a complete understanding of the Corporation's audit functions; (ii)
review with management the finances, financial condition and interim financial
statements of the Corporation; (iii) review with the Corporation's independent
auditors the year-end financial statements; and (iv) review implementation with
the independent auditors and management any action recommended by the
independent auditors. During the fiscal year ended June 30, 1998, the Audit
Committee met on one occasion.
Executive Committee. The members of the Executive Committee are John
Botti, Ira C. Whitman and Donald Payne. 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 the Company's
securities; (v) authorize the acquisition of any major assets or business or
change the business of the Corporation; or (vi) authorize any employment
agreements in excess of $75,000. The Executive Committee meets when actions must
be approved in an expedient manner and a meeting of the Board of Directors
cannot be convened. During Fiscal 1997, the Executive Committee did not deem it
necessary to meet.
Compensation Committee. The members of the Compensation Committee are
Steven Kriegsman, Edward Patrone and J. Edward Sheridan. The Compensation
Committee functions include administration of the Corporation's 1992 Employee
Stock Option Plan and Non-Executive Director Stock Option Plan and negotiation
and review of all employment agreements of executive officers of the
Corporation. During the fiscal year ended June 30, 1998, the Compensation
Committee held one meeting.
MEETINGS OF THE BOARD OF DIRECTORS
During the fiscal year ended June 30, 1998, the Board of Directors of
the Company met on four occasions and voted by unanimous written consent on two
occasions. No member of the Board of Directors attended less than 75% of the
aggregate number of (i) the total number of meetings of the Board of Directors
or
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(ii) the total number of meetings held by all Committees of the Board of
Directors.
CERTAIN REPORTS
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's Directors and officers, and persons who own, directly or
indirectly, more than 10% of a registered class of the Corporation's equity
securities, to file with the Securities and Exchange Commission ("SEC") reports
of ownership and reports of changes in ownership of common stock and other
equity securities of the Company. Officers, directors and greater than 10%
shareholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms that they file. Based solely on review of the copies
of such reports received by the Company, the Company believes that all Section
16(a) filing requirements applicable to officers, directors and 10% shareholders
were complied with during the 1997 fiscal year.
SIGNIFICANT EMPLOYEES
Dennis H. Bunt has been Chief Financial Officer of the Company 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.
William Leonard has been Vice President of Sales of the DocStar
Division since January 1998. During his career, Mr. Leonard has held
progressively responsible sales management positions with major suppliers of
imaging systems and office equipment. Most recently, he was Sales Director for
the Image Filing Systems Division of Canon USA in Lake Success, NY. There, he
supervised a national sales staff and opened an independent distribution
channel, eventually achieving $80 million in sales revenue. Prior to this role,
Mr. Leonard advanced through the sales management ranks at Canon, marketing
optical disk filing and facsimile
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systems. He began his career at Gestetner Corporation, selling office products
in the Western US.
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.
ITEM 11. EXECUTIVE COMPENSATION
The following table provides certain information concerning all Plan
and Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-B) compensation
awarded to, earned by, paid by the Company during the years ended June 30, 1998,
1997 and 1996 to each of the named executive officers of the Company.
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39
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
LONG TERM
COMPENSATION AWARDS
NO. OF
SECURITIES
NAME AND OTHER RESTRICTED UNDERLYING
PRINCIPAL FISCAL ANNUAL STOCK OPTIONS/
POSITION YEAR SALARY BONUS COMPENSATION AWARD(S) SARS
John Botti 1998 $121,000(1) 0(1) $ 1,702(2) 0(3) 0
Chairman, 1997 $110,000 0 $ 1,415 0 0
President and 1996 $ 90,000 0 $ 1,472 0 0
Chief Executive
Officer
Donald Payne 1998 $100,000 0 $ 3,802(4) 0 0
Chief Operating 1997 $100,000 0 $ 5,844 0 0
Officer, 1996 $ 43,554 0 $42,729 0 100,000(5)
President-
Imaging Div.-
Director
(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 the pre-tax profits of the Company, which
criteria was not met in 1998, 1997 or 1996, therefore, no bonuses were
issued. Additionally, Mr. Botti is entitled to receive $121,000 in
salary per year. See "Employment Agreements."
(2) Includes: (i) for 1998, an automobile and expenses of $1,500 and the
payment of premiums on term life insurance policy of $202; (ii) for
1997, an automobile and expenses of $1,213 and the payment of premiums
on a term life insurance policy of $202; and (iii) for 1996, an
automobile and expenses of $1,213 and the payment of premiums on a term
life insurance policy of $259.
(3) No restricted stock awards were granted to Mr. Botti in fiscal 1998.
Mr. Botti, however, owned 233,853 restricted shares of the Company's
Common Stock on June 30, 1998, the market value of which was
approximately $423,859 on such date, without giving effect to the
diminution in value attributed to the restriction on such shares.
(4) Includes (i) for fiscal year 1998 includes personal automobile expenses
of $3,600 and $202 for premiums on a term life insurance policy; (ii)
for fiscal year 1997 includes personal transportation of $5,642 and
$202 for premiums on a term life insurance policy; (iii) for fiscal
year 1996 includes personal automobile expenses of $1,177, the payment
of premiums
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40
on a term life insurance policy of $84 and consulting fees of $41,468
which were paid prior to Mr. Payne being hired by the Company.
(5) On June 30, 1995, Mr. Payne was granted five-year warrants to purchase
100,000 shares of Common Stock at an exercise price of $1.56 per share.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Alternative
Individual Grants Realizable Value At to
Assumed Annual (f) and (g)
Rates of Stock Grant Date
Price Appreciation Value
For Option
Term
Percent of
Number of Total Exercise
Securities Option/ of
Underlying SARs Granted Base
Option/SARs To Employees Price Expiration
Name Granted (#) In Fiscal (S/Sh) Date
(a) (b) Year (d) (c)
(C)
Grant Date
5% ($) 10% ($) Present
(f) (g) Value $
(h)
John Botti 225,000 23.9% $3.125 7/23/02 $35,156 $70,313
Donald Payne 40,000 4.3% $3.125 7/23/02 $6,250 $12,500
No Stock Appreciation Rights were granted to any of the named executive
officers during the last fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table contains information with respect to the named
executive officers concerning options held as of the year ended June 30, 1998.
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES
Number of Unexercised Value of Unexercised In-the-
Shares Options as of June 30, Money Options
Acquired 1998 at June 30, 1998(1)
on Value ---- -------------------
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ---- -------- -------- ------------------------- -------------------------
John T. Botti 0 -- 710,185/125,000 133,747/31,250
Donald Payne(2) 0 -- 100,000/70,000 25,000/0
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41
(1) Based upon the closing bid price ($1.8125 per share) of the Company's
Common Stock on June 30, 1998 less the exercise price for the aggregate
number of shares subject to the options.
(2) Includes warrants to purchase 100,000 shares of Common Stock at an
exercise price of $1.56 per share. The warrants were issued on June 30,
1995 and are exercisable over a five-year period.
EMPLOYMENT AGREEMENTS
Effective July 1, 1995, the Company entered into a new employment
agreement with Mr. Botti 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 net income, with such
additional bonuses as may be awarded in 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 100,000 vested in on June 30, 1995, 125,000 vested on June 30, 1996 and
125,000 vest on each of June 30, 1997, 1998 and 1999; (iv) certain insurance and
severance benefits and (v) automobile and expenses.
Effective June 30, 1995, the Company entered into a consulting
agreement with Donald Payne pursuant to which Mr. Payne would provide certain
services to the Company with respect to marketing and sales of its DocStar
system. Pursuant to the agreement, Mr. Payne received compensation equal to $700
per diem and warrants to purchase 100,000 shares of Common Stock at an exercise
price of $1.5625 per share. Subsequently, in January 1996, Mr. Payne was hired
as Chief Operating Officer of the Company and President of the DocStar Division.
