Broad Street Realty, Inc. - Quarter Report: 2008 September (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
|
þ
|
Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
For
the
quarterly period ended
September 30, 2008
|
o
|
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
Commission
file number: 1-9043
|
B.H.I.T.
Inc.
|
|
(Exact
name of registrant as specified in its
charter)
|
|
Delaware
|
|
36-3361229
|
|
(State
of incorporation)
|
|
(I.R.S.
Employer Identification No.)
|
|
2255
Glades Road, Suite 342-W, Boca Raton, Florida
33431
|
|
(Address
of principal executive offices)
|
|
561-443-5300
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|
(Registrant’s
telephone number)
|
|
7005
Stadium Drive, Suite 100, Brecksville, Ohio
44141
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|
(Former
Address)
|
Indicate
by a check mark whether the registrant: (1) has filed all reports required
to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes þ
No
¨
Indicate
by a check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.
|
Large
Accelerated Filer ¨
|
Accelerated
Filer ¨
|
|
Non-Accelerated
Filer ¨
|
Smaller
Reporting Company þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes þ
No
¨
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: 24,988,051
shares of common stock, $0.01 par value per share, as of October 31,
2008.
Table
of Contents
|
Part
I — Financial Information
|
1
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|
|
Item
1.
|
Financial
Statements
|
1
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
1
|
|
Recent
Events
|
1
|
|
|
Management
Changes
|
1
|
|
|
The
Colo Acquisition
|
2
|
|
|
Our
History
|
2
|
|
|
Forward
Looking Statements
|
3
|
|
|
Results
of Operations
|
3
|
|
|
Comparison
of Three Months Ended September 30, 2008 and 2007
|
3
|
|
|
Comparison
of Nine Months Ended September 30, 2008 and 2007
|
4
|
|
|
Financial
Condition and Liquidity
|
4
|
|
|
Off-Balance
Sheet Arrangements
|
4
|
|
|
How
to Learn More About BHIT
|
4
|
|
|
Item
4.
|
Controls
and Procedures
|
4
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|
Part
II — Other Information
|
5
|
|
|
Item
1.
|
Legal
Proceedings
|
5
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
5
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
5
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|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
5
|
|
Item
5.
|
Other
Information
|
5
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|
Item
6.
|
Exhibits
|
5
|
|
Signatures
|
6
|
|
|
Financial
Statements
|
F-1
|
|
|
Notes
to Financial Statements
|
F-4
|
|
Part
I — Financial Information
Item
1. Financial
Statements
Our
September 30, 2008 unaudited consolidated financial statements follow this
quarterly report beginning on page F-1.
Item
2. Management’s
Discussion and Analysis
of Financial Condition and Results of Operations
B.H.I.T.
Inc. is a shell company without significant operations or sources of revenues
other than its investments. Our existing operations relate primarily to
servicing our cash investment portfolio and maximizing existing capital with
stable interest generating instruments. However, our new management team is
aggressively investigating potential operating companies to acquire and
additional sources of financing. Currently we are focusing our efforts on
railroad track construction, repair and maintenance businesses, but we cannot
guarantee we will complete an acquisition in this industry. Accordingly, we
may
explore potential acquisitions in other industries as well.
Recent
Events
Management
Changes
Effective
November 14, 2008, our board appointed Gary O. Marino president and chief
executive officer of BHIT. Mr. Marino will continue to serve as chairman of
the
board. The board expects BHIT to benefit from Mr. Marino’s railroad experience
as the company focuses on making acquisitions in that industry. At the same
time, the board appointed Bennett Marks vice president and chief financial
officer and to serve as a member of our board of directors. Paul S. Dennis
stepped down as interim CEO and CFO and was appointed as vice president and
treasurer. Mr. Dennis will continue to serve on the board. Biographical
information for Messrs. Marino and Marks follows.
Gary
O.
