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BITWISE DESIGNS, INC.
SUBSCRIPTION AGREEMENT
OFFERING OF
50,000 SHARES OF SERIES B PREFERRED STOCK
TOTAL SUBSCRIPTION PRICE: $1,250,000
PER SHARE OFFERING PRICE: $25.00 PER SHARE.
THIS PRIVATE PLACEMENT AGREEMENT CONTAINS MATERIAL NONPUBLIC INFORMATION
CONCERNING BITWISE DESIGNS, INC. AND OTHER COMPANIES AND IS PREPARED SOLELY FOR
THE USE OF THE OFFEREE NAMED ABOVE. ANY USE OF THIS INFORMATION FOR ANY PURPOSE
OTHER THAN IN CONNECTION WITH THE CONSIDERATION OF AN INVESTMENT IN THE
SECURITIES OFFERED HEREBY MAY SUBJECT THE USER TO CRIMINAL AND CIVIL LIABILITY.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED WITH OR APPROVED BY THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES REGULATORY
AUTHORITY OF ANY STATE, NOR HAS SUCH COMMISSION OR REGULATORY AUTHORITY PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS AGREEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
September 21, 1999
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INFORMATION FOR ALL INVESTORS
PROSPECTIVE INVESTORS AND/OR THEIR REPRESENTATIVES SHOULD REVIEW THE
FOLLOWING LEGENDS REQUIRED BY CERTAIN JURISDICTIONS AND BE AWARE OF THEIR
CONTENTS. PLEASE REVIEW THE FOLLOWING MATERIAL CAREFULLY TO DETERMINE WHETHER
ANY OF THESE LEGENDS APPLY.
THIS OFFER CAN BE WITHDRAWN AT ANY TIME BEFORE A CLOSING OF THE SALE OF
THE MINIMUM NUMBER OF SECURITIES OFFERED, AND THE OFFER OF SECURITIES IS
SPECIFICALLY MADE SUBJECT TO THE TERMS DESCRIBED IN THIS AGREEMENT. THE COMPANY
RESERVES THE RIGHT TO REJECT ANY SUBSCRIPTION, IN WHOLE OR IN PART, OR TO ALLOT
TO ANY PROSPECTIVE INVESTOR LESS THAN THE NUMBER OF UNITS SUBSCRIBED FOR BY SUCH
PROSPECTIVE INVESTOR. ANY REPRESENTATION TO THE CONTRARY IS UNAUTHORIZED AND
MUST NOT BE RELIED UPON.
PROSPECTIVE INVESTORS WILL BE REQUIRED TO MAKE REPRESENTATIONS WITH
RESPECT TO THEIR NET WORTH OR INCOME AND TO REPRESENT, AMONG OTHER THINGS, THAT
THEY ARE FAMILIAR WITH AND UNDERSTAND THE TERMS OF THIS OFFERING AND HAVE ALL
REQUISITE AUTHORITY TO MAKE SUCH INVESTMENT.
THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY
THE SECURITIES DESCRIBED HEREIN IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SALE.
THIS OFFERING IS BEING MADE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE REGULATIONS
THEREUNDER (THE "SECURITIES ACT") FOR AN OFFER AND SALE OF SECURITIES THAT DOES
NOT INVOLVE A PUBLIC OFFERING BY VIRTUE OF THE COMPANY'S INTENDED COMPLIANCE
WITH THE PROVISIONS OF SECTIONS 4(2) AND 4(6) AND REGULATION D THEREOF. THE
SECURITIES OFFERED HEREBY MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF,
EXCEPT AS PERMITTED UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES
LAWS PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. THERE IS CURRENTLY NO
PUBLIC OR OTHER MARKET FOR THE SHARES OF THE SERIES B PREFERRED STOCK OF THE
COMPANY AND THERE CAN BE NO ASSURANCE THAT A PUBLIC OR OTHER MARKET WILL
DEVELOP. EACH PROSPECTIVE
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INVESTOR SHOULD PROCEED ONLY ON THE ASSUMPTION THAT SUCH PROSPECTIVE INVESTOR
MAY HAVE TO BEAR THE ECONOMIC RISK OF AN INVESTMENT IN THE SECURITIES OFFERED
HEREBY FOR AN INDEFINITE PERIOD OF TIME.
THIS AGREEMENT HAS NOT BEEN FILED WITH OR REVIEWED BY THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER COMMISSION OR REGULATORY
AUTHORITY, AND HAS NOT BEEN FILED WITH OR REVIEWED BY THE ATTORNEY GENERAL OF
THE STATES OF NEW YORK OR NEW JERSEY OR ANY OTHER STATE NOR HAS ANY SUCH
COMMISSION, AUTHORITY OR ATTORNEY GENERAL DETERMINED WHETHER IT IS ACCURATE OR
COMPLETE OR PASSED UPON OR ENDORSED THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK. ONLY THOSE WHO CAN BEAR THE RISK OF LOSS OF THEIR ENTIRE
INVESTMENT SHOULD INVEST. SEE "RISK FACTORS".
BY ACCEPTING DELIVERY OF THIS AGREEMENT, THE RECIPIENT HEREOF AGREES TO
KEEP THE CONTENTS HEREOF, AND ANY INFORMATION OBTAINED BY SUCH PERSON IN
CONNECTION HEREWITH, IN STRICTEST CONFIDENCE.
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE COMPANY AND THE TERMS OF THIS OFFERING, INCLUDING THE MERITS
AND RISKS INVOLVED. PROSPECTIVE INVESTORS SHOULD NOT CONSTRUE THE CONTENTS OF
THIS AGREEMENT AS INVESTMENT OR LEGAL ADVICE. THIS AGREEMENT AND THE OTHER
DOCUMENTS DELIVERED HEREWITH, AS WELL AS THE NATURE OF AN INVESTMENT IN THE
SECURITIES OFFERED HEREBY, SHOULD BE REVIEWED BY EACH PROSPECTIVE INVESTOR AND
SUCH INVESTOR'S INVESTMENT, TAX, LEGAL, ACCOUNTING AND OTHER ADVISORS.
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NO GENERAL SOLICITATION WILL BE CONDUCTED AND NO OFFERING LITERATURE OR
ADVERTISING IN ANY FORM WILL OR MAY BE EMPLOYED IN THE OFFERING OF THE SERIES B
PREFERRED STOCK, EXCEPT FOR THIS AGREEMENT (INCLUDING AMENDMENTS AND SUPPLEMENTS
TO THIS AGREEMENT) AND THE DOCUMENTS SUMMARIZED HEREIN OR ENCLOSED HEREWITH. NO
PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT
CONTAINED IN THIS AGREEMENT (INCLUDING AMENDMENTS AND SUPPLEMENTS TO THIS
AGREEMENT) OR IN THE DOCUMENTS SUMMARIZED HEREIN OR ENCLOSED HEREWITH AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON.
THE INFORMATION CONTAINED IN THIS AGREEMENT HAS BEEN SUPPLIED BY THE
COMPANY AND HAS BEEN INCLUDED HEREIN IN RELIANCE ON THE COMPANY. THIS AGREEMENT
CONTAINS SUMMARIES, BELIEVED BY THE COMPANY TO BE ACCURATE, OF CERTAIN
DOCUMENTS, BUT REFERENCE IS XXXXXX MADE TO SUCH DOCUMENTS FOR COMPLETE
INFORMATION CONCERNING THE RIGHTS AND OBLIGATIONS OF THE PARTIES THERETO. COPIES
OF SUCH DOCUMENTS ARE AVAILABLE ON A CONFIDENTIAL BASIS AT THE OFFICES OF
BITWISE DESIGNS, INCORPORATED, 0000 XXXXXXXXXX XXXXX, XXXXXXXXXXX, XXX XXXX
00000. ATTENTION: XXXX XXXXX, PRESIDENT. ALL SUCH SUMMARIES ARE QUALIFIED IN
THEIR ENTIRETY BY THIS REFERENCE.
THIS AGREEMENT HAS BEEN PREPARED SOLELY FOR THE BENEFIT OF PROSPECTIVE
INVESTORS INTERESTED IN THE PROPOSED PRIVATE PLACEMENT OF THE SERIES B PREFERRED
STOCK AND CONSTITUTES AN OFFER ONLY IF THE PERSON WHOSE NAME APPEARS IN THE
APPROPRIATE SPACE PROVIDED ON THE COVER OF THIS AGREEMENT. DISTRIBUTION OF THIS
AGREEMENT TO ANY PERSON OTHER THAN SUCH PROSPECTIVE INVESTOR AND THOSE PERSONS
RETAINED TO ADVICE SUCH PROSPECTIVE INVESTOR WITH RESPECT THERETO IS
UNAUTHORIZED, AND ANY REPRODUCTION OF THIS AGREEMENT, IN WHOLE OR IN PART, OR
THE DIVULGENCE OF ANY OF ITS CONTENTS, WITHOUT PRIOR WRITTEN CONSENT OF THE
COMPANY IS PROHIBITED. EACH PROSPECTIVE INVESTOR, BY ACCEPTING DELIVERY OF THIS
AGREEMENT, AGREES TO RETURN IT AND ALL OTHER DOCUMENTS RECEIVED BY SUCH
PROSPECTIVE INVESTOR TO THE COMPANY AT ITS ADDRESS SPECIFIED BELOW IF THE
PROSPECTIVE INVESTOR DOES NOT SUBSCRIBE FOR THE PURCHASE OF THE SERIES B
PREFERRED STOCK, THE PROSPECTIVE INVESTOR'S SUBSCRIPTION IS NOT ACCEPTED OR THIS
OFFERING IS TERMINATED.
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FLORIDA RESIDENTS
PURSUANT TO SECTION 517.061(11)(A)(5) OF THE FLORIDA STATUTE, FLORIDA
INVESTORS HAVE A THREE DAY RIGHT OF RECISSION. IF A FLORIDA RESIDENT HAS
EXECUTED A SUBSCRIPTION AGREEMENT, HE MAY ELECT, WITHIN THREE BUSINESS DAYS
AFTER SIGNING THE SUBSCRIPTION AGREEMENT, TO WITHDRAW FROM THE SUBSCRIPTION
AGREEMENT AND RECEIVE A FULL REFUND AND RETURN (WITHOUT INTEREST) OF ANY MONEY
PAID BY HIM. A FLORIDA RESIDENT'S WITHDRAWAL WILL BE WITHOUT ANY FURTHER
LIABILITY TO ANY PERSON. TO ACCOMPLISH SUCH WITHDRAWAL, A FLORIDA RESIDENT NEED
ONLY SEND A LETTER OR TELEGRAM TO THE COMPANY AT THE ADDRESS SET FORTH IN THIS
INVESTMENT SUMMARY INDICATING HIS INTENTION TO WITHDRAW. SUCH LETTER OR TELEGRAM
MUST BE SENT AND POSTMARKED PRIOR TO THE END OF THE AFOREMENTIONED THIRD
BUSINESS DAY. IF A FLORIDA RESIDENT SENDS A LETTER, IT IS PRUDENT TO SEND IT BY
CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO INSURE THAT IT IS RECEIVED AND ALSO
TO EVIDENCE THE TIME AND DATE WHEN IT IS MAILED. SHOULD A FLORIDA RESIDENT MAKE
THIS REQUEST ORALLY, HE SHOULD ASK FOR WRITTEN CONFIRMATION THAT HIS REQUEST HAS
BEEN RECEIVED.
PENNSYLVANIA RESIDENTS
THE SECURITIES ARE OFFERED PURSUANT TO A CLAIM OF EXEMPTION UNDER
SECTION 203(D) OF THE PENNSYLVANIA SECURITIES ACT OF 1972, AS AMENDED (THE
"ACT"). PURSUANT TO SECTION 207(M) OF THE ACT EACH PERSON WHO ACCEPTS AN OFFER
TO PURCHASE THESE SECURITIES DIRECTLY FROM THE ISSUER OR AFFILIATE OF THE ISSUER
SHALL HAVE THE RIGHT TO WITHDRAW HIS OR HER ACCEPTANCE AND RECEIVE THE FULL
REFUND OF ALL MONIES PAID, WITHOUT INCURRING ANY LIABILITY TO THE SELLER OF ANY
OTHER PERSON WITHIN TWO (2) BUSINESS DAYS FROM THE DATE OF RECEIPT BY THE ISSUER
OF HIS OR HER WRITTEN BINDING CONTRACT OF PURCHASE EVIDENCED BY HIS OR HER
SUBSCRIPTION AGREEMENT. THESE SECURITIES MAY NOT BE SOLD BY THE INVESTOR FOR A
PERIOD OF TWELVE (12) MONTHS AFTER THE DATE OF PURCHASE. THESE SECURITIES MAY
NOT BE TRANSFERRED EXCEPT IN ACCORDANCE WITH THE REQUIREMENTS OF SECTION 203(D)
OF THE ACT AND REGULATION 203.041 PROMULGATED THEREUNDER.
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BITWISE DESIGNS, INC.