COMPENSATION OF DIRECTORS
Directors were compensated for their services during the last fiscal
year in the amount of $5,000 annually. The Directors receive options to purchase
10,000 shares for each year of service under the Non-Executive Director Stock
Option Plan ("Stock 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.
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STOCK OPTION PLANS
In April 1992, the Company adopted the 1992 Employees Stock Option Plan
(the "1992 Plan") which provided for the grant of options to purchase up to
600,000 shares of the Company's Common Stock. On January 26, 1995, the
stockholders of the Company approved an amendment to the 1992 Plan to increase
the number of shares of Common Stock available under the 1992 Plan to 3,000,000
shares. Under the terms of the 1992 Plan, options granted thereunder may be
designated as options which qualify for incentive stock option treatment
("ISOs") under Section 422A of the Code, or options which do not so qualify
("Non-ISOs"). As of June 30, 1998, there were outstanding 2,338,870 options
under the 1992 Plan with exercise prices ranging from $.34 to $7.125.
The 1992 Plan is administered by a Compensation Committee designated by
the Board of Directors. The Compensation Committee has the discretion to
determine the eligible employees to whom, and the times and the price at which,
options will be granted. Whether such options shall be ISOs or Non-ISOs; the
periods during which each option will be exercisable; and the number of shares
subject to each option, shall be determined by the Committee. The Board or
Committee shall have full authority to interpret the 1992 Plan and to establish
and amend rules and regulations relating thereto.
Under the 1992 Plan, the exercise price of an option designated as an
ISO shall not be less than the fair market value of the Common Stock on the date
the option is granted. However, in the event an option designated as an ISO is
granted to a ten percent stockholder (as defined in the 1992 Plan) such exercise
price shall be at least 110% of such fair market value. Exercise prices of
Non-ISOs options may be less than such fair market value. The aggregate fair
market value of shares subject to options granted to a participant which are
designated as ISOs which become exercisable in any calendar year shall not
exceed $100,000. The "fair market value" will be the closing NASDAQ bid price,
or if the Company's Common Stock is not quoted by NASDAQ, as reported by the
National Quotation Bureau, Inc., or a market maker of the Company's Common
Stock, or if the Common Stock is not quoted by any of the above, by the Board of
Directors acting in good faith.
The Compensation Committee may, in its sole discretion, grant bonuses
or authorize loans to or guarantee loans obtained by an optionee to enable such
optionee to pay any taxes that may arise in connection with the exercise or
cancellation of an option.
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43
Unless sooner terminated, the 1992 Plan will expire in April, 2002.
In April, 1992, the Board of Directors adopted the Non-Executive
Director Stock Option Plan (the "Director Plan") which was approved by the
Company's stockholders in May, 1992. With the approval of the shareholders, the
Director Plan was amended in December, 1997. Options are granted under the
Director Plan until April, 2002 to (i) non-executive directors as defined and
(ii) members of any advisory board established by the Company who are not
full-time employees of the Company or any of its subsidiaries. The Director Plan
provides that each non-executive director will automatically be granted an
option to purchase 20,000 shares, upon joining the Board of Directors, and
10,000 shares on each September 1st thereafter, provided such person has served
as a director for the 12 months immediately prior to such September 1st. Each
eligible director of an advisory board will receive, upon joining the advisory
board, and on each September 1st thereafter, an option to purchase 5,000 shares
of the Company's Common Stock, providing such person has served as a director of
the advisory board for the previous 12 month period.
As of June 30, 1998, there are outstanding 140,000 options under the
Director Plan with exercise prices from $2.781 to $5.125.
The exercise price for options granted under the Director Plan is 100%
of the fair market value of the Common Stock on the date of grant. The "fair
market value" is the closing NASDAQ bid price, or if the Company's Common Stock
is not quoted by NASDAQ, as reported by the National Quotation Bureau, Inc., or
a market maker of the Company's Common Stock, or if the Common Stock is not
quoted by any of the above by the Board of Directors acting in good faith. Until
otherwise provided in the Stock Option Plan the exercise price of options
granted under the Director Plan must be paid at the time of exercise, either in
cash, by delivery of shares of common Stock of the Company or by a combination
of each. The term of each option commences on the date it is granted and unless
terminated sooner as provided in the Director Plan, expires five years from the
date of grant. The Director Plan is administered by a committee of the board of
directors composed of not fewer than three persons who are officers of the
Company (the "Committee"). The Committee has no discretion to determine which
non- executive director or advisory board member will receive options or the
number of shares subject to the option, the term of the option or the
exercisability of the option. However, the Committee will make all
determinations of the interpretation of the Director Plan. Options
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44
granted under the Director Plan are not qualified for incentive stock
option treatment.
SHAREHOLDER RETURN PERFORMANCE PRESENTATION:
Set forth herein is a line graph comparing the total cumulative return on the
Company's common stock and the NASDAQ Composite Index (assuming reinvestment of
dividends). The Company's common stock is listed for trading in the NASDAQ
SmallCap market under the trading symbol BTWS.
[CHART]
CUMULATIVE TOTAL SHAREHOLDER RETURN
Date Bitwise NASDAQ Peer
Composite Index Issuser
6/30/94 $ 9,730 $10,029 $16,667
6/30/95 3,514 13,359 37,500
6/30/96 10,270 16,959 20,000
6/30/97 6,554 20,637 15,000
6/30/98 3,919 27,115 27,500
Footnotes:
(1) Assumes $10,000 was invested at June 30, 1993 in Bitwise and each index
presented
(2) The peer issuer has been chosen in good faith by management. Most of the
Company's peers are divisions of large multi-national companies therefore
a comparison is not meaningful, however management has chosen one peer
issuer in a similar business, Filenet Corp.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of September 21,
1998 with respect to (i) each director and each executive officer, (ii) all
directors and officers as a group, and (iii) the persons (including any "group"
as that term is used in Section l3(d)(3) of the Securities Exchange Act of
l934), known by the Corporation to be the beneficial owner of more than five
(5%) percent of the Corporation's Common Stock and Series A Preferred Stock.
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) 10.6%
c/o Bitwise Designs
Rotterdam Industrial Park
Schenectady, NY 12306
Common Ira C. Whitman 667,239 (3) 7.5%
c/o Bitwise Designs
Rotterdam Industrial Park
Schenectady, NY 12306
Common Steven Kriegsman 20,000 (4) .2%
c/o Bitwise Designs
Rotterdam Industrial Park
Schenectady, NY 12306
Common Dennis Bunt 99,216 (5) 1.1%
c/o Bitwise Designs, Inc.
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45
Rotterdam Industrial Park
Schenectady, New York 12306
Common Donald J. Payne 170,000 (6) 1.9%
c/o Bitwise Designs, Inc.
Rotterdam Industrial Park
Schenectady, New York 12306
Common J. Edward Sheridan 60,000 (7) .7%
c/o Bitwise Designs, Inc.
Rotterdam Industrial Park
Schenectady, New York 12306
Common Charles Johnston 20,000 (4) .2%
c/o Bitwise Designs, Inc.
Rotterdam Industrial Park
Schenectady, New York 12306
Common Edward N. Patrone 20,000 (4) .2%
c/o Bitwise Designs, Inc.
Rotterdam Industrial Park
Schenectady, New York 12306
Series A John T. Botti 100 (8) 50%
Preferred c\o Bitwise Designs, Inc.