Marino, age 64, joined our board in January 2007 and was appointed chairman
in
January 2008 and CEO in November 2008. Mr. Marino serves as chairman, president
and CEO of Patriot Rail Corp., an owner and operator of short line and regional
railroads, and formerly held the same positions at RailAmerica, Inc. (NYSE:RRA),
a company he founded in 1985, until his retirement in 2004. From 1984 until
1993, Mr. Marino served as chairman, president and CEO of Boca Raton Capital
Corporation, a publicly owned venture capital investment company. Prior to
that
he spent more than fifteen years in commercial banking in New York as a senior
loan officer and was also president and CEO of two small business investment
companies (SBICs), as well as president of a Florida-based commercial bank.
Mr.
Marino received his B.A. degree from Colgate University and his M.B.A. from
Fordham University. From 1966 to 1969, he served as an officer of the United
States Army Ordnance Corps. He has also served on the board of directors of
the
American Association of Railroads.
1
Bennett
Marks, age 60, is executive vice president and CFO of Patriot Rail Corp., an
owner and operator of short line and regional railroads. Mr. Marks has served
as
EVP and CFO of six publicly-held and privately-owned companies in the
transportation, healthcare, manufacturing, distribution and telecommunications
industries. While CFO at RailAmerica, Inc. (NYSE:RRA), he developed and
implemented the financial framework of the company as revenues grew from $130
million to $450 million. Mr. Marks has 21 years of experience in public
accounting, including ten years as an audit/client services partner with KPMG
where he was an Associate SEC Reviewing Partner and the Administrative Partner
in Charge of the West Palm Beach office. A licensed CPA in Florida and New
York,
he has held leadership positions in a variety of community, charitable, and
professional organizations. Mr. Marks received his degree in accounting from
New
York University.
The
Colo Acquisition
On
July
24, 2008 we entered into an asset purchase agreement with L.A. Colo, LLC
(“Colo”) and Iron Rail Group, LLC, the current owner of Colo, pursuant to which
we agreed to purchase substantially all of the assets of Colo for $15.0 million,
subject to adjustment. Colo provides railroad maintenance and construction
services to short line railroads and industrial customers. We expected to
complete the Colo acquisition by the end of September, but the transaction
was
delayed due to deteriorating financial and economical conditions. We
subsequently elected not to proceed with the acquisition.
BHIT
had
placed $350,000 in a purchase money escrow for the Colo acquisition. Iron Rail
has demanded payment of this amount in full in connection with the termination
of the purchase agreement. We have authorized the distribution of $10,000 of
the
escrow to Iron Rail, but dispute that Iron Rail is entitled to the remaining
$340,000. The parties are currently in discussions to resolve this matter,
but
there can be no guaranty that they will be able to do so.
Our
History
The
company was originally organized under the laws of the State of Massachusetts
in
1985, under the name VMS Hotel Investment Trust, for the purpose of investing
in
mortgage loans, principally to entities affiliated with VMS Realty Partners.
These loans were collateralized by hotel and resort properties. The company
was
subsequently reorganized as a Delaware corporation in 1987 and changed its
name
to B.H.I.T. Inc. in 1998.
As
the
result of a public offering in 1986, the company received gross proceeds of
$98.5 million. From 1989 to 1992 we experienced severe losses due primarily
to a
decline in real estate property values and the resulting default on mortgage
loans held by us. The company has recorded losses every year since 1989
resulting in the accumulated deficit totaling $87,733,320 on September 30,
2008.
In
September 2000, Summa Holdings, Inc. (“Summa”), formerly known as Arrowhead
Holdings Corporation, purchased 5,870,563 shares of our stock, or 39.2% of
the
outstanding shares. Subsequent purchases of our shares resulted in Summa owning
a total of 6,243,563 shares, or 41.7% of the outstanding shares on December
31,
2006.
2
On
January 24, 2007, a group of private investors purchased all of the BHIT shares
held by Summa. As a result of the transaction, James Benenson, Jr. and John
V.
Curci each resigned as directors and officers of the company and Paul S. Dennis,
Gary O. Marino, Harvey J. Polly and Andrew H. Scott were appointed to fill
vacancies in the board. In April 2008 Mr. Scott resigned from the board to
pursue other business interests.
In
June
2007, we sold 10.0 million of our common shares in a private placement for
$0.10
per share for a total of $1.0 million.