0000 Xxxxxxxxxx Xxxxx
Xxxxxxxxxxx, Xxx Xxxx 00000
Re: 50,000 Shares of Series B Preferred Stock
Dear Purchaser:
Bitwise Designs, Inc., a Delaware corporation (the "Company"), has
agreed to sell to certain "accredited investors" (as defined under Rule 501 of
Regulation D promulgated under the Securities Act of 1933, as amended (the
"Act")) (the "Investors") up to 50,000 Shares of Series B Preferred Stock (the
"Preferred Shares") at a price of $25.00 per share. The Preferred Shares are
being offered by the Company pursuant to Section 4(2) of the Act, and/or
Regulation D promulgated thereunder.
The Preferred Shares are being offered (the "Preferred Offering") on a
"best efforts all or none" basis. All proceeds received by the Company from
Investors for the Preferred Shares offered hereby will be deposited in a
non-interest bearing escrow account established by Xxxxxxxxx & XxXxxxx, LLP,
counsel to the Company. The Preferred Offering commences on the date of this
Agreement and terminates on September 30, 1999 unless extended by the Company
until October 10, 1999 (as extended, the "Offering Period"). If the Preferred
Shares are subscribed for prior to the expiration of the Offering Period, a
closing (the "Closing") will be held as soon as practicable and the funds held
in escrow will be released to the Company. Funds received by the Company, but
not cleared, prior to the termination of the Offering Period, will be allowed to
clear after such date.
DESCRIPTION OF SECURITIES.
PREFERRED STOCK
The Board of Directors is authorized to issue shares of Preferred
Stock, $.10 par value per share, from time to time in one or more series. The
Board may issue a series of Preferred Stock having the right to vote on any
matter submitted to stockholders, including, without limitation, the right to
vote by itself as a series, or as a class together with any other or all series
of Preferred Stock. The Board of Directors may determine that the holders of
Preferred Stock voting as a class will have the right to elect one or more
additional members of the Board of Directors, or the majority of the members of
the Board of Directors. The Board of Directors has previously designated a
series of preferred stock as Series A Preferred Stock which has the right to
elect a majority of the Board of Directors and as a result, the holders of the
Series A Preferred Stock are able to control the Company's policies and affairs.
The Board of Directors may also grant to holders of any series of
Preferred Stock preferential rights to dividends and amounts payable in
liquidation. Furthermore, the Board of Directors may determine whether the
shares of any series of Preferred Stock may be convertible into Common Stock or
any other series of Preferred Stock of the Company at a specified conversion
price or rate, and upon other terms and conditions as determined by the Board of
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Directors.
SERIES A PREFERRED STOCK
As of the date of this Agreement, the Board of Directors has designated
200 shares of Preferred Stock as Series A Preferred Stock, of which 100 shares
have been issued to each of Xxxx X. Xxxxx and Xxx X. Xxxxxxx, the President and
Senior Vice President, respectively, of the Company. The holders of the Series A
Preferred Shares have the right to elect a majority of the Board of Directors as
long as such holder remains, subject to certain conditions, an officer, director
and 5% stockholder of the Company. During such time as the Series A Preferred
Stock is outstanding, the Board of Directors will consist of an odd number of
directors, a majority of whom will be designated as "Preferred Directors" and be
elected solely by the holders of Series A Preferred Stock voting separately as a
group. The holders of the Series A Preferred Stock have a preference on
liquidation of $1.00 per share and no dividend or conversion rights.
SERIES B PREFERRED STOCK
Prior to the Closing, the Company will file a Certificate of
Designation (the "Certificate of Designation") designating 50,000 shares of
Preferred Stock as "Series B Convertible Redeemable Preferred Stock" ("Series B
Preferred Stock"). The following is a summary of the rights, preferences and
privileges of the Series B Preferred Stock and is qualified in its entirety by
the provisions of the Company's Certificate of Incorporation and the Certificate
of Designation. A copy of the Certificate of Designation is annexed hereto as
Exhibit A.
Dividends. Subject to the limitations described below, holders of
shares of the Series B Preferred Stock will be entitled to receive, when, as and
if declared by the Board out of funds of the Company legally available for
payment, dividends in cash at an annual rate of 10% per share, payable
semi-annually and commencing on December 31, 1999 and thereafter on June 30th
and December 31st of each year. Dividends will be cumulative from the date of
original issuance of the Series B Preferred Stock and will be payable to holders
of record as they appear on the stock books of the Company on the tenth business
day prior to the dividend payment date.
The Series B Preferred Stock will be junior to dividends to any series
or class of the Company's stock hereafter issued which ranks senior as to
dividends to the Series B Preferred Stock ("Senior Dividend Stock"), and if at
any time any dividend on Senior Dividend Stock is in default, the Company may
not pay any dividend on the Series B Preferred Stock until all accrued and
unpaid dividends on the Senior Dividend Stock for all prior periods and the
current period are paid or declared and set aside for payment. No such Senior
Dividend Stock shall be issued without the approval of holders of a majority of
the Series B Preferred Stock. The Series B Preferred Stock will have priority as
to dividends over the Common Stock and any other series or class of the
Company's stock hereafter issued which ranks junior as to dividends to the
Series B Preferred Stock ("Junior Dividend Stock"), and no dividend (other than
dividends payable solely in Junior Dividend Stock) may be paid on, and no
purchase, redemption or other acquisition may be made
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by the Company of, any Junior Dividend Stock unless all accrued and unpaid
dividends on the Series B Preferred Stock for all prior periods and the current
period have been paid or declared and set apart for payment. The Company may not
pay dividends on any class or series of the Company's stock having parity with
the Series B Preferred Stock as to dividends ("parity dividend stock"), unless
it has paid or declared and set apart for payment or contemporaneously pays or
declares and sets apart for payment all accrued and unpaid dividends for all
prior periods on the Series B Preferred Stock and may not pay dividends on the
Series B Preferred Stock unless it has paid or declared and set apart for
payment or contemporaneously pays or declares and sets apart for payment all
accrued and unpaid dividends for all prior periods on the parity dividend stock.
Whenever all accrued dividends are not paid in full on the Series B Preferred
Stock or any parity dividend stock, all dividends declared on the Series B
Preferred Stock and such parity dividend stock will be declared or made pro rata
so that the amount of dividends declared per share on the Series B Preferred
Stock and such parity dividends stock will bear the same ratio that accrued and
unpaid dividends per share on the Series B Preferred Stock and such parity
dividend stock bear to each other.
The amount of dividends payable for the initial dividend period and for
any period shorter than a full year dividend period will be computed on the
basis of a 360-day year of twelve 30-day months. No interest will be payable in
respect of any dividend payment on the Series B Preferred Stock which may be in
arrears.
See "Redemption" below for information regarding restrictions on the
Company's ability to redeem the Series B Preferred Stock when dividends on the
Series B Preferred Stock are in arrears.
Voting Rights. The holders of the Series B Preferred Stock will be
entitled to no voting rights except with respect to (i) the establishment of
another class of preferred stock with rights equal to or senior to the Series B
Preferred Stock, (ii) any proposed changes in the rights of the Series B
Preferred holders, or (iii) as required by Delaware law.
Redemption at Option of Company. The Series B Preferred Stock is
redeemable at any time commencing one year after the Closing at the option of
the Company, on not less than 30 nor more than 60 days written notice to
registered holders at a redemption price equal to $25.00 plus accrued and unpaid
dividends, provided (i) the public sale of the shares of Common Stock issuable
upon conversion of the Preferred Shares (the "Conversion Shares") are covered by
an effective registration statement or are otherwise exempt from registration;
and (ii) during the immediately preceding 20 consecutive trading days ending
within 10 days of the date of the notice of redemption, the closing bid price of
the Company's Common Stock is not less than $3.75 per share, subject to
proportional adjustments for stock splits, stock dividends, combinations of
shares, corporate reorganizations or like events. However, commencing 36 months
after the Closing, the Series B Preferred Stock is redeemable at the option of
the Company, on not less than 30 nor more than 60 days written notice to
registered holders at a redemption price equal to $25.00 plus accrued and unpaid
dividends, provided the public sale of the shares of Common Stock issuable upon
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conversion of the Series B Preferred Stock (the "Conversion Shares") are covered
by an effective registration statement or are otherwise exempt from
registration.
If less than all of the outstanding shares of Series B Preferred Stock
are to be redeemed, the Company will select those to be redeemed pro rata or by
lot or in such other manner as the Board of Directors may determine. There is no
mandatory redemption or sinking fund obligation with respect to the Series B
Preferred Stock. In the event that the Company has failed to pay accrued and
unpaid dividends on the Series B Preferred Stock, it may not redeem any of the
then outstanding shares of the Series B Preferred Stock, unless all the then
outstanding shares are redeemed, until all such accrued and unpaid dividends and
(except with respect to shares to be redeemed) the then current semi-annual
dividend have been paid in full.
Notice of redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of record of shares of Series
B Preferred Stock to be redeemed at the address shown on the stock books of the
Company. After the redemption date, dividends will cease to accrue on the shares
of Series B Preferred Stock called for redemption, and all rights of the holders
of such shares will terminate except the right to receive the redemption price
without interest (unless the Company defaults in the payment of the redemption
price). Shares of Series B Preferred Stock redeemed by the Company will be
restored to the status of authorized but unissued shares of preferred stock,
without designation as to series, and may thereafter be issued, but not as
shares of Series B Preferred Stock unless used to pay dividends on the then
outstanding Series B Preferred Stock.
Conversion Rights. The holders of Series B Preferred Stock will be
entitled at any time to convert their shares of Series B Preferred Stock into
one share of Common Stock (the "Conversion Shares"), at any time commencing one
year after the closing of the Offering (the "Closing"), at the option of the
holder, into such number of shares of the Company's Common Stock as shall equal
$25.00 divided by the conversion price (the "Conversion Price") of $1.875 per
share, subject to adjustment to for stock splits, stock dividends, combinations
of shares, corporate reorganizations or like events. However, commencing three
years after the Closing, the Conversion Price shall be the lower of (i) $1.875
per share, subject to adjustment for stock splits and corporate reorganizations,
and (ii) the average of the closing bid and asked prices of the Company's Common
Stock for the immediately preceding 10 consecutive trading days ending one
trading day prior to the date of the notice of conversion; provided, however,
that the holder shall not be entitled to convert more than 20% of the Series B
Preferred Shares held by such holder on the third anniversary of the Closing
during any period of thirty days. For purposes of conversion, each share of
Series B Preferred Stock shall be valued at $25.00 per share. However,
conversion rights will expire after 5:00 p.m. on the redemption date for any
shares of Series B Preferred Stock which the Company has called for redemption.
No payment or adjustment will be made in respect of dividends for Series B
Preferred Stock that may be accrued or unpaid or in arrears upon conversion of
shares of Series B Preferred Stock. No fractional shares will be issued and, in
lieu of any fractional share, cash in an amount based on the then current market
price, determined as provided in the Certificate of Designation, of the Common
Stock will be paid.
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In case of any consolidation or merger of the Company with any other
corporation (other than a wholly owned subsidiary), or in case of sale or
transfer of all or substantially all of the assets of the Company, or in the
case of any share exchange whereby the Common Stock is converted into other
securities or property, the Company will be required to make appropriate
provision so that the holder of each share of Series B Preferred Stock then
outstanding will have the right thereafter to convert such share of Series B
Preferred Stock into the kind and amount of shares of stock and other securities
and property receivable upon such consolidation, merger, sale, transfer or share
exchange by a holder of the number of shares of Common Stock into which such
share of Series B Preferred Stock might have been converted immediately prior to
such consolidation, merger, sale, transfer or share exchange.
Liquidation Rights. In case of the voluntary or involuntary
liquidation. dissolution or winding up of the Company, holders of shares of
Series B Preferred Stock are entitled to receive the liquidation price of $25.00
per share, plus an amount equal to any accrued and unpaid dividends to the
payment date, before any payment or distribution is made to the holders of the
Common Stock or any other series or class of the Company's stock hereafter
issued which ranks junior as to liquidation rights to the Series B Preferred
Stock. The holders of the shares of the Series B Preferred will not be entitled
to receive the liquidation price of such shares until the liquidation price of
any other series or class of the Company's stock hereafter issued which ranks
senior as to the liquidation rights to the Series B Preferred Stock ("senior
liquidation stock") has been paid in full. No such senior liquidation stock
shall be issued without the approval of holders of a majority of the Series B
Preferred Stock. See "Voting Rights." The holders of Series B Preferred Stock
and all series or classes of the Company's stock hereafter issued 'which rank on
a parity as to liquidation rights with the Series B Preferred Stock ("parity
liquidation stock") are entitled to share ratably, in accordance with the
respective preferential amounts payable on such stock, in any distribution
(after payment of the liquidation price of the senior liquidation stock) which
is not sufficient to pay in full the aggregate of the amounts payable thereon.
After payment in full of the liquidation price of the shares of the Series B
Preferred Stock, the holders of such shares will not be entitled to any further
participation in any distribution of assets by the Company. Neither a
consolidation or merger of the Company with another corporation, nor a sale or
transfer of all or part of the Company's assets for cash, securities or other
property will be considered a liquidation, dissolution or winding up of the
Company.