Stock Rotterdam Industrial Park
Schenectady, N.Y. 12306
Series A Ira C. Whitman 100 (9) 50%
Preferred c/o Bitwise Designs, Inc.
Stock Rotterdam Industrial Park
Schenectady, N.Y. 12306
Directors/Officers as a group (2)(3)(4)(5)(6)(7)(8)(9) 2,001,338 22.4%
(Footnotes appear on next page....)
(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.
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46
(4) Includes vested options to purchase 20,000 shares of Common
Stock.
(5) Includes vested options to purchase 97,333 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 options to purchase 70,000 shares of Common Stock. Also
includes warrants to purchase 100,000 shares of Common Stock at an
exercise price of $1.5625 per share.
(7) Includes vested options to purchase 60,000 shares of Common
Stock.
(8) See footnote (2). Each share of Series A Preferred Stock is
entitled to ten (10) votes per share.
(9) See footnote (3). Each share of Series A Preferred Stock is
entitled to ten (10) votes per share.
*Percentage not significant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as disclosed herein, the Company has not entered into any
material transactions or series of similar transactions with any director,
executive officer or any security holder owning 5% or more of the Company's
Common Stock.
Mr. Botti has personally guaranteed the lease of the Company's
facilities from Rotterdam Ventures, Inc. The Company may attempt to negotiate
with this entity to cancel or limit the personal guarantee.
On July 17, 1995, the Company entered into an agreement with Whale
Securities Co., L.P. pursuant to which Whale Securities has been retained as the
Company's financial consultant and investment banker for a one-year period.
Under the terms of the consulting agreement, Whale Securities received five-year
warrants to purchase 200,000 shares of Common Stock at an exercise price of
$1.50 per share.
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47
In connection with the December 1995 private offering, the Company
issued to Whale Securities Co. L.P. and its designees, for services Whale
provided as placement agent, warrants (the "Placement Agent Warrants") to
purchase (i) 214,884 shares of common Stock and (ii) Warrants to purchase
214,884 Unit Warrants. The terms of the Warrants issued to Whale are similar to
those sold to the investors in the December private offering, in that they are
exercisable for a period of five years, and have an exercise price of $4.50 per
share. The Warrants issued to Whale and its designees are not redeemable by the
Company. The Warrants issued to Whale contain certain anti-dilution provisions.
For information concerning employment agreements with, and compensation
of, the Company's executive officers and directors, see "MANAGEMENT -- Executive
Compensation."
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
a)(1) Financial Statements
The following Financial Statements of the Company
are included in Part II, Item 8 of this report:
Independent Auditors' Reports
Consolidated Balance Sheets as of June 30, 1998
and 1997
Consolidated Statements of Operations for the years
ended June 30, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for
the years ended June 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years
ended June 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
a)(2) Financial Statement Schedule
The following consolidated financial statements
schedule for each of the three years in the period ended June 30, 1998 is
included pursuant to item 14 (d):
Report of PricewaterhouseCoopers LLP on Financial
Statements Schedule
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48
Report of KPMG Peat Marwick LLP on Financial
Statements Schedule
Schedule II, Valuation and Qualifying Accounts
(b) Reports on Form 8-K
During the quarter ended June 30, 1998 the Company
filed the following reports: None
(c) Exhibits
The following exhibits, designated by an asterisk
(*), have been previously filed with the Commission
and, pursuant to 17 C.F.R. Section 230.411, are
incorporated by reference to the document referenced
in brackets following the descriptions of such
exhibits.
Exhibit No. Description
2.1* Agreement and Plan of Merger between Bitwise Designs,
Inc. and Electrograph Systems, Inc. dated February 7,
1994
2.2* Agreement and Plan of Merger between Bitwise Designs,
Inc. and Systems Solutions, Inc. dated April 29, 1994
3.1* Certificate of Incorporation of Bitwise Designs, Inc.-
Delaware (Exhibit 3.3.1 to Registration Statement on Form
S-18, File No. 33-46246-NY)
3.1.1* Certificate of Designation of Series B Preferred Stock
3.2* By-Laws (Exhibit 3.2 to Registration Statement on Form S-
18, File No. 33-46246-NY)
4.1* Form of Common Stock Certificate (Exhibit 4.1 to
Registration Statement on Form S-18, File No. 33-46246-NY)
48
49
4.2* Form of Series A Preferred Stock Certificate (Exhibit 4.2
to Registration Statement on Form S-18, File No. 33-
46246-NY)
4.3* Form of Warrant issued to Berkeley Securities Corp.
(Exhibit 4.3 to Registration Statement on Form S-18, File
No. 33-46246-NY)
4.4* Form of Warrant issued to certain individuals in April,
1992 (Exhibit 4.4 to Registration Statement on Form S-18,
File No. 33-46246-NY)
4.5* Form of Series B Preferred Stock Certificates (Exhibit
4.5 to the Registration Statement on form SB-2, File No.
33-76494)
4.6* Form of Warrant to be issued to Berkeley Securities
Corp.(Exhibit 4.6 to the Registration Statement on form
SB-2, File No. 33-76494)
4.7* Form of Note and Warrant Purchase, Paying and
Conversion/Exercise agency agreement dated as of August
8, 1997 between the Company and Banca del Gottardo
(Exhibit 4.7 to the Company's Form 10-KSB dated June 30,
1997).
4.8* Terms of 8% Convertible Notes due August 11, 2002
(Exhibit 4.8 to the Company's Form 10-KSB dated June 30,
1997).
4.9* Terms of Warrants and Global Warrant expiring August 11,
2002 (Exhibit 4.9 to the Company's Form 10-KSB dated June
30, 1997).
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
49
50
Registration Statement on Form S-18, File No. 33-46246-
NY)
10.3* Lease agreement with Apple Commercial Credit for laser
printer, dated June 23, 1987 (Exhibit 10.3 to
Registration Statement on Form S-18, File No. 33-46246-
NY)
10.4* Leases with Adirondack Leasing Associates, Ltd. (Exhibit
10.4 to Registration Statement on Form S-18, File No. 33-
46246-NY)
10.5* Loan agreement with U.S. Small Business Administration
and Norstar Bank, dated April 4, 1991 (Exhibit 10.5 to
Registration Statement on Form S-18, File No. 33-46246-
NY)
10.6* Loan agreement with Schenectady Economic Development
Corporation, dated August 7, 1991 (Exhibit 10.6 to
Registration Statement on Form S-18, File No. 33-46246-
NY)
10.8* Employment agreement with John T. Botti, dated April,
1992 (Exhibit 10.8 to Registration Statement on Form S-
18, File No. 33-46246-NY)
10.9* Employment agreement with Ira C. Whitman, dated April,
1992 (Exhibit 10.9 to Registration Statement on Form S-
18, File No. 33-46246-NY)
10.10* 1992 Employee stock option plan (Exhibit 10.10 to
Registration Statement on Form S-18, File No. 33-46246-
NY)
10.11* 1992 Nonexecutive Directors stock option plan (Exhibit 10.11
to Registration Statement on Form S-18, File No.
33-46246-NY)
10.13* Loan agreement with Norstar Bank dated February 6, 1992
(Exhibit 10.13 to Registration Statement on Form S-18,
File No. 33-46246-NY)
10.13.1* Norstar Bank waiver agreement (Exhibit 10.13.1 to
Registration Statement on Form S-18, File No. 33-46246-
NY)
50
51
10.14* Agreement with Prime Computer, Inc. (Exhibit 10.14 to
Registration Statement on Form S-18, File No. 33-46246-
NY)
10.15* Agreement with Mentor Computer Graphics Ltd. (Exhibit
10.15 to Registration Statement on Form S-18, File No.