Forward
Looking Statements
Some
of
the statements that we make in this report, including statements about our
confidence in BHIT’s prospects and strategies, are forward-looking statements
within the meaning of § 21E of the Securities Exchange Act. Some of these
forward-looking statements can be identified by words like “believe,” “expect,”
“will,” “should,” “intend,” “plan,” or similar terms; others can be determined
by context. Statements contained in this report that are not historical facts
are forward-looking statements. These statements are necessarily estimates
reflecting our best judgment based upon current information, and involve a
number of risks and uncertainties. Many factors could affect the accuracy of
these forward-looking statements, causing our actual results to differ
significantly from those anticipated in these statements. While it is impossible
to identify all applicable risks and uncertainties, they include our ability
to:
| · |
execute
our business plan by identifying and acquiring an operating
company;
|
| · |
obtain
appropriate financing to complete potential
acquisitions;
|
| · |
effectively
invest our existing funds and raise additional capital to fund our
operations; and
|
| · |
comply
with SEC regulations and filing requirements applicable to us as
a public
company.
|
You
should not place undue reliance on our forward-looking statements, which reflect
our analysis only as of the date of this report. The risks and uncertainties
listed above and elsewhere in this report and other documents that we file
with
the Securities and Exchange Commission, including our annual report on Form
10-KSB, quarterly reports on Form 10-Q, and any current reports on Form 8-K,
must be carefully considered by any investor or potential investor in
BHIT.
Results
of Operations
Comparison
of Three Months Ended September 30, 2008 and 2007
Our
total
revenues for the quarter ended September 30, 2008 were $10,539, compared to
$25,820 for the same period in 2007, a decrease of $15,281, or 59.2%. Revenues
decreased as the result of a decrease in invested funds as well as lower
interest rates earned on invested funds.
Our
total
expenses for the third quarter of 2008 increased $351,955, or 1,026.7%, to
$386,236, compared to $34,281 for the second quarter of 2007. The increase
was
caused by the write off of $355,898 in professional fees and other costs
associated with the Colo acquisition due to the termination of the transaction
in October 2008.
Accordingly,
our net loss for the third quarter of 2008 was $375,697 ($0.015 per share),
compared to a net loss of $8,461 ($0.001 per share) in 2007, an increase of
$367,236.
3
Comparison
of Nine Months Ended September 30, 2008 and 2007
Our
total
revenues for the nine months ended September 30, 2008 were $39,695, compared
to
$56,468 for the same period in 2007, a decrease of $16,773, or 29.7%. Revenues
decreased as the result of lower interest earned on invested funds. Lower
interest rates were partially offset by an increase in funds from the proceeds
of our June 2007 private placement.
Our
total
expenses for the first nine months of 2008 increased $236,024, or 88.7%, to
$502,170, compared to $266,146 for the same period in 2007. The increase was
caused by higher general and administrative expenses in 2008 as a result of
professional fees associated with exploring potential acquisition candidates,
including the write off of $355,898 previously deferred for these acquisitions,
partially offset by $180,000 in stock based compensation expense recognized
in
2007 arising from the issuance of stock options to members of the board of
directors.
Accordingly,
our net loss for the first nine months of 2008 was $462,475 ($0.019 per share),
compared to a net loss of $209,678 ($0.012 per share) in 2007, an increase
of
$252,797.
Financial
Condition and Liquidity
Cash
and
cash equivalents consist of cash and short-term investments. Our cash and cash
equivalents balance at September 30, 2008 was $1,533,629, a decrease of $735,425
from $2,269,054 at December 31, 2007. Cash and cash equivalents decreased in
the
first nine months of 2008 primarily as the result of our net loss for the period
and the $340,000 we deposited in escrow in connection with the terminated Colo
acquisition.
At
this
time, we have no material commitments for capital expenditures, although we
are
reviewing various acquisition opportunities. We believe our cash is sufficient
to meet our needs for anticipated operating expenses as a shell company for
2008. However, we are exploring additional sources of financing to fund the
possible acquisition of an operating company.
Off-Balance
Sheet Arrangements
We
do not
have any material off-balance sheet arrangements.
How
to Learn More About BHIT
We
file
annual, quarterly and current reports and other information with the SEC. Our
SEC filings are available to the public on the internet at the SEC’s web site at
SEC.gov. To learn more about BHIT you can also contact our CEO, Gary O. Marino,
at 561-443-5300.