No Sinking Fund. The Company is not required to provide for the
retirement or redemption of the Series B Preferred Stock through the operation
of a sinking fund.
Other Provisions. The shares of Series B Preferred Stock, when issued,
will be duly and validly issued, fully paid and nonassessable. The holders of
the shares of the Series B Preferred Stock have no preemptive rights with
respect to any shares of capital stock of the Company or any other securities of
the Company convertible into or carrying rights or options to purchase any such
shares.
REGISTRATION RIGHTS
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The Company shall use its best efforts to file with the Securities and
Exchange Commission (the "SEC") a registration statement with the SEC on or
before October 30, 1999 to allow the resale by the Purchaser(s) of the
Conversion Shares.
In connection with any registration of the Conversion Shares offered
hereby, the Company covenants and agrees as follows:
(a) The Company shall use its best efforts to have any
registration statements filed with the SEC including the
Conversion Shares declared effective at the earliest possible
time, and shall furnish each Purchaser desiring to sell
Conversion Shares such number of prospectuses as shall
reasonably be requested. The Company shall keep effective any
registration or qualification contemplated hereby and shall
from time to time amend or supplement each applicable
registration statement, preliminary prospectus, final
prospectus, application, document and communication for a
period of time equal to the earlier of (i) the date that all
of the Conversion Shares have been sold pursuant to the
registration statement or (ii) the date the Purchasers receive
an opinion of counsel that the Conversion Shares may be sold
under Rule 144(k) or (iii) the third anniversary of the
effective date of the registration statement.
(b) The Company shall pay all costs (excluding fees and
expenses of Purchaser(s) counsel and any underwriting or
selling commissions), fees and expenses in connection with all
registration statements filed pursuant to this Subscription
Agreement including, without limitation, the Company's legal
and accounting fees, printing expenses, blue sky fees and
expenses; provided that the Company shall not be responsible
for transfer taxes, fees and disbursement of accountants and
counsel for Purchasers, and other related selling expenses
incurred by the Purchasers.
(c) The Company will use reasonable efforts to qualify the
Conversion Shares included in a registration statement for
offering and sale under the securities or blue sky laws of
such states as reasonably are requested by the Purchaser(s),
provided that the Company shall not be obligated to execute or
file any general consent to service of process or to qualify
as a foreign corporation to do business under the laws of any
such jurisdiction or to subject itself to taxation in any such
jurisdiction.
(d) (i) Subject to the conditions set forth below, the Company
agrees to indemnify and hold harmless the Purchaser(s) of any
of the Conversion Shares, their officers, directors, partners,
employees, agents and counsel, and each person, if any, who
controls any such person within the meaning
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of Section 15 of the Act or Section 20(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), from
and against any and all loss, liability, charge, claim, damage
and expense whatsoever (which shall include, for all purposes
of this paragraph (d), but not be limited to, reasonable
attorneys' fees and any and all expense whatsoever reasonably
incurred, and any and all amounts paid in settlement of any
claim or litigation), as and when incurred, arising out of,
based upon, or in connection with (A) any untrue statement or
alleged untrue statement of a material fact contained (Y) in
any registration statement, final prospectus, or any amendment
or supplement thereto, or (Z) in any application or other
document or communication (in this paragraph (d) collectively
called an "application") executed by or on behalf of the
Company filed in any jurisdiction in order to register or
qualify any of the Conversion Shares under the securities or
blue sky laws thereof; or any omission or alleged omission to
state a material fact required to be stated therein or
necessary to make the statements therein not misleading,
unless such statement or omission was made in reliance upon
and in conformity with written information furnished to the
Company with respect to the Purchaser(s) of any of the
Conversion Shares by or on behalf of such Purchaser expressly
for inclusion in any such registration or final prospectus, or
any amendment or supplement thereto, or in any application, as
the case may be; or (B) any breach of any representation,
warranty, covenant or agreement of the Company contained in
this Agreement.
(ii) Promptly after receipt by any person in respect
of which indemnity may be sought pursuant to this Paragraph
(d) (an "Indemnified Party") of notice of any claim or the
commencement of any action, the Indemnified Party shall, if a
claim in respect thereof is to be made against the person
against whom such indemnity may be sought (an "Indemnifying
Party"), notify the Indemnifying Party in writing of the claim
or the commencement of such action; provided that the failure
to notify the Indemnifying Party shall not relieve it from any
liability which it may have to an Indemnified Party otherwise
than under this Paragraph (d) except to the extent of any
actual prejudice resulting therefore. If any such claim or
action shall be brought against an Indemnified Party and it
shall notify the Indemnifying Party thereof, the Indemnifying
Party shall be entitled to participate therein, and, to the
extent that it wishes, jointly with any other similarly
notified Indemnifying Party, to assume the defense thereof
with counsel reasonably satisfactory to the Indemnified Party.
After notice from the Indemnifying Party to the Indemnified
Party of its election to assume the defense of such claim or
action, the Indemnifying Party shall not be liable to the
Indemnified Party for any legal or other expenses subsequently
incurred by the Indemnified Party in connection with the
defense thereof
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13
other than reasonable costs of investigation; provided that
the Indemnified Party shall have the right to employ separate
counsel to represent the Indemnified Party in connection with
any claim in respect of which indemnity may be sought by the
Indemnified Party against the Indemnifying Party, but the fees
and expenses of such counsel shall be for the account of such
Indemnified Party unless (A) the Indemnifying Party and the
Indemnified Party shall have mutually agreed in writing to the
retention of such counsel or (B) the Indemnifying Party shall
not have assumed the defense thereof with counsel reasonably
satisfactory to the Indemnified Party or (C) in the opinion of
counsel to such Indemnified Party, representation of both
parties by the same counsel would be inappropriate due to
actual or potential conflicts of interest between them, it
being understood however, that the Indemnifying Party shall
not, in connection with any one such claim or action or
separate but substantially similar or related claims or
actions in the same jurisdiction arising out of the same
allegations or circumstances, be liable for the fees and
expenses of more than one separate firm of attorneys (together
with local counsel) at any time for all Indemnified Parties.
No Indemnifying Party shall, without the prior written consent
of the Indemnified Party, effect any settlement of any claim
or pending or threatened proceeding in respect of which the
Indemnified Party is or could have been a party and indemnity
could have been sought hereunder by such Indemnified Party and
such settlement includes an unconditional release of such
Indemnified Party from all liability arising out of such claim
or proceeding. Whether or not the defense of any claim or
action is assumed by the Indemnifying Party, such Indemnifying
Party will not be subject to any liability for any settlement
made without its consent, which consent will not be
unreasonably withheld.
(iii) The Purchaser(s) of Conversion Shares agree,
severally, and not jointly, to indemnify and hold harmless the
Company, its officers, directors, employees, accountants,
agents or counsel and each other person, if any, who controls
the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, to the same extent as the
foregoing indemnity from the Company to the Purchaser(s) in
paragraph (d)(ii), but only with respect to statements or
omissions, if any, made in any registration statement,
preliminary prospectus, or final prospectus (as from time to
time amended and supplemented), or any amendment or supplement
thereto, or in any application, in reliance upon and in
conformity with written information furnished to the Company
with respect to the Purchaser or his plan of distribution, by
or on behalf of the Purchaser expressly for inclusion in any
such registration statement, preliminary prospectus, or final
prospectus, or any amendment or supplement thereto, or in any
application, as the case may be. If any action shall be
brought against the
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14
Company or any other person so indemnified based on any such
registration statement, preliminary prospectus, or final
prospectus, or any amendment or supplement thereto, or in any
application, and in respect of which indemnity may be sought
against the Purchaser pursuant to this paragraph (d)(iii), the
Purchaser shall have the rights and duties given to the
Company, and the Company and each other person so indemnified
shall have the rights and duties given to the indemnified
parties, by the provisions of paragraph (d)(i).
(e) The Company as soon as practicable, but in any event not
later than 45 days after the end of the 12-month period
beginning on the day after the end of the fiscal quarter of
the Company during which the effective date of the
registration statement occurs (90 days in the event that the
end of such fiscal quarter is the end of the Company's fiscal
year), shall make generally available to its security holders,
in the manner specified in Rule 158(b) of the Rules and
Regulations, an earnings statement which will be in the detail
required by, and will otherwise comply with, the provisions of
Section 11(a) of the Act and Rule 158(a) of the Rules and
Regulations, which statement need not be audited unless
required by the Act, covering a period of at least 12
consecutive months after the effective date of the
Registration Statement.
(f) In connection with the registration of the Conversion
Shares, the Purchasers shall have the following obligations:
(i) It shall be a condition precedent to the
obligations of the Company to complete the registration
pursuant to this Agreement with respect to the Conversion
Shares of a particular Purchaser that such Purchaser shall
furnish to the Company such information in writing regarding
itself, the Conversion Shares held by it, and the intended
method of disposition of the Conversion Shares held by it, as
shall be reasonably required to effect the registration of
such Conversion Shares. In addition, each Purchaser shall
execute such other documents in connection with such
registration as the Company may reasonably request. At least
fourteen (14) days prior to the first anticipated filing date
of the Registration Statement, the Company shall notify each
Purchaser of the information the Company requires from each
such Purchaser (the "Requested Information"). If at least 5
business days prior to the effective date of the registration
statement the Company has not received the Requested
Information from a Purchaser (a "Non-Responsive Purchaser"),
then the Company may request effectiveness of the Registration
Statement without including securities of such Non-Responsive
Purchaser;
(ii) Each Purchaser, by such Purchaser's acceptance
of the Conversion Shares, agrees to cooperate with the Company
as reasonably
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15
requested by the Company in connection with the preparation
and filing of the Registration Statement hereunder; and
(iii) Each Purchaser agrees that, upon receipt of any
notice from the Company of (A) the happening of any event as a
result of which the prospectus included in the registration
statement, as then in effect, includes an untrue statement of
a material fact or omits to state a material fact required to
be stated therein or necessary to make the statements therein
in light of the circumstances under which they were made, not
misleading; or (B) the issuance by the SEC of any stop order
or other suspension of the effectiveness of the registration
statement, such Purchaser will immediately discontinue
disposition of Conversion Shares pursuant to the Registration
Statement covering such Conversion Shares until such
Purchaser's receipt of the copies of a supplemented or amended
Prospectus in the case of all event described in clause (A)
above, or a notice of the removal of any suspension in the
case of an event described in clause (B) above. If so directed
by the Company, such Purchaser shall deliver to the Company or
destroy (and deliver to the Company a certificate of
destruction) all copies in such Purchaser's possession of the
prospectus covering such Conversion Shares at the time of
receipt of such notice. Notwithstanding the foregoing,
however, the Purchaser may retain his copy of the prospectus
covering such Conversion Shares, but must agree in writing not
to use such prospectus to offer securities.
Other Simultaneous Offerings
This Preferred Offering is subject to the successful
completion of a concurrent offering of 740,000 units of the Company's
securities, each unit consisting of 2 shares of common stock and 2 Series B
Common Stock Purchase Warrants to purchase common stock of the Company (the
"Unit Offering"). The Company will not conduct a closing on subscriptions for
the Preferred Shares unless it is able to close on the Unit Offering.
Contemporaneously, the Company is offering for $100,000, 999,999 Series C Common
Stock Purchase Warrants to purchase common stock of the Company, along with
membership interests representing 20% of the membership interests of
Xxxxxxxxxxxx.Xxx, LLC, a subsidiary of the Company, after giving effect to the
separate sale of $1,500,000 of Authentidate's securities (the "Authentidate
Offering") (the Preferred Offering, Unit Offering and Authentidate Offering may
be collectively referred to herein as the "Offerings"). The Company will use its
best efforts to register for public distribution all the Common Shares, Series B
Warrants, the Shares underlying the Series B and C Warrants and Shares into
which the Preferred Shares are convertible.
The Series B Warrants are exercisable for a period of three
years from the date of issuance at a price of $1.375 per share and are
redeemable by the Company at any time commencing one year after the closing at a
redemption price of $.05 per Warrant provided, (i) that the shares underlying
the warrants are covered by an effective registration statement or are otherwise
exempt from registration and (ii) the closing bid price of the common stock is
not less than $3.25 per share,
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as proportionately adjusted to reflect any stock splits, stock dividends,
combination of shares, corporate reorganizations or like events during the
immediately preceding 20 consecutive trading days ending within 10 days of the
date of notice.
The Series C Warrants are exercisable for a period of three
years from the date of issuance at base price of $1.50 per share which will
increase by $.75 at three different milestone dates. The Series C Warrants will
be issued in three classes and each class contain differing milestone dates. The
Series C Warrants are also redeemable by the Company at any time commencing six
months after the closing at a redemption price of $.05 per Warrant provided, (i)
that the shares underlying the warrants are covered by an effective registration
statement or are otherwise exempt from registration and (ii) the closing bid
price of the common stock is not less than 120% of the current exercise price
during each of the immediately preceding 20 consecutive trading days ending
within 10 days of the date of notice.