33-46246-NY)
10.16* Agreement with Robert W. Schwartz, Inc. dated February
10, 1992 (Exhibit 10.16 to Registration Statement on Form
S-18, File No. 33-46246-NY)
10.17* Form of Financial Consulting Agreement with the
Underwriter (Exhibit 10.17 to the Registration Statement
on form SB-2, File No. 33-76494)
10.18* Financing Agreement by and among Maryland Industrial
Development Financing Authority, JED Associates, State
National Bank of Maryland, Electronic Marketing
Associates, Inc. (name was changed to System Solutions
Technology, Inc.), Trimarc Systems Incorporated and
Intermec Mid-Atlantic Corporation dated December 11, 1985
(Exhibit 10.18 to the Registration Statement on form SB-
2, File No. 33-76494)
10.19* Maryland Industrial Development Financing Authority
Limited Obligation Economic Development Revenue Bond
(Exhibit 10.19 to the Registration Statement on form SB-
2, File No. 33-76494)
10.20* Cross-Collateral Security Agreement between NationsCredit
Corporation, Bitwise Designs, Electrograph Systems, Inc.
and System Solutions Technology, Inc. dated July 18,
1995.
10.21* Subcontract dated September 28, 1995 between PRC, Inc.
and System Solutions Technology, Inc.
10.22* Financial Consulting Agreement dated July 17, 1995
between the Company and Whale Securities, Co.
10.23* Agreement and Plan of Merger by and among Bitwise
Designs, Inc., Bitwise DJS, Inc., certain individuals and
DJS Marketing Group, Inc. dated March 6, 1996 (Exhibit 2
to Form 8-K dated March 22, 1996)
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52
10.24* Form of Conversion Agency Agreement between the Company
and Banca del Gottardo dated as of August 8, 1997
(Exhibit 10.24 to Form 10-KSB dated June 30, 1997).
10.25* Form of Warrant Agency Agreement between the Company and
Banca del Gottardo dated as of August 8, 1997 (Exhibit to
Form 10-KSB dated June 30, 1997).
10.26* Stock Purchase and Merger Agreement dated April 7, 1998
between the Company USI and SST. (Exhibit A to Proxy
Statement dated May 8, 1998).
11 Statement re: Computation of Per Share Earnings
21 Subsidiaries of Registrant
23 Consent of PricewaterhouseCoopers, LLP
23.1 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BITWISE DESIGNS, INC.
By: /s/John T. Botti
_______________________
John T. Botti
President, Chairman of the
Board and Chief Executive
Officer
Dated: September 28, 1998
Pursuant to the requirements of the Securities Act of 1933, this Report
has been signed below by the following persons in the capacities and on the
dates indicated:
Signature Capacity Date
/s/John T. Botti President,
- ---------------------------- Chairman of the September 28, 1998
John T. Botti Board and Chief
Executive Officer
/s/Donald J. Payne Chief Operating September 28, 1998
- ---------------------------- Officer and Director
Donald J. Payne
/s/Ira C. Whitman
- ---------------------------- Senior Vice September 28, 1998
Ira C. Whitman President and Director
/s/Steven A. Kriegsman Director September 28, 1998
- ----------------------------
Steven A. Kriegsman
/s/J. Edward Sheridan Director September 28, 1998
- ----------------------------
J. Edward Sheridan
/s/Charles C. Johnston Director September 28, 1998
- ----------------------------
Charles C. Johnston
/s/Edward N. Patrone Director September 28, 1998
- ----------------------------
Edward N. Patrone
/s/Dennis H. Bunt Chief Financial September 28, 1998
- ---------------------------- Officer and Principal
Dennis H. Bunt Accounting Officer
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REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and
Shareholder of Bitwise Designs and Subsidiaries, Inc.
Our audits of the consolidated financial statements referred to in our report
dated August 27, 1998 appearing in the 1998 Annual Report to Shareholders of
Bitwise Designs, Inc. and Subsidiaries (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedules listed in Item
14(a)(2) of this Form 10-K. In our opinion, these financial statement schedules
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Albany, New York
August 27, 1998
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55
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Bitwise Designs, Inc.:
Under date of September 6, 1996, we reported on the consolidated statements of
operations, shareholders' equity, and cash flows of Bitwise Designs, Inc. and
subsidiaries for the year ended June 30, 1996, as contained in the annual
report on Form 10-K for the year ended June 30, 1998. In connection with our
audit of the aforementioned consolidated financial statements, we also audited
the related financial statement schedule as listed in the accompanying index.
This financial statement schedule is the responsibility of the Company's
management. Our responsbility is to express an opinion on this financial
statement schedule based on our audit.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
Albany, New York
September 6, 1996
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BITWISE DESIGNS, INC. AND SUBSIDIARIES
VALUATIONS AND QUALIFYING ACCOUNTS SCHEDULE II
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance at Additions Charged to
Beginning Charged To Other Balance At End
Description of Period Expense Accounts (a) Deductions (b) Of Period
----------- --------- ------- ------------ -------------- ---------
Allowance for doubtful
accounts
Year ended June 30
1998 . . . . . . . 189,126 416,780 -- (125,677) 480,229
1997 . . . . . . . 215,322 118,710 -- (144,906) 189,126
1996 . . . . . . . 111,482 93,721 60,638 (50,519) 215,322
Reserve for slow moving
or obsolete inventory
Year ended June 30:
1998 . . . . . . . 301,370 726,705 -- (313,690) 714,385
1997 . . . . . . . 412,056 181,825 -- (292,511) 301,370
1996 . . . . . . . 282,222 295,088 33,350 (198,604) 412,056
(a) Additions related to acquisition of subsidiaries
(b) Deductions due to writedowns and sales of subsidiaries
56
57
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
(AND REPORTS OF INDEPENDENT ACCOUNTANTS)
58
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 7-22
59
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, 1998 and 1997, and the
results of their operations and their cash flows for each of the two years in
the period ended June 30, 1998, 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.