1. Subscription: The Preferred Offering
a. By your execution of this Subscription Agreement and delivery of the
subscription amount to the Company, you hereby subscribe to purchase the
aggregate amount of Preferred Shares as set forth on pages 35-36 of this
Agreement.
b. Subscription payments by check should be made payable to "Bitwise
Designs, Inc." and should be delivered, together with one fully executed and
completed copies of this Agreement, to Xxxxxx X. Xxxxx, Esq., Xxxxxxxxx &
XxXxxxx, LLP, 000 Xxxxxxxxx Xxxxxx, Xxx Xxxx, XX 00000. Alternatively, funds may
be wired directly to an escrow account at Republic National Bank of New York. In
the event the subscription is not accepted in whole or in part by the Company,
the full amount of any subscription payment will be promptly refunded to the
Investor without deduction therefrom or interest thereon.
c. This subscription is subject to the terms and conditions of the
Preferred Offering which are described herein, as same may be amended or
supplemented. Upon acceptance by the Company of any subscription, and following
clearance of funds, the Company will deliver to the Subscriber the Preferred
Stock certificates in the amount subscribed.
2. Description of Business
OVERVIEW
Bitwise Designs, Inc. ("Bitwise" or the "Company"), and its
wholly-owned subsidiary DJS Marketing Group, Inc. ("DJS") (Bitwise and DJS are
sometimes collectively referred to herein as the "Company") are engaged in the
manufacture and distribution of document imaging systems, computer systems and
related peripheral equipment, components, and accessories and network and
internet services.
The Company was organized in August 1985 and reincorporated under the
laws of the state of Delaware in May 1992. The Company's executive offices are
located at 0000 Xxxxxxxxxx Xxxxx
00
00
Xxxxxxxxxxx, Xxx Xxxx 12308, and its telephone number is (000) 000-0000.
In March 1996, the Company acquired DJS, a system integrator, computer
reseller and personal computer manufacturer in Albany, New York. DJS is an
authorized sales and support provider for Novell, Microsoft Solutions and Lotus
Notes, as well as a member of Microage Infosystems. DJS operates under the
tradename "Computer Professionals."
RECENT EVENTS
In August 1998, the Company organized a subsidiary, Xxxxxxxxxxxx.Xxx,
LLC ("Authentidate"), a Delaware limited liability company. As of the date of
this Subscription Agreement, Bitwise owns 92.5% of the membership interests of
Authentidate. Through Authentidate, the Company intends to implement a business
line which provides for the verification of the authenticity of digital images
through a secure clock to stamp the date and time on each image.
The product name is Authentidate(TM) Image Marking and the Company has a patent
pending for the innovative technology behind this business plan.
Concurrent to this Offering, the Company is also commencing two other
offerings. The first, the Unit Offering, is an offering by the Company of
740,000 units of its securities for an aggregate offering price of $740,000. The
units consist of 2 shares of common stock and 2 Series B Common Stock Purchase
Warrants. The second offering, the Authentidate Offering, is by Authentidate and
the Company. The Authentidate offering is for 20% of the outstanding membership
interests of Authentidate (after giving effect to the sale of $1,500,000 of
Authentidate's securities), plus Bitwise Designs Series C Warrants for the
purchase of up to 999,999 shares of Bitwise common stock. The offering price is
$100,000. This Preferred Offering is conditioned on the successful completion of
the Unit Offering.
The Company has been notified that its line of credit with Nations
Credit Distribution Service, Inc. (the "Bank") will be terminated on September
30, 1999. The line of credit contained a balance of approximately $1,100,000.
The Bank has requested the Company to repay this obligation by September 30,
1999. The Company intends to negotiate with the Bank in order to obtain more
favorable repayment terms. Approximately $500,000 of the proceeds raised in the
Offerings will be applied towards the repayment of this obligation. If the
Company is not able to obtain more favorable repayment terms or reinstate the
line of credit, it will be forced to pay off the line of credit in full by the
September 30, 1999, thereby necessitating a greater portion of the net proceeds
of the Offerings to be used for debt repayment.
PRODUCTS
Document Imaging and Management
In January 1996, Bitwise, on a national level, introduced its document
imaging management system under the tradename DocStar which enables users to
scan paper documents onto an optical disk, hard drive or other storage medium
from which they can be retrieved in seconds. This system allows users to
eliminate or significantly reduce paper filing systems. The Company believes
that
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a broad spectrum of businesses and governmental agencies experience the problem
of storage, management and security of paper documents. The DocStar product line
is intended to provide a cost effective method of reducing the space necessary
to store documents while granting a user the ability to instantly retrieve
documents.
The operation of a document management system is similar to the
operation of a facsimile machine. Documents are fed into an optical scanner that
reads the documents and stores the information on one of several alternative
mass storage devices. Documents can also be transmitted from or to the system
via facsimile machine or modem. Documents can be retrieved almost
instantaneously for viewing, printing or faxing thereby offering a significant
time-saving tool to the modern office.
The main components of a document management system are a personal
computer, a high speed electronic document scanner, a laser printer capable of
reproducing documents quickly, and a software package which controls scanning,
indexing, storage and reproduction. Bitwise purchases scanners, laser printers
and other essential hardware from unaffiliated third parties and manufactures
the PC's for the system. The software utilized in DocStar consists of various
versions of existing software from other developers, as well as software
developed by the Company. Options and accessories include a jukebox, an optical
disk tower, additional software, scanner upgrades, monitor upgrades and hardware
upgrades.
The Company markets the document management system under the tradename
DocStar through a national dealer network. The Company owns one dealership in
the Albany, New York region, which also serves as a test market for new
applications and software. The Company believes that the emerging document
imaging market will be its primary business and basis for growth during the next
few years. This is an evolving market which will experience significant growth
in the future. The Company believes that this emerging market can provide the
Company with significant profits. However, there can be no assurance that the
Company's efforts in this emerging market will result in profits, income or
significant revenues to the Company.
Computer Products and Integration Services
The Company purchases peripheral computer products from many different
suppliers. Peripheral computer products are products that operate in conjunction
with computers, including but not limited to, printers, monitors, scanners,
modems and software. A Systems Integrator, such as DJS, configures various
computer hardware and peripheral products such as software together, to satisfy
a customer's individual needs. The Company believes that the market for personal
computers and integration services will continue to grow for the next several
years.
Networks
DJS also designs and installs network systems which involves network
software being installed on a fileserver computer with less powerful computers
sharing information from the fileserver. Applications that the network system
provides include E-mail, accounting systems, word processing, communication and
any other applications that require the sharing of information.
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Although Management believes that designing and installing network systems may
be an area of growth for DJS, there can be no assurance that growth in the
network market will be realized.
Internet/Intranet Development
The Internet/Intranet is a computer based communication system, with
international applicability, which provides customers with the ability to
advertise products, provide news and stock market products, provide educational
data bases, as well as one on one and Group Communications. The Company, through
DJS, provides customer Internet services, including installation of web pages.
RESEARCH AND DEVELOPMENT
The market for the Company's products is characterized by rapid
technological change involving the application of a number of advanced
technologies, including those relating to computer hardware and software, mass
storage devices, and other peripheral components. The Company's ability to be
competitive depends upon its ability to anticipate and effectively react to
technological change, as well as the application requirements of its customers.
Since inception, the Company has devoted efforts to research and
development activities in an effort to improve its current products and
introduce new products. Current development efforts are directed toward
improving ease of use, adding system enhancements and increasing performance.
The Company will continue to improve its document imaging products in an effort
to satisfy the needs of an ever changing marketplace.
QUALITY CONTROL AND SERVICE
Quality control by the Company is administered at each of the three
levels of the production process. First, components considered for use in
standard systems are tested for compatibility by the research staff. Second,
incoming components receive a physical damage inspection on receipt and again at
the start of the production process. Each memory module is electronically tested
prior to assembly. Each complete unit is then functionally tested at the end of
the assembly process to demonstrate that all components are engaged and fully
operational.
Third, each complete unit is "burned-in" from eight to twelve hours.
This process involves running a component test program which sequentially tests
each memory bit, processor circuit, and drive memory track to verify correct
operation in a temperature-controlled chamber. This test is repeated
continuously over the burn-in period. Since electronic components have their
greatest failure risk during the first few hours of active operation, management
believes that the burn-in process reveals nearly all faulty components before
they reach the end user.
The Company's dealers provide service to the end users. All dealers
receive service training from the national service staff. The Company provides
the dealer with replacement parts free of charge for 13 months after date of
shipment. The Company's vendors provide a similar warranty for failed
components. The Company offers liberal telephone support service to its dealers.
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MANUFACTURING AND SUPPLIERS
The Company's products have been designed to enable a variety of system
configurations to be assembled from a few basic modules. The Company's
manufacturing operations consist primarily of the assembly, test and quality
control of all parts, components, subassemblies and systems.
The Company uses standard parts and components in its existing product
lines which it purchases from unaffiliated third party suppliers. The Company,
however, does not have any contractual arrangements with its current suppliers.
Although the Company has never experienced material delays in deliveries from
its suppliers, shortages of component parts could occur and delay or interrupt
the Company's manufacture and delivery of products and adversely affect the
Company's operating results. The Company believes adequate alternative suppliers
are available to mitigate the potentially adverse effect of supply
interruptions, but there can be no assurance that such components will be
available as and when needed.
All peripheral computer products available through the Company, such as
monitors and scanner/printer units, are manufactured by third parties. The
Company only assembles the computer and the optical disk tower option which are
part of the DocStar system.
PATENTS AND TRADEMARKS
The Company has one patent pending and has registered the logo "BitWise
Designs" and Bitwise's associated trademarks, "DocStar" and "Authentidate." The
patent pending is for innovative technology that can verify the authenticity of
digital images by employing a secure clock to stamp the date and time on each
image captured. The product name is Authentidate(TM) Image Marking. No assurance
can be given that registration will be effective to protect the Company's
trademarks. The Company believes the tradename "BitWise Designs" and the
trademarks "DocStar" and "Authentidate" are material to its business.
SALES AND MARKETING
The Company's products are primarily being distributed through a
national dealer network and through a dealership owned by the Company in its
local market area. The Company believes that it has achieved a national sales
presence through national advertising, favorable reviews in industry
publications, newspapers, magazines, press releases and other periodicals
utilized by the document imaging industry. Moreover, the Company offers direct
mail and tele-marketing services to selected qualified dealers in their market
area. Management intends to increase the number of dealer locations for the
current fiscal year, although there can be no assurance it will be successful in
such efforts.
The Company's products are usually sold on credit terms or through a
floor planning finance company (to qualified accounts), and are warranted
against defects in materials and workmanship for a period of 13 months from
purchase. The Company currently employs five regional sales directors, one
district sales manager and three direct sales manager to cover the significant
markets of the country.
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COMPETITION
The market for the Company's products is rapidly changing and highly
competitive. The competition is direct (i.e., companies that make similar
products) and indirect (i.e., companies that participate in the market, but are
not direct competitors of the Company). The Company competes with major document
imaging manufacturers such as Panasonic, Sharp and Mita. Many of the Company's
current and prospective competitors have significantly greater financial,
technical, manufacturing and marketing resources, as well as a larger installed
base, than the Company.
EMPLOYEES
Bitwise employs 50 full-time employees including its executive
officers. No employees are covered by a collective bargaining agreement, and the
Company believes its employee relations are satisfactory.
3. Use Of Proceeds
The gross proceeds from the sale of the Series B Preferred Shares
offered hereby will be approximately $1,250,000. Additionally, the gross
proceeds from the Unit and Authentidate Offerings will be $840,000. The net
proceeds from the Offerings, estimated to be $2,003,000, will be used for
general working capital needs, including costs associated with general operating
expense such as the payment of outstanding payables and the purchase of
inventory. It is estimated that $500,000 will be applied towards paying down the
Company's line of credit with the Bank and $400,000 will be used for initial
funding of Authentidate.
4. Management
The executive officers and directors of the Company are as follows:
NAME AGE OFFICE
Xxxx X. Xxxxx 35 President, Chief Executive Officer and Chairman of
the Board
Xxx X. Xxxxxxx 36 Senior Vice-President--Research and Development,
Secretary and Director
Xxxxxx X. Xxxxxxxxx 56 Director
X. Xxxxxx Xxxxxxxx 62 Director
Xxxxxxx X. Xxxxxxxx 63 Director
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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. Xxxxx
has selected Xxxxxx Xxxxxxxxx as its representative on the Board.
Xxxx X. Xxxxx, a co-founder, has served as President, Chief Executive
Officer and Director since the incorporation of the Company in August 1985. Xx.
Xxxxx graduated from Rensselaer Polytechnic Institute ("RPI") with a B.S. degree
in electrical engineering in 1994 with a concentration in computer systems
design and in 1996 earned a Master of Business Administration degree from RPI.
Xxx X. Xxxxxxx, 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. Xx. Xxxxxxx 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.
Xxxxxx X. Xxxxxxxxx joined the Board of Directors in December, 1997. In
1989, Xx. Xxxxxxxxx founded The Xxxxxxxxx Group, a private financial consulting
services firm and has served as its President since such time. In 1981 Xx.
Xxxxxxxxx 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.
Xx. Xxxxxxxxx served as Chairman and Chief Executive Officer of ANA Financial
until 1989. Xx. Xxxxxxxxx is a former Certified Public Accountant. Xx. Xxxxxxxxx
holds a B.S. from New York University.
X. Xxxxxx Xxxxxxxx joined the Board of Directors in June, 1992. From
1985 to the present, Xx. Xxxxxxxx has served as the President of Sheridan
Management Corp. From 1975 to 1985, Xx. Xxxxxxxx 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 Xxxxxxxxx Industries. From 1970 to 1973
he was the Vice President, Corporate Finance of X.X. Xxxxxxxx. From 1967 to 1970
Xx. Xxxxxxxx was the Director of Acquisitions of Westinghouse Electric. From
1964 to 1967 he was employed by Corporate Equities, Inc., a venture capital
firm. Xx. Xxxxxxxx holds an M.B.A. from Harvard University and a B.A. from
Dartmouth College.
Xxxxxxx X. Xxxxxxxx joined the Board of Directors in December, 1997.
Xx. Xxxxxxxx has been the Chairman of Ventex Technology, Inc., a privately-held
neon light transformer company. since July 1993. Xx. Xxxxxxxx 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. Xx. Xxxxxxxx
serves as a Trustee of Worcester Polytechnic Institute ("WPI") and earned his
B.S. degree from WPI in 1957.
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5. Summary Financial Information
The following selected financial data were derived from the Company's
most recent draft of its Form 10-K, due to be filed with the Securities and
Exchange Commission by September 28,1999. This information is unaudited and the
data for the 1999 fiscal year is therefore subject to change based on the audit
which is currently in progress. The complete draft of the Form 10-K, and the
Company's reports on Form 10-Q for the quarters ending September 30, 1998,
December 31, 1998 and March 31, 1999 are attached as Exhibits B and C,
respectively.
YEAR ENDED JUNE 30,
1999 1998 1997
STATEMENT OF OPERATIONS DATA:
Net Sales 19,503,730 33,755,625 53,109,469
Gross Profit 6,723,592 8,092,566 10,006,736
Net (Loss)/Net Income (2,038,664) (5,464,059) (2,143,159)
Basic and Diluted
Net(Loss)/Net Income
Per Common Share (0.28) (0.74) (0.30)
BALANCE SHEET DATA:
Current Assets 10,965,661 12,138,995 13,622,171
Current Liabilities 6,206,211 4,789,896 7,730,498
Working Capital 4,759,450 7,349,099 5,891,673
Total Assets 15,592,963 14,708,454 18,924,765
Total Long Term Liabilities
4,923,313 3,975,000(1) 1,297
Stockholders' Equity 4,463,529 6,478,226 11,192,970
6. RISK FACTORS
An investment in the Preferred Shares involves a high degree of risk and should
be considered only by those investors who could afford the risk of loss of their
entire investment.
--------
(1) Long-term liabilities excluding discount of $534,668
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THIS SUBSCRIPTION AGREEMENT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E
OF THE SECURITIES EXCHANGE ACT OF 1934. WHEN USED IN THIS REPORT, THE WORDS
"BELIEVE," "ANTICIPATE," "THINK," "INTEND," "PLAN," "WILL BE," "EXPECT", AND
SIMILAR EXPRESSIONS IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS
REGARDING FUTURE EVENTS AND/OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY
ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, WHICH COULD CAUSE ACTUAL EVENTS
OR THE ACTUAL FUTURE RESULTS OF THE COMPANY TO DIFFER MATERIALLY FROM ANY
FORWARD-LOOKING STATEMENT. SUCH RISKS AND UNCERTAINTIES INCLUDE AMONG OTHER
THINGS, THE AVAILABILITY OF ANY NEEDED FINANCING, THE COMPANY'S ABILITY TO
IMPLEMENT ITS BUSINESS PLAN FOR VARIOUS APPLICATIONS OF ITS TECHNOLOGIES, THE
IMPACT OF COMPETITION, THE MANAGEMENT OF GROWTH, AND OTHER RISKS AND
UNCERTAINTIES THAT MAY BE DETAILED FROM TIME TO TIME IN THE COMPANY'S REPORTS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. IN LIGHT OF THE SIGNIFICANT
RISKS AND UNCERTAINTIES INHERENT IN THE FORWARD-LOOKING STATEMENTS INCLUDED
HEREIN, THE INCLUSION OF SUCH STATEMENTS SHOULD NOT BE REGARDED AS A
REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON THAT THE OBJECTIVES AND PLANS
OF THE COMPANY WILL BE ACHIEVED.
SIGNIFICANT LOSSES; UNCERTAINTY OF INTEGRATION OF INTRODUCED PRODUCT LINES
The Company incurred losses of $2,038,664; $5,464,059 and $2,143,159
for its fiscal years ended June 30, 1999, 1998 and 1997. Furthermore, in 1996,
the Company expanded nationally its sales of its DocStar line of document
imaging systems which has led to increased costs associated with the product
line. The Company will continue to incur these costs in the future as it
attempts to increase market awareness and sales. The Company's prospects should
be considered in light of the difficulties frequently encountered in connection
with the establishment of a new business line and the competitive environment in
which the Company operates. There can be no assurance that the Company will be
able to achieve profitable operations in future operating periods.
NEED FOR ADDITIONAL FINANCING
The Company's capital requirements have been and will continue to be
significant. The Company has been substantially dependent upon public offerings
and private placements of its securities and on short-term and long-term loans
from lending institutions to fund such requirements. The Company anticipates it
will utilize significant amounts of capital to promote and market DocStar. The
Company's line of credit with Nations Credit Distribution Service, Inc. (the
"Bank") will be terminated on September 30, 1999. The line of credit contained a
balance of approximately $1,100,000 and the Bank has requested the Company to
repay this obligation by
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September 30, 1999. The Company intends to negotiate with the Bank in order to
obtain more favorable repayment terms. Approximately $500,000 of the proceeds
raised from the Offerings will be applied towards the repayment of this
obligation. There can be no assurance that more favorable repayment terms will
be obtained, in which case $1,100,000 of the proceeds of the Offerings may have
to be utilized to repay this loan. In this event, the remaining funds may be
insufficient to accomplish the objectives of the Offerings. Further, there can
be no assurance that the amount of proceeds from the Offerings, together with
cash generated from other sources, will be sufficient to maintain operations or
finance further Company development. The Company, in the future, may need
additional funds from loans and/or the sale of equity securities. No assurance
can be given that such funds will be available or, if available, will be on
commercially reasonable terms satisfactory to the Company. In the event such
funds are not available, the Company may be forced to curtail operations, or, in
an extreme situation, cease operations.
SECURITY INTERESTS; RESTRICTIVE COVENANTS
The Company has granted security interests with respect to
substantially all of its assets to secure certain of its indebtedness, which
will continue following this offering. In the event of a default by the Company
on its secured obligations, a secured creditor could declare the Company's
indebtedness to be immediately due and payable and foreclose on the assets
securing the defaulted indebtedness. Moreover, to the extent that all of the
Company's assets continue to be pledged to secure outstanding indebtedness, such
assets will not be available to secure additional indebtedness. The Company's
loan agreement with its institutional lender restricts the ability of the
Company to incur additional indebtedness. The terms of such agreement may limit
the ability of the Company to obtain additional financing on terms favorable to
the Company or at all.
UNCERTAINTY OF WIDESPREAD MARKET ACCEPTANCE OF THE DOCSTAR SYSTEM
Although, the Company introduced its DocStar imaging system products on
a national level in January 1996, demand and market acceptance for the DocStar
imaging system remains subject to a high level of uncertainty. Achieving
widespread acceptance of this product line will continue to require substantial
marketing efforts and the expenditure of significant funds to create brand
recognition and customer demand for such products. There can be no assurance
that adequate marketing arrangements will be made for such products. Moreover,
there can be no assurance that these products will ever achieve widespread
market acceptance or increased sales or that the sale of such products will be
profitable.
TECHNOLOGICAL OBSOLESCENCE; RECENT DECREASES IN RETAIL PRICES
The computer industry is characterized by extensive research and
development efforts which result in the frequent introduction of new products
which render existing products obsolete. The ability of the Company to compete
successfully in the future will depend in large
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part on its ability to maintain a technically competent research and development
staff and its ability to adapt to technological changes in the industry and
enhance and improve existing products and successfully develop and market new
products that meet the changing needs of its customers. Although the Company is
dedicated to continued research and development of its products with a view
towards offering products with the most advanced capabilities, there can be no
assurance that the Company will be able to continue to develop new products on a
regular basis which will be competitive with products offered by other
manufacturers. At the present time, the Company does not have a targeted level
of expenditures for research and development. The Company will evaluate all
opportunities but believes the majority of its research and development will be
devoted to enhancements of its existing products.
Technological improvements in new products offered by the Company and
its competitors, which, among other things, results in the rapid decline of the
value of inventories, as well as the general decline in the economy and other
factors, have resulted in recent declines in retail prices for desktop
computers. As competitive pressures have increased, many companies have ceased
operation and liquidated inventories, further increasing downward pricing
pressure. Such declines have, in the past, and may in the future, reduce the
Company's profit margins.
LACK OF PATENT/INTELLECTUAL PROPERTY PROTECTION
The Company does not currently hold any patents and the technology
embodied in the Company's current products cannot be patented. The Company (1)
has a patent pending for the innovative technology underlying the Authentidate
business plan that can verify the authenticity of digital images by employing a
secure clock to stamp the date and time on each image captured and (2) has
registered as trademarks the logo "BitWise Designs," "DocStar" and
"Authentidate". The Company relies on confidentiality agreements with its key
employees to the extent it deems such to be necessary. The Company further
intends to file a patent application for any new products it may develop, to the
extent any technology included in such products is patentable, if any. There can
be no assurance that any patents in fact, will be issued or that such patents
will be effective to protect the Company's products from duplication by other
manufacturers. In addition, there can be no assurance that any patents that may
be issued will be effective to protect the Company's products from duplication
by other developers. Other companies operating within the Company's business
segment may independently develop substantially equivalent proprietary
information or otherwise obtain access to the Company's know-how. In addition,
there can be no assurance that the Company will be able to afford the expense of
any litigation which may be necessary to enforce its rights under any patent.
Although the Company believes that the products sold by it do not and will not
infringe upon the patents or violate the proprietary rights of others, it is
possible that such infringement or violation has or may occur. In the event that
products sold by the Company are deemed to infringe upon the patents or
proprietary rights of others, the Company could be required to modify its
products or obtain a license for the manufacture and/or sale of such products.
There can be no assurance that, in such an event, the Company would be able to
do so in a timely manner, upon acceptable terms
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and conditions, or at all, and the failure to do any of the foregoing could have
a material adverse effect upon the Company. Moreover, there can be no assurance
that the Company will have the financial or other resources necessary to enforce
or defend a patent infringement or proprietary rights violation action. In
addition, if the Company's products or proposed products are deemed to infringe
upon the patents or proprietary rights of others, the Company could, under
certain circumstances, become liable for damages, which could also have a
material adverse effect on the Company.
DEPENDENCE ON THIRD-PARTY MANUFACTURING AND SUPPLIERS
The Company does not own or lease any manufacturing facilities and does
not manufacture any of the component parts for its products but rather purchases
all of such components from unaffiliated suppliers. All of the Company's
products are assembled at the Company's facilities. The Company believes that at
the present time it has sufficient sources of supply of component parts, and
that in the event any existing supplier ceases to furnish component parts to the
Company, alternative sources are available. However, there can be no assurance
that future production capacity of the Company's current suppliers and
manufacturers will be sufficient to satisfy the Company's requirements or that
alternate suppliers and manufacturers will be available on commercially
reasonable terms, or at all. Further, there can be no assurance that the
availability of such supplies will continue in the future.
COMPETITION
The computer hardware industry is highly competitive. The Company
competes in the portable computer market with major computer manufacturers such
as International Business Machines, Inc., Apple Computers, Inc., Compaq Computer
Corporation and Dell Computer, as well as various manufacturers of super
portables who are concentrated in the Company's target market, such as Dolch
Computer Systems, Inc. and Ergo Computing, Inc. All of these companies have
substantially more experience and greater sales, financial and distribution
resources than that of the Company. The Company also competes with many
independent computer companies, smaller than those mentioned, many of which also
have substantially greater sales, financial resources and experience than that
of the Company. The most significant factors which form the basis upon which the
Company competes are the quality of its products, including advanced
capabilities, and price. There can be no assurance the Company can effectively
continue to compete in the future.
The microcomputer distribution industry is intensely competitive and is
characterized by constant pricing pressures and rapid product performance,
improvement and technological change resulting in relatively short product lives
and early product obsolescence. Competition is primarily based on product lines
and availability, price, delivery and other support services. Competing
distributors include other national distributors, regional distributors and
manufacturers' direct sale organizations, many of which have substantially
greater technical, financial and other resources than the Company. Major
wholesale electronic distribution
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competitors include Xxxxxx Micro D, Inc., Merisel, Inc., Robec, Inc., Tech Data
Corporation, Entertainment Marketing Inc. and Gates/FA Distributing Inc. The
Company's ability to compete favorably is, in significant part, dependent upon
its ability to control costs, react timely and appropriately to short- and
long-term trends and competitively price its products while preventing erosion
of its margins, and there is no assurance that the Company will be able to do
so.