/s/ PRICEWATERHOUSECOOPERS LLP
Albany, New York
August 27, 1998
60
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Bitwise Designs, Inc.:
We have audited the accompanying consolidated statements of operations,
shareholders' equity, and cash flows of Bitwise Designs, Inc. and subsidiaries
for the year ended June 30, 1996. 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 results of operations and the cash flows
of Bitwise Designs, Inc. and subsidiaries for the year ended June 30, 1996, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Albany, New York
September 6, 1996
3
61
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and 1997
ASSETS 1998 1997
Current assets:
Cash and cash equivalents $ 4,000,370 $ 2,863,847
Accounts receivable, net of allowance for doubtful accounts of
$480,229 in 1998 and $189,126 in 1997 4,609,807 7,219,539
Due from related parties 48,422 216,465
Inventories 3,210,868 3,137,332
Income taxes receivable 3,291 8,650
Prepaid expenses and other current assets 266,237 176,338
------------ ------------
Total current assets 12,138,995 13,622,171
Property and equipment, net 776,925 998,781
Other assets:
Software development costs, net of accumulated amortization of
$185,818 in 1998 and $115,758 in 1997 88,391 81,059
Excess of cost over net assets of companies acquired, net 1,422,526 4,182,932
Deferred financing costs 244,109
Other assets 37,508 39,822
------------ ------------
Total assets $ 14,708,454 $ 18,924,765
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under lines of credit $ 1,673,275 $ 4,219,877
Accounts payable 2,294,192 2,956,270
Accrued expenses and other current liabilities 822,429 542,550
Current portion of long-term debt -- 1,601
Current portion of obligations under capital leases -- 10,200
------------ ------------
Total current liabilities 4,789,896 7,730,498
Long-term debt, net of discount 3,440,332
Obligations under capital leases, net of current portion 1,297
------------ ------------
Total liabilities 8,230,228 7,731,795
------------ ------------
Commitments
Shareholders' equity
Preferred stock - $.10 par value, 5,000,000 shares authorized:
Series A - 200 shares issued and outstanding ($1.00 liquidation value) 20 20
Common stock, $.001 par value; authorized 20,000,000 shares; issued
7,410,745 and 7,367,720 shares in 1998 and 1997, respectively 7,411 7,368
Additional paid-in capital 19,822,159 18,996,591
Accumulated deficit (13,274,645) (7,810,586)
------------ ------------
6,554,945 11,193,393
Less cost of common shares in treasury (28,082 shares in 1998
and 338 shares in 1997) (76,719) (423)
------------ ------------
Total shareholders' equity 6,478,226 11,192,970
------------ ------------
Total liabilities and shareholders' equity $ 14,708,454 $ 18,924,765
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
4
62
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30, 1998, 1997 and 1996
1998 1997 1996
Net sales $ 33,755,625 $ 53,109,469 $ 30,611,258
Cost of goods sold 25,663,059 43,102,733 25,784,565
------------ ------------ ------------
Gross profit 8,092,566 10,006,736 4,826,693
------------ ------------ ------------
Selling, general and administrative expenses 12,251,515 11,834,173 7,564,946
Product development expenses 230,652 176,539 129,075
------------ ------------ ------------
Total operating expenses 12,482,167 12,010,712 7,694,021
------------ ------------ ------------
Loss from operations (4,389,601) (2,003,976) (2,867,328)
------------ ------------ ------------
Other income (expense):
Interest and other income 163,126 116,565 157,218
(Loss) gain on sale of subsidiaries (255,888) 214,989
Interest expense (939,595) (444,918) (232,678)
------------ ------------ ------------
(1,032,357) (113,364) (75,460)
------------ ------------ ------------
Loss before income taxes (5,421,958) (2,117,340) (2,942,788)
Income tax expense 42,101 25,819 18,251
------------ ------------ ------------
Net loss $ (5,464,059) $ (2,143,159) $ (2,961,039)
============ ============ ============
Per share amounts:
Net loss per common share $ (.74) $ (.30) $ (.55)
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
5
63
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended June 30, 1998, 1997, and 1996
PREFERRED STOCK COMMON STOCK
--------------------- -------------------------
NUMBER OF $.10 PAR NUMBER OF $.001 PAR PAID-IN
SHARES VALUE SHARES VALUE CAPITAL
-------- --------- --------- ------------ ------------
Balances at July 1, 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 1,428,565 1,429 4,242,218
Issuance of stock pursuant to acquisition, net 200,000 200 1,049,800
Compensation expense 25,000
Stock warrants exercised 652,380 653 1,452,847
Preferred stock dividends 7% Series B shares
($.25 per share) (20,441)
10% Series B shares ($.35 per share) (10,000)
Net loss
-------- --------- --------- ------------ ------------
Balance, June 30, 1996 112,203 $ 11,220 6,754,606 $ 6,755 $ 18,277,114
Stock options exercised 30,527 30 26,532
Stock warrants exercised 358,142 358 724,969
Conversion of preferred shares to common (112,003) (11,200) 112,003 112 11,088
Issuance of shares pursuant to dissolution of
Subsidiary Employee Stock Ownership Plan 112,442 113 (113)
Cost of filing stock registration statement (35,389)
Preferred stock dividends
7% Series B shares ($.25 per share) (5,110)
10% Series B shares ($.35 per share) (2,500)
Net loss
-------- --------- --------- ------------ ------------
Balance, June 30, 1997 200 $ 20 7,367,720 $ 7,368 $ 18,996,591
Stock options exercised 35,333 35 82,255
Detachable warrants issued in connection with 650,411
convertible note
Warrants issued for non-employee services 67,910
Acquisition of shares through note default
(27,744 shares)
Conversion of debt to common shares 7,692 8 24,992
Net loss
-------- --------- --------- ------------ ------------
Balance, June 30, 1998 200 $ 20 7,410,745 $ 7,411 $ 19,822,159
======== ========= ========= ============ ============
TOTAL
ACCUMULATED TREASURY SHAREHOLDERS'
DEFICIT STOCK EQUITY
------------- ---------- ------------
Balances at July 1, 1995 $ (2,706,388) $ (423) $ 8,846.572
Issuance of common stock pursuant to private
Placement under Regulation D, net 4,243,647
Issuance of stock pursuant to acquisition, net 1,050,000
Compensation expense 25,000
Stock warrants exercised 1,453,500
Preferred stock dividends 7% Series B shares
($.25 per share) (20,441)
10% Series B shares ($.35 per share) (10,000)
Net loss (2,961,039) (2,961,039)
------------- ---------- ------------
Balance, June 30, 1996 $ (5,667,427) $ (423) $ 12,627,239
Stock options exercised 26,562
Stock warrants exercised 725,327
Conversion of preferred shares to common
Issuance of shares pursuant to dissolution of
Subsidiary Employee Stock Ownership Plan
Cost of filing stock registration statement (35,389)
Preferred stock dividends
7% Series B shares ($.25 per share) (5,110)
10% Series B shares ($.35 per share) (2,500)
Net loss (2,143,159) (2,143,159)
------------- ---------- ------------
Balance, June 30, 1997 (7,810,586) (423) 11,192,970
Stock options exercised 82,290
Detachable warrants issued in connection with 650,411
convertible note
Warrants issued for non-employee services 67,910
Acquisition of shares through note default
(27,744 shares) (76,296) (76,296)
Conversion of debt to common shares 25,000
Net loss (5,464,059) (5,464,059)
------------- ---------- ------------
Balance, June 30, 1998 $ (13,274,645) $ (76,719) $ 6,478,226
============= ========== ============
The accompanying notes are an integral part of the consolidated financial
statements.
6
64
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1998, 1997 and 1996
1998 1997 1996
Cash flows from operating activities:
Net loss $(5,464,059) $(2,143,159) $(2,961,039)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 813,392 671,440 549,547
Provision for doubtful accounts receivable 416,780 118,710 93,721
Loss (gain) on sale of subsidiary 255,888 (214,989)
Non-cash compensation expense 67,910 25,000
Loss on disposals of equipment 87,235
Changes in operating assets and liabilities:
Accounts receivable and due from related parties (741,608) (3,801,719) (1,817,346)
Inventories (1,482,031) (785,305) (1,137,804)
Prepaid expenses and other current assets (113,863) 69,234 31,694
Accounts payable and accrued expenses 1,301,813 278,747 103,110
Income taxes receivable 5,359 8,160 (760)
----------- ----------- -----------
Net cash used in operating activities (4,940,419) (5,798,881) (5,026,642)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (250,162) (425,739) (565,753)
Trademarks acquired (25,000)
Proceeds from sale of equipment 6,000
Deferred licensing costs (6,190)
Software development costs (77,392) (110,390) (29,957)
Increase in notes receivable (175,000)
Proceeds from sale of businesses 3,600,000 2,522,361
Acquisition of business, net of cash acquired (34,179)
Other (1,500) (7,187)
----------- ----------- -----------
Net cash provided by (used in) investing activities 3,270,946 1,954,045 (805,079)
----------- ----------- -----------
Cash flows from financing activities:
Increase (decrease) in borrowings under line of credit, net (873,836) 2,667,653 1,650,267
Proceeds from borrowings on long-term debt 4,000,000
Principal payments on long-term debt (1,601) (20,509) (134,664)
Principal payments on capital lease obligations (10,277) (24,656) (31,781)
Dividends paid - Series B Preferred (7,610) (30,441)
Stock options exercised 82,290 26,562
Stock warrants exercised 725,327 1,453,500
Proceeds from issuance of common stock, net 4,243,647
Payment of deferred offering and financing costs (390,580) (35,389)
----------- ----------- -----------
Net cash provided by financing activities 2,805,996 3,331,378 7,150,528
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 1,136,523 (513,458) 1,318,807
Cash and cash equivalents, beginning of year 2,863,847 3,377,305 2,058,498
----------- ----------- -----------
Cash and cash equivalents, end of year $ 4,000,370 $ 2,863,847 $ 3,377,305
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
7
65
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 and Internet services. Bitwise sells a line of
document imaging systems which it markets nationally under the
tradename "DocStar."