DEPENDENCE UPON EXECUTIVE OFFICERS
The success of the Company is largely dependent upon the services of
its Chairman of the Board and President, Xxxx X. Xxxxx and Xxx X. Xxxxxxx, its
Senior Vice-President. The loss of the services of one or more of these
individuals would have a material adverse affect on the Company's business and
prospects. The Company has entered into a five-year employment agreement with
Xx. Xxxxx expiring in June 2000. The Company has obtained, for its benefit, "key
man" life insurance in the amount of $1,000,000 on the lives of Messrs. Xxxxx
and Xxxxxxx.
POSSIBLE ACQUISITIONS
The Company may at times become involved in discussions with potential
acquisition candidates. Accordingly, a portion of the proceeds of this offering
currently allocated to working capital may be used by the Company in connection
with the acquisitions of compatible product lines and businesses. However, there
can be no assurance that the Company will identify and/or consummate an
acquisition, or that such acquisitions, if completed, will be profitable.
Further, there can be no assurance that any proceeds received by the Company
from the Offering, together with cash flow, will be sufficient to finance such
acquisitions.
To the extent the Company effects a business combination with a
financially unstable company or an entity in its early stage of development or
growth (including entities without established records of sales or earnings),
the Company will become subject to numerous risks inherent in the business and
operations of financially unstable and early stage or potential emerging growth
companies. Although the Company will endeavor to evaluate the risks inherent in
a particular acquired business or industry, there can be no assurance that the
Company will properly ascertain or assess all significant risk factors.
The Company evaluates acquisition candidates by analyzing the company's
products which complement or expand the Company's product line; financial
stability, including the Company's profitability and cash flow; and management.
The Company's long term plan is to expand the Company's sales and income
potential by achieving economies of scale as it expands its revenue base.
Technological growth will be considered after the above basic criteria are
evaluated.
In addition, should the Company consummate an acquisition, such
acquisition could have
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an adverse affect on the Company's liquidity and earnings. The Company is
currently not considering any acquisition and the Company cannot give any
assurances that any business acquisition opportunities may be obtained in the
future or if obtained, may be negotiated on terms favorable to the Company.
CONTROL BY PRESENT MANAGEMENT
Xxxx X. Xxxxx and Xxx X. Xxxxxxx, the Company's President and Senior
Vice-President, respectively, are currently entitled to elect a majority of the
directors of the Company through the exercise of the rights and preferences
accorded holders of the Company's Series A Preferred Stock. The Series A
Preferred Stock allows Messrs. Xxxxx and Xxxxxxx to elect a majority of the
Company's Board of Directors, subject to certain conditions. The Series A
Preferred Stock may make the Company a less attractive acquisition candidate and
such power may also discourage or impede offers to acquire the Company not
approved by the Board of Directors, including offers for some or all of the
shares of the Company's Common Stock at substantial premiums above the then
current market value of such shares.
NO DIVIDENDS
The Company has not paid any dividends on its Common Stock since its
inception and does not contemplate or anticipate paying any dividends on its
Common Stock in the foreseeable future. Earnings, if any, will be used to
finance the development and expansion of the Company's business.
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ SYSTEM;
RISKS RELATING TO LOW PRICED "XXXXX" STOCKS
The Company's Common Stock is listed on Nasdaq SmallCap Market (Symbol
"BTWS"). In order to continue to be listed on Nasdaq, however, the Company must
maintain $2,000,000 in net tangible assets and a $1,000,000 market value of the
public float. The failure to meet these maintenance criteria in the future may
result in the delisting of the Company's Common Stock from Nasdaq, and trading,
if any, in the Company's securities would thereafter be conducted in the
non-Nasdaq over-the-counter market. As a result of such delisting, an investor
could find it more difficult to dispose of, or to obtain accurate quotations as
to the market value of, the Company's securities.
The Company is currently completing its audited financial statements
and its Annual Report on form 10-K for the fiscal year ending June 30, 1999. The
Form 10-K is due to be filed with the SEC and Nasdaq on or about September 30,
1999.
Although the Company anticipates that the Common Stock will be continue
to be listed for trading on Nasdaq, if the Common Stock were to become delisted
from trading on Nasdaq
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and the trading price of the Common Stock were to fall below $5.00 per share on
the date the Common Stock was delisted, trading in such securities would also be
subject to the requirements of certain rules promulgated under the Exchange Act,
which require additional disclosure by broker-dealers in connection with any
trades involving a stock defined as a xxxxx stock (generally, any non-Nasdaq
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions). Such rules require the delivery, prior to any xxxxx stock
transaction, of a disclosure schedule explaining the xxxxx stock market and the
risks associated therewith, and impose various sales practice requirements on
broker-dealers who sell xxxxx stocks to persons other than established customers
and accredited investors (generally institutions). For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transaction prior to sale. The additional burdens imposed upon broker-dealers by
such requirements may discourage broker-dealers from effecting transactions in
the Company's securities, which could severely limit the market price and
liquidity of such securities and the ability of purchasers to sell their
securities of the Company in the secondary market.
ARBITRARY OFFERING PRICE OF PREFERRED STOCK
The offering price of the Series B Preferred Stock, as well as the
Conversion Price of the Series B Preferred Stock has been determined by the
Company and is arbitrary in that it does not necessarily bear any relationship
to the assets, earnings or book value of the Company, the market value of the
Company's Common Stock, or any other recognized criteria of value.
SHARES AVAILABLE FOR FUTURE SALE; SALES BY AFFILIATES
Approximately 1,131,806 shares of Common Stock currently outstanding
may be deemed "restricted securities" as that term is defined under the
Securities Act of 1933 (the "Act"), and in the future, may be sold pursuant to a
registration under the Act, in compliance with Rule 144 under the Act, or
pursuant to another exemption therefrom. Rule 144 provides, that, in general, a
person holding restricted securities for a period of one year may, every three
months thereafter, sell in brokerage transactions an amount of shares which does
not exceed the greater of one percent of the Company's then outstanding Common
Stock or the average weekly trading volume of the Common Stock during the four
calendar weeks prior to such sale. Rule 144 also permits, under certain
circumstances, the sale of shares without any quantity limitations by a person
who is not an affiliate of the Company and was not an affiliate at any time
during the 90 day period prior to sale and who has satisfied a two year holding
period. Sales of the Company's Common Stock by certain present stockholders
under Rule 144 may, in the future, have a depressive effect on the market price
of the Company's securities. In addition, the sale of shares by officers and
directors and other affiliated shareholders, may also have a depressive effect
on the market for the Company's securities.
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SIGNIFICANT OUTSTANDING OPTIONS AND WARRANTS
As of June 30, 1999, there were outstanding immediately exercisable
stock options to purchase an aggregate of 2,094,870 shares of Common Stock at
exercise prices ranging from $0.34 to $8.00 per share, and outstanding
immediately exercisable warrants to purchase an aggregate of 2,898,995 shares of
Common Stock at exercise prices ranging from $1.50 to $8.00 per share. To the
extent that outstanding stock options and warrants are exercised dilution to the
Company's shareholders will occur. Moreover, the terms upon which the Company
will be able to obtain additional equity capital may be adversely affected,
since the holders of the outstanding options and warrants can be expected to
exercise them at a time when the Company would, in all likelihood, be able to
obtain any needed capital on terms more favorable to the Company than the
exercise terms provided by the outstanding options and warrants.
TAX LOSS CARRYFORWARDS
At June 30, 1999, the Company has net operating loss carryforwards
("NOLS") for federal income tax purposes of approximately $13,000,000 available
to offset future taxable income. Under Section 382 of the Internal Revenue Code
of 1986, as amended, utilization of prior NOLS is limited after an ownership
change, as defined in Section 382, to an annual amount equal to the value of the
loss corporation's outstanding stock immediately before the date of the
ownership change multiplied by the federal long-term exempt tax rate. Use of the
Company's NOLS could also be limited as a result of grants of stock options
under stock option plans and other events. In the event the Company achieves
profitable operations, any significant limitation on the utilization of NOLS
would have the effect of increasing the Company's current tax liability.
AUTHORIZATION OF PREFERRED STOCK; EXISTENCE OF SERIES A PREFERRED STOCK
The Company's Certificate of Incorporation authorize the issuance of
"blank check" preferred stock with such designation, rights and preferences as
may be determined from time to time by the Board of Directors. As of the date of
this Agreement, the Board of Directors has designated 200 shares of Preferred
Stock as Series A Preferred Stock, of which 100 shares have been issued to each
of Xxxx X. Xxxxx and Xxx X. Xxxxxxx, the President and Senior Vice President,
respectively, of the Company. The holders of the Series A Preferred Shares have
the right to elect a majority of the Board of Directors as long as such holder
remains, subject to certain conditions, an officer, director and 5% stockholder
of the Company. During such time as the Series A Preferred Stock is outstanding,
the Board of Directors will consist of an odd number of directors, a majority of
whom will be designated as "Preferred Directors" and be elected solely by the
holders of Series A Preferred Stock voting separately as a group. The holders of
the Series A Preferred Stock have a preference on liquidation of $1.00 per share
and no dividend or conversion rights. Moreover, the Board of Directors is
empowered, without shareholder approval, to make additional issuances of
preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other rights
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of the holders of the Company's Common Stock. The holders of the Series A
Preferred Stock have the right to elect a majority of the Board of Directors. In
the event of additional issuances, the preferred stock could be utilized, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of the Company. Except for the Series B Preferred Stock being
offered by the Company, the Company has no present intention to issue any
additional shares of its currently authorized preferred stock or to create any
new series of preferred stock. However, there can be no assurance that the
Company will not do so in the future.
LIMITED TRANSFERABILITY OF UNITS; LACK OF TRADING MARKET
Purchasers of the Unit offered hereby must be aware of the long-term
nature of their investment and be able to bear the economic risks of their
investment for an indefinite period of time. No trading market exist for the
Unit. Neither the Unit offered hereby nor the Securities included therein have
been registered under the Act or the securities laws of any state. The right of
any purchaser to sell, transfer, pledge or otherwise dispose of the Units or the
Securities included therein will be limited by the Act and state securities laws
and the regulations promulgated thereunder. Consequently, a holder of Units may
not be able to liquidate his investment.
7. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, you as follows:
(a) The Company, and each of its subsidiaries, is duly
organized, validly existing and in good standing under the laws of their
respective states of incorporation, with all requisite power and authority to
own, lease, license, and use its properties and assets and to carry out the
business in which it is engaged. The Company, and each of its subsidiaries, is
duly qualified to transact the business in which it is engaged and is in good
standing as a foreign corporation in every jurisdiction in which its ownership,
leasing, licensing or use of property or assets or the conduct of its business
make such qualification necessary.
(b) The Company has all requisite power and authority to (i)
execute, deliver and perform its obligations under this Agreement and (ii) to
issue, sell and deliver the Preferred Shares and Conversion Shares. This
Agreement has been duly authorized by the Company, and (subject, with respect to
enforceability, to the provisions of bankruptcy and similar laws) when executed
and delivered by the Company, will constitute the legal, valid and binding
obligation of the Company, enforceable as to the Company in accordance with its
terms. The Preferred Shares have been duly authorized by the Company and
(subject, with respect to enforceability, to the provisions of bankruptcy and
similar laws), when executed, issued, sold and delivered in accordance with the
terms of this Agreement, against payment therefor, the Preferred Shares will
have been validly executed, issued, sold and delivered and will constitute the
legal, valid and binding obligation of the Company, enforceable as to the
Company in accordance with its terms.
(c) No consent, authorization, approval, order, license,
certificate or permit of
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or from, or declaration or filing with, any federal, state, local or other
governmental authority or any court or any other tribunal is required by the
Company for the execution, delivery or performance by the Company of this
Agreement or the execution, issuance, sale or delivery of the Preferred Shares
and Conversion Shares.
(d) No consent of any party to any contract, agreement,
instrument, lease, license, arrangement or understanding to which the Company is
a party or to which any of its properties or assets are subject is required for
the execution, delivery or performance by the Company of this Agreement, or the
execution, issuance, sale and delivery of the Preferred Shares and Conversion
Shares.
(e) The execution, delivery and performance of this Agreement,
and the execution, issuance, sale and delivery of the Preferred Shares, will not
violate, result in a breach of, conflict with (with or without the giving of
notice or the passage of time or both) or entitle any party to terminate or call
a default under any contract, agreement, instrument, lease, license, arrangement
or understanding or violate or result in a breach of any term of the certificate
of incorporation or by-laws of, or conflict with any law, rule, regulation,
order, judgment or decree binding upon, the Company or to which any of its
operations, businesses, properties or assets are subject.