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. 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.
During the fiscal year ended June 30, 1998 the Company incurred a net
loss of $5,464,059, and cash used by operating activities totaled
$4,940,419. The Company's available cash balance at June 30, 1998
totaled approximately $4 million, and it has available approximately
$862,000 under existing lines of credit. However, the Company has been
in violation of profitability requirements under its line of credit
covenants. Those covenants have been waived or amended. 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, the Company's ability to
improve operating cash flow is highly dependent on the market
acceptance of its DocStar document imaging system and the Company's
ability to reduce overhead costs. If the Company is unable to attain
projected sales levels for its DocStar systems, is unable to implement
cost reduction strategies, or comply with debt covenant requirements,
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, which are wholly-owned. The
accounts of the subsidiaries have been consolidated since the
acquisition date. 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, 1998 and 1997, 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.
8
66
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 1998 and 1997 amounted to $77,392
and $110,390, respectively. Amortization expense related to software
development costs for the years ended June 30, 1998, 1997 and 1996 was
$70,060, $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 1998, 1997 and 1996 was $234,380, $282,520, and $256,551
respectively. Accumulated amortization at June 30, 1998 and 1997 was
$193,527 and $502,159, 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.
9
67
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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 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.
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.
Reclassifications:
It is the Company's policy to reclassify, where appropriate, prior year
financial statements to conform to the current year presentation.
Advertising expenses:
The Company recognizes advertising expenses as incurred. Advertising
and promotion expense for 1998, 1997 and 1996 was approximately
$1,175,000, $1,361,000 and $968,000 respectively.
Fourth quarter adjustments:
The Company 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 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). 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.
10
68
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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.
Year 2000 compliance:
The year 2000 creates risks for the Company if the computers, software
and other equipment utilizing microprocessors do not correctly
recognize and process date information beyond the year 1999. The
Company addressed this issue by performing a survey on all of their
desktops and servers to ensure year 2000 compliance. The survey
concluded that all of the Company's in-house work systems use hardware
that is 100% year 2000 compliant. Most of the Company's software and
operating systems are Microsoft(TM) -based and are believed to be year
2000 compliant. The only software that may not be year 2000 compliant
is the Company's third-party accounting software. The Company is
currently communicating with the manufacturer and they have a new
version which will remedy this issue. The new version of the
accounting system will be installed and tested in October 1998. The
Company's product hardware is fully year 2000 compliant and the
software will also be year 2000 compliant in the latest version 2.30
scheduled for release in December 1998. Because the DocStar System is
a relatively new system, it was designed to handle a four digit year.
In addition, the Company is in the process of surveying their contract
vendors for year 2000 compliance. However, the Company does not
believe there will be significant difficulties finding alternative
supply sources should the need arise. The Company does not anticipate
material costs related to compliance with year 2000 issues.
Achieving year 2000 compliance is dependent on many factors, some of
which are not completely within the Company's control. If the Company's
internal systems or the internal systems of the significant vendors or
suppliers fail to achieve year 2000 compliance, the Company's business
and its results of operations could be adversely affected.
2. LOSS PER SHARE
The following is basic and diluted loss per share information:
1998 1997 1996
Net loss $(5,464,059) $(2,143,159) $(2,961,039)
Less preferrec stock dividends (7,610) (30,441)
----------- ----------- -----------
Net loss available to common
stockholders $(5,464,059) $(2,150,769) $(2,991,480)
Weighted average shares 7,380,484 7,194,096 5,479,237
Basic and diluted loss per share (.74) (.30) (.55)
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.
11
69
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. INVENTORIES
Inventories at June 30, 1998 and 1997 consist of:
1998 1997
Purchased components and raw materials $2,860,591 $1,301,871
Finished goods 350,277 1,835,461
---------- ----------
$3,210,868 $3,137,332
========== ==========
4. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1998 and 1997 consists of the
following:
ESTIMATED
USEFUL LIFE
1998 1997 IN YEARS
Machinery and equipment $ 1,253,958 $ 1,245,668 3-6
Demonstration and rental computers 200,747 293,336 5-6
Furniture and fixtures 237,515 241,907 5-7
Leasehold improvements 84,021 80,699 6
Vehicles 15,089 7,804 5
----------- -----------
1,791,330 1,869,414
Less accumulated depreciation and
amortization (1,014,405) (870,633)
----------- -----------
$ 776,925 $ 998,781
=========== ===========
Depreciation and amortization expense on property and equipment for the
years ended June 30, 1998, 1997 and 1996 was $321,041, $319,543 and
$258,043, respectively.
5. CREDIT FACILITIES
Line of credit:
The Company has available two lines of credit totaling $2,125,000, as
described further below, of which approximately $862,000 was available
at June 30, 1998.
One line of credit ($1,500,000) may be utilized by Bitwise and is
collateralized by accounts receivable, inventory and all other assets.
The interest rate on this line of credit is based on the prime rate
plus 2% per annum (10.5% at June 30, 1998). 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, 1998.
Subsequent to June 30, 1998, the agreement was amended to remove the
profitability requirement and to require certain minimum working
capital (as defined) thresholds to be net for each of the fiscal
quarters of 1999.
Effective June 30, 1998 a separate accounts receivable credit facility
for DJS was terminated. At June 30, 1998 the total outstanding balance
was $1,036,065 on this facility. This balance was paid off in August
1998.
In addition, DJS may utilize a wholesale inventory credit facility in
the amount of $625,000. This facility 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.
12
70
BITWISE DESIGNS, INC. AND SUBSIDIARIES
6. LONG-TERM DEBT
Long-term debt at June 30, 1998 and 1997 consists of the following:
1998 1997
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 charge 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. $ 3,975,000
Other 1,601
----------- -----------
3,975,000 1,601
Less current portion 1,601
Less unamortized discount (534,668)
----------- -----------
Long-term debt, net of current portion $ 3,440,332 $ -0-
=========== ===========
7. INCOME TAXES
Income tax expense (benefit) for the years ended June 30, 1998, 1997
and 1996 consists of currently payable state and local income taxes.
At June 30, 1998, the Company has federal net operating loss
carryforwards for tax purposes approximating $9,945,000. 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 and
2013-$3,197,000.
Through the acquisition of Electrograph, the Company acquired
approximately $1,066,000 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, 1998,
the remaining federal net operating loss carryforwards were $866,000.
The following table reconciles the expected tax benefit at the federal
statutory rate of 34% to the effective tax rate.