(f) The Company has, as of the date hereof, an authorized
capitalization consisting of 20,000,000 shares of Common Stock, par value $.001,
of which 7,410,745 shares are issued and outstanding and 5,000,000 shares of
Preferred Stock, par value $.10, of which 200 shares are designated as Series A
Preferred Stock and are issued and outstanding. Each issued and outstanding
share of Common Stock and Preferred Stock is duly authorized, validly issued,
fully paid, and non-assessable, without any personal liability attaching to the
ownership thereof solely by being such a holder, and has not been issued and is
not owned or held in violation of any preemptive rights of stockholders. There
is no commitment, plan, or arrangement to issue, and no outstanding option,
warrant, or other right calling for the issuance of, any share of capital stock
of the Company or any security or other instrument which by its terms is
convertible into, exercisable for, or exchangeable for capital stock of the
Company other than: (1) the 1992 Incentive Stock Option Plan, as amended, which
provides for the issuance of up to 3,000,000 shares of Common Stock and under
which options to purchase an aggregate of 1, 984,870 shares of Common Stock are
outstanding; (2) the 1992 Non-executive Director Plan, as amended, which
provides for the issuance of options to purchase 20,000 shares of Common Stock
to each director upon appointment to the Board and 10,000 shares of Common Stock
for each year of service and provides for the issuance of 5,000 shares of Common
Stock to each member of an advisory board upon appointment and for each year of
service, under which options to purchase an aggregate of 110,000 shares of
Common Stock are outstanding; and (3) warrants to purchase 2,898,995 shares of
Common Stock.
(g) The unaudited financial statements as of and for the
period ended June 30, 1999 (the "Financial Statements") of the Company to be
audited and included within the Form 10-K, the draft of which is annexed as
Exhibit B hereto, and the audited financial statements as of and for the period
ended June 30,1998, annexed as Exhibit D hereto, fairly present in accordance
with
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generally accepted accounting principles the financial position, the results of
operations, and the other information with respect to the Company purported to
be shown therein at the respective dates and for the respective periods to which
they apply. The Financial Statements have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved, are correct and complete, and are in accordance with the books
and records of the Company. There has at no time been a material adverse change
in the financial condition, results of operations, business, properties, assets,
liabilities, or future prospects of the Company from the latest information set
forth herein, except that the Company anticipates that losses for the year ended
June 30, 1999 will be approximately $2,038,664.
(h) As of the date hereof there is no litigation, arbitration,
claim, governmental or other proceeding (formal or informal), or investigation
pending or to the Company's knowledge threatened, with respect to the Company,
or its respective operations, businesses, properties, or assets, except as
individually or in the aggregate do not now have and will not in the future have
a material adverse effect upon the operations, business, properties, or assets
of the Company. The Company is not in violation of, or in default with respect
to, any law, rule, regulation, order, judgment, or decree, except as properly
described elsewhere in this Agreement and the Form 10-K annexed hereto, or such
as individually or in the aggregate do not have and will not in the future have
a material adverse effect upon the operations, business, properties, or assets
of the Company; nor is the Company required to take any action in order to avoid
any such violation or default.
(i) As of the date hereof, the Company has free and marketable
title to all real property that it owns and good title to all other properties
and assets which are owned by it, free and clear of all liens other than liens
for taxes not yet due and payable, charges, pledges, mortgages, security
interests, and encumbrances, except as may be properly described elsewhere in
this Agreement and the Form 10-K annexed hereto, or such as in the aggregate do
not now have and will not in the future have a material adverse effect
(individually or in aggregate) upon the financial condition, results of
operations, business, properties, or assets of the Company.
(j) As of the date hereof, the Company is not in violation or
breach of, or in default with respect to complying with, any material provision
of any material contract, agreement, instrument, lease, license, arrangement,
other than any such violation or breach which would not have, individually or in
the aggregate, a material adverse effect on the Company's business, and each
such contract, agreement, instrument, lease, license, arrangement, and
under-standing is in full force and effect and is the legal, valid, and binding
obligation of the parties thereto enforceable as to them in accordance with its
terms. The Company enjoys peaceful and undisturbed possession under all leases
and licenses under which it is operating as of the date hereof. As of the date
hereof, the Company is not a party to or bound by any contract, agreement,
instrument, lease, license, arrangement, or understanding, or subject to any
charter or other restriction, which has had or may in the future have a material
adverse effect on the financial condition, results of operations, business,
properties, assets, liabilities, or future prospects of the Company. The Company
is not in violation or breach of, or in default with respect to, any term of its
Certificate of Incorporation or By-Laws.
(k) There is no right under any patent, patent application,
copyright, franchise, or
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other intangible property or asset (all of the foregoing being herein called
"Intangibles") necessary to the business of the Company as presently conducted
except that the Company (1) has a patent pending for the innovative technology
underlying the Authentidate business plan that can verify the authenticity of
digital images by employing a secure clock to stamp the date and time on each
image captured and (2) has registered as trademarks the logo "BitWise Designs,"
"DocStar" and "Authentidate." To the knowledge of the Company, there is no
Intangible of others which has had or may in the future have a materially
adverse effect on the financial condition, results of operations, business,
properties, assets, liabilities, or future prospects of the Company.
(l) To its best knowledge, the Company has not infringed, is
not infringing, and has not received notice of infringement with respect to
asserted Intangibles of others. To the best knowledge of the Company, none of
the patents, patent applications, trademarks, service marks, trade names and
copyrights, and licenses and rights to the foregoing presently owned or held by
the Company, materially infringe upon any like right of any other person or
entity. The Company (i) owns or has the right to use, free and clear of all
liens, charges, claims, encumbrances, pledges, security interests, defects or
other restrictions of any kind whatsoever, sufficient patents, trademarks,
service marks, trade names, copyrights, licenses and right with respect to the
foregoing, to conduct its business as presently conducted and (ii) is not
obligated or under any liability whatsoever to make any payments by way of
royalties, fees or otherwise to any owner or licensee of, or other claimant to,
any patent, trademark, service mark, trade name, copyright, know-how, technology
or other intangible asset, with respect to the use thereof or in connection with
the conduct of its business as now conducted or otherwise. The Company has
direct ownership of title to all its intellectual property (including all United
States and foreign patent applications and patents), other proprietary rights,
confidential information and know-how; owns all the rights to its Intangibles as
are currently used in or have potential for use in its business.
(m) The Company will use its best efforts to cut its operating
expenses for fiscal year 2000 by 15%.
(n) The Company will not incur any debt for borrowed money,
except for accounts receivable working capital credit facility, without the
consent of the holders of a majority interest of the Series B Preferred Stock.
(o) The following table sets forth certain information as of
September 21, 1999 with respect to (i) each director and each executive officer,
(ii) all directors and officers as a group, and (iii) the persons (including any
"group" as that term is used in Section l3(d)(3) of the Securities Exchange Act
of l934), known by the Company to be the beneficial owner of more than five (5%)
percent of the Company's Common Stock and Series A Preferred Stock.
Amount and Nature
Type of Name and Address of of Beneficial Percentage
Class Beneficial Holder Ownership (1) of Class
----- ----------------- ------------- --------
Common Xxxx X. Xxxxx 944,683 (2) 10.8%
c/o Bitwise Designs
0000 Xxxxxxxxxx Xxxxx
Xxxxxxxxxxx, XX 00000
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Common Xxx X. Xxxxxxx 667,239(3) 7.6%
c/o Bitwise Designs
0000 Xxxxxxxxxx Xxxxx
Xxxxxxxxxxx, XX 00000
Common Xxxxxx Xxxxxxxxx 30,000(4) .3%
c/o Bitwise Designs
0000 Xxxxxxxxxx Xxxxx
Xxxxxxxxxxx, XX 00000
Common Xxxxxx Xxxx 74,216(5) 0.8%
c/o Bitwise Designs, Inc.
0000 Xxxxxxxxxx Xxxxx
Xxxxxxxxxxx, XX 00000
Common X. Xxxxxx Xxxxxxxx 70,000(6) .8%
c/o Bitwise Designs, Inc.
0000 Xxxxxxxxxx Xxxxx
Xxxxxxxxxxx, XX 00000
Common Xxxxxxx Xxxxxxxx 30,000(4) .3%
c/o Bitwise Designs, Inc.
0000 Xxxxxxxxxx Xxxxx
Xxxxxxxxxxx, XX 00000
Series A Xxxx X. Xxxxx 100(7) 50%
Preferred Stock c\o Bitwise Designs, Inc.
0000 Xxxxxxxxxx Xxxxx
Xxxxxxxxxxx, XX 00000
Series A Xxx X. Xxxxxxx 100(8) 50%
Preferred Stock c/o Bitwise Designs, Inc.
0000 Xxxxxxxxxx Xxxxx
Xxxxxxxxxxx, XX 00000
Directors/Officers
as a group (2)(3)(4)(5)(6)(7)(8) 1,816,338 20.7%
(1) Unless otherwise indicated below, each director, officer and 5%
shareholder has sole voting and sole investment power with respect to
all shares that he beneficially owns.
(2) Includes vested stock options to purchase 710,185 shares of Common
Stock.
(3) Includes vested stock options to purchase 435,185 shares of Common
Stock.
(4) Includes vested options to purchase 30,000 shares of Common Stock.
(5) Includes vested options to purchase 71,333 shares of Common Stock and
excludes nonvested options to purchase 6,667 shares of Common Stock.
Includes 1,000 shares of Common Stock owned by Xx. Xxxx'x wife.
(6) Includes vested options to purchase 60,000 shares of Common Stock.
(7) See footnote (2). Each share of Series A Preferred Stock is entitled to
ten (10) votes per share.
(8) See footnote (3). Each share of Series A Preferred Stock is entitled to
ten (10) votes per share.
*Percentage not significant.
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8. Representations and Warranties of the Investor. You hereby represent
and warrant to, and agree with, the Company as follows:
(a) You are an "Accredited Investor" as that term is defined
in Section 501(a) of Regulation D promulgated under the Securities Act of 1933,
as amended (the "Securities Act").
Specifically you are (CHECK APPROPRIATE ITEMS(S)):
A bank as defined in Section 3(a)(2) of the Securities
Act, or a savings and loan association or other institution as defined in
Section 3(a)(5)(A) of the Securities Act, whether acting in its individual or
fiduciary capacity; a broker or dealer registered pursuant to Section 15 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); an insurance
company as defined in Section 2(13) of the Securities Act; an investment company
registered under the Investment Company Act of 1940 or a business development
company as defined in Section 2(a)(48) of that Act; a small Business Investment
Company licensed by the U.S. Small Business Administration under Section 301(c)
or (d) of the Small Business Investment Act of 1958; a plan established and
maintained by a state, its political subdivisions, or any agency or
instrumentality of a state or its political subdivisions, for the benefit of its
employees, if such plan has total assets in excess of $5,000,000; an employee
benefit plan within the meaning of the Employee Retirement Income Security Act
of 1974, if the investment decision is made by a plan fiduciary, as defined in
Section 3(21) of such Act, which is either a bank, savings and loan association,
insurance company, or registered investment advisor, or if the employee benefit
plan has total assets in excess of $5,000,000 or, if a self-directed plan, with
investment decisions made solely by persons that are accredited investors;
_____ (ii) A private business development company as defined
in Section 202(a)(22) of the Investment Advisers Act of 1940;
_____ (iii) An organization described in Section 501(c)(3) of
the Internal Revenue Code, corporation, Massachusetts or similar business trust,
or partnership, not formed for the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000;
_____ (iv) A director, executive officer, or general partner
of the Company;
_____ (v) A natural person whose individual net worth, or
joint net worth with that person's spouse, at the time of his or her purchase
exceeds $1,000,000;
_____ (vi) A natural person who had an individual income in
excess of $200,000 in each of the two most recent years or joint income with
that person's spouse in excess of $300,000 in each of those years and has a
reasonable expectation of reaching the same income level in the current year;
_____ (vii) A trust, with total assets in excess of
$5,000,000, not formed for the specific purpose of acquiring the securities
offered, whose purchase is directed by a sophisticated person as described in
Rule 506(b)(2)(ii); or
_____ (viii) An entity in which all of the equity owners are
accredited investors. (If this alternative is checked, you must identify each
equity owner and provide statements signed by
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each demonstrating how each qualified as an accredited investor.)
(b) If you are a natural person, you are: a bona fide resident
of the State contained in your address set forth at the end of this Agreement as
your home address; at least 21 years of age; and legally competent to execute
this Agreement. If an entity, you are duly authorized to execute this Agreement
and this Agreement, when executed and delivered by you, will constitute your
legal, valid and binding obligation enforceable against you in accordance with
its terms.
(c) You have received, read carefully and are familiar with
this Agreement. Respecting the Company, its business, plans and financial
condition, the terms of the Preferred Offering and any other matters relating to
the Preferred Offering: you have received all materials which have been
requested by you; and the Company has answered all inquiries that you or your
representatives have put to it. You have had access to all additional
information necessary to verify the accuracy of the information set forth in
this Agreement and any other materials furnished herewith, and you have taken
all the steps necessary to evaluate the merits and risks of an investment as
proposed hereunder.
(d) You or your purchaser representative have such knowledge
and experience in finance, securities, investments and other business matters so
as to be able to protect your interests in connection with this transaction, and
your investment in the Company hereunder is not material when compared to your
total financial capacity.