1998 1997 1996
Computed expected tax benefit $(1,843,466) $ (719,896) $(1,000,548)
Increase in valuation allowance 867,815 210,211 914,153
Additional tax gain on sale of assets 381,464
Additional tax gain on sale of subsidiary 393,666
Nondeductible goodwill amortization 79,689 96,057 87,227
Adjustment to prior years' taxes (17,911)
Loss of NOL carryforward on sale of subsidiary 470,221
State income taxes, net of federal benefit 42,101 25,819 18,251
Other nondeductible expenses 32,075 32,164 17,079
----------- ----------- -----------
$ 42,101 $ 25,819 $ 18,251
=========== =========== ===========
13
71
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. INCOME TAXES, CONTINUED
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities as of June 30, 1998, 1997 and 1996
are presented below:
1998 1997 1996
Deferred income tax asset:
Allowance for doubtful accounts $ 179,187 $ 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 264,368 177,206 186,198
Deferred rent and other liabilities 180,724 134,120 82,864
Net operating loss carryforward 3,350,234 2,719,117 2,532,117
----------- ----------- -----------
Total gross deferred tax assets 3,974,513 3,100,579 2,874,388
Less valuation allowance (3,896,836) (3,029,021) (2,818,810)
----------- ----------- -----------
Net deferred tax asset 77,677 71,558 55,578
Deferred income tax liability:
Equipment, principally due to differences in
Depreciation methods (77,677) (71,558) (55,578)
----------- ----------- -----------
Net deferred income taxes $ -0- $ -0- $ -0-
=========== =========== ===========
The valuation allowance for deferred tax assets as of July 1, 1998 and
1997 was $3,896,836 and $3,024,021, respectively. The net change in the
total valuation allowance for the years ended June 30, 1998 and 1997
was an increase of $867,815 and $210,211, 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, 1998, 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:
1999 $ 96,420
2000 64,299
2001 58,593
-----------
$ 219,312
===========
Rental expense was approximately $309,000, $277,000 and $317,000 for
the years ended June 30, 1998, 1997 and 1996, respectively.
14
72
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
9. PREFERRED STOCK
The Board of Directors is authorized to issue shares of preferred
stock, $.10 par value per share, from time to time in one or more
series. The Board may issue a series of preferred stock having the
right to vote on any matter submitted to shareholders including,
without limitation, the right to vote by itself as a series, or as a
class together with any other or all series of preferred stock. The
Board of Directors may determine that the holders of preferred stock
voting as a class will have the right to elect one or more additional
members of the Board of Directors, or the majority of the members of
the Board of Directors. The Board of Directors has designated a series
of preferred stock which has the right to elect a majority of the Board
of Directors. The holders of preferred stock which have the right to
elect a majority of the Board of Directors are therefore able to
control the Company's policies and affairs.
The Board of Directors 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.
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.
15
73
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. 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 July 1, 1995 1,503,880 $ 1.98
Options granted equal to market price 692,500 5.78
Options granting exceeding market price 75,000 7.13
Options canceled or surrendered (95,000) 1.56
----------
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
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
==========
16
74
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. STOCK OPTION PLANS AND STOCK WARRANTS, CONTINUED
A) 1992 Employees Stock Option Plan, Continued:
The following is a summary of the status of employee stock options at
June 30, 1998:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
-------------------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE RANGE NUMBER LIFE PRICE NUMBER PRICE
-------------------- ------ ---- ----- ------ -----
$ .34 - 2.00 948,370 2.2 $ 1.55 753,300 $ 1.52
2.01 - 4.00 949,500 4.1 3.01 550,068 3.11
4.01 - 6.00 142,000 2.2 5.27 86,333 5.32
6.01 - 8.00 299,000 2.8 6.36 196,002 6.36
As of June 30, 1998 and 1997, 1,585,703 shares and 890,537 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 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.
17
75
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. STOCK OPTION PLANS AND STOCK WARRANTS, CONTINUED
B) Non-Executive Director Stock Option Plan, Continued
A schedule of director stock option activity is as follows:
WEIGHTED
AVERAGE
NUMBER OPTION
OF PRICE
SHARES PER SHARE
--------- ---------
Outstanding July 1, 1995 140,000 $ 4.38
Options granted equal to market price 50,000 4.50
---------
Outstanding June 30, 1996 190,000 4.41
Options granted equal to market 40,000 3.38
Options cancelled or surrendered (30,000) 4.54
---------
Outstanding June 30, 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
=========
The options range in price from $2.00 to $6.00 per share and have a
weighted average remaining contractual life of three years.
C) Common Stock Warrants:
A schedule of common stock warrant activity is as follows:
WEIGHTED
AVERAGE
NUMBER WARRANT
OF PRICE
SHARES PER SHARE
---------- ----------
Outstanding July 1, 1995 1,312,000 $ 2.36
Warrants granted equal to market price 22,000 6.21
Warrants granted less than market price 1,957,137 4.31
Warrants exercised (652,380) 2.23
Adjustments for antidilution 36,380 3.59
----------
Outstanding June 30, 1996 2,675,137 3.75
Warrants granted equal to market price 10,000 4.44
Warrants exercised (358,142) 2.03
----------
Outstanding June 30, 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
==========
18
76
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. STOCK OPTION PLANS AND STOCK WARRANTS, CONTINUED
C) Common Stock Warrants, continued:
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, 1998 and 1997
were to various firms providing services to the Company.
The following is a summary of the status of common stock warrants at
June 30, 1998:
OUTSTANDING WARRANTS EXERCISABLE WARRANTS
----------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE RANGE NUMBER LIFE PRICE NUMBER PRICE
-------------------- ------- ----------- -------- --------- ---------
$1.50 - 4.00 919,284 2.8 $ 2.84 919,284 $ 2.84
4.01 - 8.00 1,847,711 1.5 4.28 1,847,711 4.28
D) Options and warrants valuation:
The per share weighted average fair value of stock options and common
stock warrants granted during fiscal 1998, 1997 and 1996 was $1.15,
$1.00 and $3.88, respectively. These amounts were determined using the
Black Scholes option-pricing model which values options and warrants
based on the stock price at the grant date, the expected life of the
option or warrant, the estimated volatility of the stock, expected
dividend payments and the risk-free interest rate over the expected
life of the option or warrant. The dividend yield was zero in 1998,
1997 and 1996. The expected volatility was based on the stock prices
for the period beginning in May 1992 when the Company completed its
first public offering. The expected volatility was 68.7%, 69.0%, and
69.8% for 1998, 1997, and 1996, respectively. The risk-free interest
rate was the rate available on zero coupon U.S. government issues with
a term equal to the remaining term for each grant. The risk free rate
ranges from 5.5% to 6.3% in 1998, 6.0% to 6.8% in 1997, and 5.4% to
6.7% in 1996, respectively. The expected life of the option or warrant
was estimated based on the exercise history from previous grants and is
estimated to be five years.
The Company applies APB No. 25 in accounting for its stock option and
stock warrant plans and, accordingly, no compensation cost has been
recognized in the Company's financial statements for stock options
under any of the stock plans. However, compensation cost has been
recognized for warrants granted. If under SFAS No. 123, the Company
determined compensation cost based on the fair value at the grant date
for its stock options and warrants, net loss and loss per share would
have been increased to the pro forma amounts indicated below:
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996
Net loss
As reported ($ 5,464,059) ($ 2,143,159) ($ 2,961,039)
Pro forma ( 6,160,155) ( 2,237,301) ( 4,151,890)
Basic and diluted loss per share
As reported $ (.74) $ (.30) $ (.55)
Pro forma (.83) (.31) (.76)
19
77
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. STOCK OPTION PLANS AND STOCK WARRANTS, CONTINUED
D) Options and Warrants Valuation, 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 1998, 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.
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% 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.
12. CASH FLOWS - SUPPLEMENTAL INFORMATION
Cash flows:
The Company paid interest in the amounts of $639,446, $424,843 and
$207,684 for the years ended June 30, 1998, 1997 and 1996,
respectively. Income taxes paid aggregated $27,254, $40,446 and $19,011
during the years ended June 30, 1998, 1997, and 1996, 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.
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.
20
78
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
13. RELATED PARTIES
Employee receivables:
At June 30, 1998 and 1997, "Due from related parties" included
non-interest bearing advances of $48,422 and $25,056, respectively,
from employees and officers of the Company.
Notes receivable:
During 1996, Bitwise entered into a promissory note receivable with the
former shareholders of DJS Marketing Group, Inc. (the DJS Note). The
DJS Note bears interest at the rate of 8% per annum. The note principal
and accrued interest thereon was due on March 8, 1998 and was
collateralized by 30,000 shares of Bitwise Designs, Inc. common stock.
The borrowers defaulted on the note and 27,744 shares of Bitwise common
stock were returned to the Company and recorded as treasury shares.
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 contributed $-0-,
$1,341, and $1,750 during the years ended June 30, 1998, 1997, and
1996, respectively.
15. ACQUISITIONS AND SALES OF BUSINESSES
In June 1998, the Company sold SST in a stock sale. The Company
realized a loss of $255,888. The Company received $3.6 million in cash
and $400,000 in accounts receivable and inventory.
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 which expired on March 31, 1998 and were not renewed.
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.
21
79
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. 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.
17. 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.
22
80
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. FINANCIAL INSTRUMENTS, CONTINUED
Fair value:
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value.
Cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses and other current liabilities. The carrying amount
of cash and cash equivalents, accounts receivable, accounts payable
and accrued expenses and other current liabilities approximates fair
value because of the short maturity of these instruments.
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.
23
81
Exhibit Index
-------------
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)
4.2* Form of Series A Preferred Stock Certificate (Exhibit 4.2
to Registration Statement on Form S-18, File No. 33-
46246-NY)
4.3* Form of Warrant issued to Berkeley Securities Corp.
(Exhibit 4.3 to Registration Statement on Form S-18, File
No. 33-46246-NY)
4.4* Form of Warrant issued to certain individuals in April,
1992 (Exhibit 4.4 to Registration Statement on Form S-18,
File No. 33-46246-NY)
4.5* Form of Series B Preferred Stock Certificates (Exhibit
4.5 to the Registration Statement on form SB-2, File No.
33-76494)
4.6* Form of Warrant to be issued to Berkeley Securities
Corp.(Exhibit 4.6 to the Registration Statement on form
SB-2, File No. 33-76494)
4.7* Form of Note and Warrant Purchase, Paying and
Conversion/Exercise agency agreement dated as of August
8, 1997 between the Company and Banca del Gottardo
(Exhibit 4.7 to the Company's Form 10-KSB dated June 30,
1997).
4.8* Terms of 8% Convertible Notes due August 11, 2002
(Exhibit 4.8 to the Company's Form 10-KSB dated June 30,
1997).
4.9* Terms of Warrants and Global Warrant expiring August 11,
2002 (Exhibit 4.9 to the Company's Form 10-KSB dated June
30, 1997).
10.1* Lease agreement with Rotterdam Industrial Park, dated
August 7, 1991 (Exhibit 10.1 to Registration Statement on
Form S-18, File No. 33-46246-NY)
10.1.1* Lease warrant waiver agreement (Exhibit 10.1.1 to
Registration Statement on Form S-18, File No. 33-46246-
NY)
10.2* Lease with Siemens Credit Corporation for telephone
system dated November 25, 1991 (Exhibit 10.2 to
Registration Statement on Form S-18, File No. 33-46246-
NY)
10.3* Lease agreement with Apple Commercial Credit for laser
printer, dated June 23, 1987 (Exhibit 10.3 to
Registration Statement on Form S-18, File No. 33-46246-
NY)
10.4* Leases with Adirondack Leasing Associates, Ltd. (Exhibit
10.4 to Registration Statement on Form S-18, File No. 33-
46246-NY)
10.5* Loan agreement with U.S. Small Business Administration
and Norstar Bank, dated April 4, 1991 (Exhibit 10.5 to
Registration Statement on Form S-18, File No. 33-46246-
NY)
10.6* Loan agreement with Schenectady Economic Development
Corporation, dated August 7, 1991 (Exhibit 10.6 to
Registration Statement on Form S-18, File No. 33-46246-
NY)
10.8* Employment agreement with John T. Botti, dated April,
1992 (Exhibit 10.8 to Registration Statement on Form S-
18, File No. 33-46246-NY)
10.9* Employment agreement with Ira C. Whitman, dated April,
1992 (Exhibit 10.9 to Registration Statement on Form S-
18, File No. 33-46246-NY)
10.10* 1992 Employee stock option plan (Exhibit 10.10 to
Registration Statement on Form S-18, File No. 33-46246-
NY)
10.11* 1992 Nonexecutive Directors stock option plan (Exhibit 10.11
to Registration Statement on Form S-18, File No.
33-46246-NY)
10.13* Loan agreement with Norstar Bank dated February 6, 1992
(Exhibit 10.13 to Registration Statement on Form S-18,
File No. 33-46246-NY)
10.13.1* Norstar Bank waiver agreement (Exhibit 10.13.1 to
Registration Statement on Form S-18, File No. 33-46246-
NY)
10.14* Agreement with Prime Computer, Inc. (Exhibit 10.14 to
Registration Statement on Form S-18, File No. 33-46246-
NY)
10.15* Agreement with Mentor Computer Graphics Ltd. (Exhibit
10.15 to Registration Statement on Form S-18, File No.
33-46246-NY)
10.16* Agreement with Robert W. Schwartz, Inc. dated February
10, 1992 (Exhibit 10.16 to Registration Statement on Form
S-18, File No. 33-46246-NY)
10.17* Form of Financial Consulting Agreement with the
Underwriter (Exhibit 10.17 to the Registration Statement
on form SB-2, File No. 33-76494)
10.18* Financing Agreement by and among Maryland Industrial
Development Financing Authority, JED Associates, State
National Bank of Maryland, Electronic Marketing
Associates, Inc. (name was changed to System Solutions
Technology, Inc.), Trimarc Systems Incorporated and
Intermec Mid-Atlantic Corporation dated December 11, 1985
(Exhibit 10.18 to the Registration Statement on form SB-
2, File No. 33-76494)
10.19* Maryland Industrial Development Financing Authority
Limited Obligation Economic Development Revenue Bond
(Exhibit 10.19 to the Registration Statement on form SB-
2, File No. 33-76494)
10.20* Cross-Collateral Security Agreement between NationsCredit
Corporation, Bitwise Designs, Electrograph Systems, Inc.
and System Solutions Technology, Inc. dated July 18,
1995.
10.21* Subcontract dated September 28, 1995 between PRC, Inc.
and System Solutions Technology, Inc.
10.22* Financial Consulting Agreement dated July 17, 1995
between the Company and Whale Securities, Co.
10.23* Agreement and Plan of Merger by and among Bitwise
Designs, Inc., Bitwise DJS, Inc., certain individuals and
DJS Marketing Group, Inc. dated March 6, 1996 (Exhibit 2
to Form 8-K dated March 22, 1996)
10.24* Form of Conversion Agency Agreement between the Company
and Banca del Gottardo dated as of August 8, 1997
(Exhibit 10.24 to Form 10-KSB dated June 30, 1997).
10.25* Form of Warrant Agency Agreement between the Company and
Banca del Gottardo dated as of August 8, 1997 (Exhibit to
Form 10-KSB dated June 30, 1997).
10.26* Stock Purchase and Merger Agreement dated April 7, 1998
between the Company USI and SST. (Exhibit A to Proxy
Statement dated May 8, 1998).
11 Statement re: Computation of Per Share Earnings
21 Subsidiaries of Registrant
23 Consent of PricewaterhouseCoopers, LLP
23.1 Consent of KPMG Peat Marwick, LLP
27 Financial Data Schedule
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*Previously Filed.