(e) You understand the various risks of an investment in the
Company as proposed herein and can afford to bear such risks, including, but not
limited to, the risks of losing your entire investment.
(f) You acknowledge that no market for the Preferred Shares
presently exists and none may develop in the future and that you may find it
impossible to liquidate your investment at a time when it may be desirable to do
so, or at any other time.
(g) You have been advised by the Company that the Preferred
Shares have not been registered under the Securities Act, that the Preferred
Shares will be issued on the basis of the statutory exemption provided by
Section 4(2) of the Securities Act and/or Regulation D promulgated thereunder
relating to transactions by an issuer not involving any public offering and
under similar exemptions under certain state securities laws; that this
transaction has not been reviewed by, passed on or submitted to any Federal or
state agency or self-regulatory organization where an exemption is being relied
upon, and that the Company's reliance thereon is based in part upon the
representations made by you in this Agreement. You acknowledge that you have
been informed by the Company of, or are otherwise familiar with, the nature of
the limitations imposed by the Securities Act and the rules and regulations
thereunder on the transfer of securities. In particular, you agree that no sale,
assignment or transfer of the Preferred Shares shall be valid or effective, and
the Company shall not be required to give any effect to any such sale,
assignment or transfer, unless (i) the sale, assignment or transfer of the
Preferred Shares is registered under the Securities Act, or (ii) the Preferred
Shares are sold, assigned or transferred in accordance with all the requirements
and limitations of Rule 144 under the Securities Act, it being understood that
Rule 144 is not available at the present time for the sale of the Preferred
Shares, or (iii) such sale, assignment, or transfer is otherwise exempt from
registration under the Securities Act. You acknowledge that the Preferred
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Shares shall be subject to a stop transfer order and the certificate or
certificates evidencing any Preferred Shares shall bear the following or a
substantially similar legend and such other legends as may be required by state
blue sky laws:
"These securities have not been registered under the Securities Act of 1933.
Such securities may not be sold or offered for sale, transferred, hypothecated
or otherwise assigned in the absence of an effective registration statement with
respect thereto under such Act or an opinion reasonably acceptable to the
Company of counsel reasonably acceptable to the Company that an exemption from
registration for such sale, offer, transfer, hypothecation or other assignment
is available under such Act."
(h) You will acquire the Preferred Shares for your own account
(or for the joint account of you and your spouse either in joint tenancy,
tenancy by the entirety or tenancy in common) for investment and not with a view
to the sale or distribution thereof or the granting of any participation
therein, and that you have no present intention of distribution or selling to
others any of such interest or granting any participation therein.
(i) It never has been represented, guaranteed or warranted by
any broker, the Company, any of the officers, directors, shareholders, employees
or agents of either, or any other persons, whether expressly or by implication,
that:
(i) the Company or you will realize any given
percentage of profits and/or amount or type of consideration, profit or
loss as a result of the Company's activities or your investment in the
Company; or
(ii) the past performance or experience of the
management of the Company, or of any other person, will in any way
indicate the predictable results of the ownership of the securities or
of the Company's activities.
(j) You understand that the net proceeds from all
subscriptions paid and accepted pursuant to the Offerings (after deduction for
expenses of the Offerings, including any agent fees) will be used for, in
conjunction with the net proceeds received from the other concurrent offerings,
by Xxxxxxxxxxxx.Xxx, LLC for the initial implementation of its business plan and
by Bitwise for general working capital, the payment of vendors and the repayment
of the line of credit.
(k) Without limiting any of your other representations and
warranties hereunder, you acknowledge that you have reviewed and are aware of
the Risk Factors set forth in Section 6 herein.
(l) You are aware that this Preferred Offering is subject to
the successful completion of the Unit Offering referenced in Section 2, "Recent
Events" herein. You understand that no subscriptions for Preferred Shares will
be accepted by the Company unless the Unit Offering is fully subscribed.
(m) You are aware that Authentidate may be converted into a C
corporation. You
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understand and agree that if Authentidate is converted into a C corporation,
based on its capitalization after giving effect to a sale of $1,500,000 of its
securities, it will issue up to 20% of its shares of common stock in lieu of
membership interests.
(n) (i) You hereby agree not to directly or indirectly use the
shares of Bitwise Common Stock acquired pursuant to these Offerings, and the
voting power attached to such shares, either voting separately or as part of a
group, to effect a "Change in Control," as defined below, of Bitwise.
(ii) You hereby further agree, on behalf of yourself
and any entity which owns shares of Bitwise Common Stock beneficially owned by
you (within the meaning of Rule 13d-3), not to exercise any Series B Warrants or
Series C Warrants, or convert any shares of Series B Preferred Stock,
beneficially owned by you (within the meaning of Rule 13d-3), if the shares
received upon such exercise or conversion, will, when added to any other shares
of Bitwise Common Stock beneficially held by you within sixty days of the date
of such exercise or conversion, equals or exceeds 10% of the outstanding shares
of Bitwise Common Stock. Bitwise further agrees that in the event you are
prohibited from exercising any Warrant or converting any share of Series B
Preferred Stock on account of this subparagraph 8. (n) (ii), the exercise period
of the Warrant or the conversion period of the Series B Preferred Stock shall be
deemed extended, with respect to the amount of such Warrant or Series B
Preferred Stock which you had a bona fide intent to exercise or convert and
which you were not able to exercise or convert, until you are able to effectuate
such exercise or conversion without violating this subparagraph 8. (n) (ii) (not
to exceed 90 days in any one instance), and with respect to the Series C
Warrants, any and all increases in the exercise price provided for in section
1.2 of the Series C Warrants shall be delayed for a period equal to the
extension in the exercise period provided by this subparagraph 8. (n) (ii);
provided that you furnish notice to Bitwise specifying the number of Warrants or
Series B Preferred Stock which you were prohibited from exercising or converting
within two business days of such attempted exercise or conversion.
(iii) A "Change in Control" of Bitwise shall be
deemed to have occurred if there shall be consummated or there shall have
occurred without the approval of the Continuing Directors, as defined below:
(A)(1) any consolidation or merger of Bitwise in which Bitwise is not the
continuing or surviving corporation or pursuant to which shares of the Bitwise's
Common Stock would be converted into cash, securities or other property, other
than a merger of Bitwise in which the holders of the Bitwise's Common Stock
immediately prior to the merger have the same proportionate ownership of common
stock of the surviving corporation immediately after the merger, or (2) any
sale, lease, exchange or other transfer (in one transaction or a series of
related transactions) of all, or substantially all, of the assets of Bitwise, or
(B) the approval by the stockholders of Bitwise of any plan or proposal for the
liquidation or dissolution of Bitwise, or (C) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the entire Board of Directors shall cease for any reason to constitute a
majority thereof unless the election, or the nomination for election by
Xxxxxxx's stockholders, of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of the period (the "Continuing Directors"). A Change of Control shall
not include any sale of securities in a public offering or the exercise of any
right to designate a director pursuant to an agreement outstanding on the date
hereof.
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9. Corporate Funding Group, LLC. Upon the closing of the Preferred and
Unit Offerings, the Company will retain Corporate Funding Group, LLC ("Corporate
Funding") to perform certain financial consulting services. Pursuant to the
letter agreement between the Company and Corporate Funding, Corporate Funding
will, at the Company's request, furnish advice and recommendations with respect
to such aspects of the business and affairs the Company and assume
responsibility for consenting, or withholding the consent for, the private sale
by certain securityholders and officers of the Company of securities of the
Company. In addition, Corporate Funding will be granted a three-year
preferential right to purchase any of the Company's securities which the Company
may seek to sell in a private offering exempt from the registration requirements
of the Act. As compensation for providing such services to Bitwise, Bitwise
shall sell to Corporate Funding 20,000 Series B Warrants, at a price of $.001
per warrant. Corporate Funding is an affiliate of certain anticipated
purchasers.
10. Indemnification. You acknowledge that you understand the meaning
and legal consequences of the representations and warranties contained in
paragraph 8 hereof, and you hereby agree to indemnify and hold harmless the
Company and each incorporator, officer, director, employee, agent and
controlling person thereof, past, present or future, from and against any and
all loss, damage or disability due to or arising out of a breach of any such
representation or warranty.
11. Transferability. This Agreement is assignable or transferable by
you except as prohibited by applicable Federal and State Securities Laws.
12. Miscellaneous.
(a) All notices and other communications provided for
hereunder or under the Series B Preferred Shares shall be in writing, and, if to
you, shall be delivered or mailed by registered mail addressed to you at your
address as set forth below, or to such other address as you may designate to the
Company in writing, and if to the Company, shall be delivered or mailed by
registered mail to the Company at 0000 Xxxxxxxxxx Xxxxx, Xxxxxxxxxxx, Xxx Xxxx
00000, Attention: Office of the President, or to such other address as the
Company may designate to you in writing. All such notices shall be effective one
day after delivery or three days after mailing.
(b) This Agreement shall be construed in accordance with and
governed by the internal laws of the State of New York without reference to that
State's conflicts of laws provisions.
(c) This Agreement constitutes the entire agreement between
the parties hereto with respect to the subject matter hereof and may be amended
only by a writing executed by all parties hereto.
(d) This Agreement may be executed in one or more counterparts
representing, however, one and the same agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year this subscription has been accepted by the Company as set
forth below.
Very truly yours,
BITWISE DESIGNS, INC.
Dated: ______, 1999 By: __________________________
Name:
Title:
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43
EXECUTION PAGE FOR SUBSCRIPTION BY INDIVIDUALS
(not applicable to subscriptions by entities, Individual
Retirement Account, Xxxxx Plans or ERISA Plans)
TOTAL SUBSCRIPTION AMOUNT $__________________________.
__ INDIVIDUAL OWNER __ CUSTODIAN UNDER
(One signature required below) Uniform Gifts to Minors Act
__ JOINT TENANTS WITH RIGHT _______________________________
OF SURVIVORSHIP (Insert applicable state)
(All tenants must sign below) (Custodian must sign below)
__ TENANTS IN COMMON __ COMMUNITY PROPERTY
(All tenants must sign below) (Both spouses in community
property states must sign
below)
PRINT INFORMATION AS IT IS TO APPEAR ON THE COMPANY RECORDS.
------------------------------ ----------------------------------
(Name of Subscriber) (Social Security or Taxpayer ID No.)
------------------------------
------------------------------ ----------------------------------
(Home Address) (Home Telephone)
------------------------------
------------------------------ ----------------------------------
(Business Address) (Business Telephone)
------------------------------ ----------------------------------
(Name of Co-Subscriber) (Social Security or Taxpayer ID No.)
------------------------------
------------------------------ ----------------------------------
(Home Address) (Home Telephone)
------------------------------
------------------------------
------------------------------ ----------------------------------
(Business Address) (Business Telephone)
SIGNATURE(S)
Dated ___________________, 1999.
(1) By (2) By
------------------------ ---------------------------
Signature of Authorized Signature of Authorized Co-
Signatory Signatory
------------------------ ---------------------------
Print Name of Signatory Print Name of Co-Signatory
and Title, if applicable and Title, if applicable
ACCEPTED AND AGREED:
BITWISE DESIGNS, INC.
By: Dated , 1999
-------------------------- ------------------------
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EXECUTION PAGE FOR SUBSCRIPTION BY NON-INDIVIDUALS
TOTAL SUBSCRIPTION AMOUNT $ .
--------------------------
__ EMPLOYEE BENEFIT PLAN OR TRUST (including pension plan, profit sharing plan,
other defined contribution plan and SEP)
__ IRA, XXX XXXXXXXX OR XXXXX PLAN
__ TRUST (other than employee benefit trust)
__ CORPORATION (Please include certified corporate resolution authorizing
signature)
__ PARTNERSHIP
__ OTHER _____________________________________________________________________
PRINT INFORMATION AS IT IS TO APPEAR ON THE COMPANY RECORDS.
------------------------------ ----------------------------------
(Name of Subscriber) (Taxpayer ID No.)
------------------------------ ----------------------------------
(Plan number, if applicable)
------------------------------ ----------------------------------
(Address) (Telephone Number)
------------------------------------------------------------------------------
Name and Taxpayer ID number of sponsor, if applicable
The undersigned trustee, partner, corporate officer or
fiduciary certificates that he or she has full power and authority from all
beneficiaries, partners or shareholders of the entity named above to execute
this Subscription Agreement on behalf of the entity and to make the
representations, warranties and agreements made herein on their behalf and that
investment in the Common Stock has been affirmatively authorized by the
governing board or body of such entity and is not prohibited by law or the
governing documents of the entity.
SIGNATURE(S)
Dated , 1999.
-------------------
By By
------------------------ ---------------------------
Signature of Authorized Signature of Authorized Co-
Signatory Signatory
------------------------ ---------------------------
Print Name of Signatory Print Name of Required
Co-Signatory
------------------------ ---------------------------
Print Title of Signatory Print Title of Required Co-Signatory
ACCEPTED AND AGREED:
BITWISE DESIGNS, INC.
By: Dated , 1999
------------------------ -----------------------
39