Item
4. Controls
and Procedures
Under
the
direction of our chief executive officer and chief financial officer, management
evaluated our disclosure controls and procedures (as defined in Exchange Act
Rule 13a-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rule 13a-15(f)) and concluded that our disclosure controls and
procedures were effective as of September 30, 2008, and no change in our
internal control over financial reporting occurred during the quarter ended
September 30, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial
reporting.
4
Part
II — Other Information
Item
1. Legal
Proceedings
We
are
not aware of any pending legal proceedings involving BHIT as of October 31,
2008, nor were any proceedings terminated in the third quarter of
2008.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
Not
applicable.
Item
3. Defaults
Upon Senior Securities
Not
applicable.
Item
4. Submission
of Matters to a Vote of Security Holders
Not
applicable.
Item
5. Other
Information
For
information regarding recent changes in BHIT’s management team, please turn to
“Recent Events” on page 1.
Item
6. Exhibits
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Principal Executive Officer
Pursuant
to § 302 of the Sarbanes-Oxley Act of 2002
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Principal Financial Officer
Pursuant
to § 302 of the Sarbanes-Oxley Act of 2002
|
|
32
|
Rule
13a-14(b)/15d-14(b) Certification Pursuant to § 906 of the Sarbanes-Oxley
Act of 2002
|
5
Signatures
In
accordance with the requirements of the Securities Exchange Act of 1934,
B.H.I.T. Inc. has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
|
B.H.I.T.
Inc.
|
|
|
Date:
November 14, 2008
|
/s/
Gary O. Marino
|
|
By
Gary O. Marino
|
|
|
Chairman
and Chief Executive Officer
|
6
B.H.I.T.
Inc.
Balance
Sheets
As
of September 30, 2008 and December 31, 2007
|
September 30, 2008
|
December 31, 2007
|
||||||
|
|
(Unaudited)
|
|
|||||
|
ASSETS
|
|||||||
|
Current
Assets
|
|||||||
|
Cash
and cash equivalents
|
$
|
1,533,629
|
$
|
2,269,054
|
|||
|
Interest
receivable on cash and cash equivalents
|
444
|
1,897
|
|||||
|
Prepaid
insurance
|
-
|
13,786
|
|||||
|
Total
Current Assets
|
1,534,073
|
2,284,737
|
|||||
|
Other
Assets
|
|||||||
|
Escrowed
funds
|
340,000
|
-
|
|||||
|
Total
Other Assets
|
340,000
|
-
|
|||||
|
Total
Assets
|
$
|
1,874,073
|
$
|
2,284,737
|
|||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||
|
Current
Liabilities
|
|||||||
|
Accounts
payable and other accrued expenses
|
$
|
124,735
|
$
|
72,924
|
|||
|
Stockholders'
Equity
|
|||||||
|
Shares
of Common Stock, $0.01 par value, 75,000,000 shares authorized and
25,020,808 shares issued at September 30, 2008 and at December 31,
2007
|
89,490,847
|
89,490,847
|
|||||
|
Accumulated
deficit
|
(87,733,320
|
)
|
(87,270,845
|
)
|
|||
|
Treasury
stock, at cost, for 32,757 shares of Common Stock
|
(8,189
|
)
|
(8,189
|
)
|
|||
|
Total
Stockholders' Equity
|
1,749,338
|
2,211,813
|
|||||
|
Total
Liabilities and Stockholders' Equity
|
$
|
1,874,073
|
$
|
2,284,737
|
|||
See
accompanying notes to financial statements
F-1
B.H.I.T.
Inc.
Statements
of Operations
For
the Three and Nine Months Ended September 30, 2008 and
2007
(Unaudited)
|
Three Months
|
Nine Months
|
||||||||||||
|
2008
|
2007
|
2008
|
2007
|
||||||||||
|
Revenue
|
|||||||||||||
|
Interest
earned on cash and cash equivalents
|
$
|
10,539
|
$
|
25,820
|
$
|
39,695
|
$
|
56,468
|
|||||
|
Expenses
|
|||||||||||||
|
General
and administrative
|
30,338
|
34,281
|
146,272
|
86,146
|
|||||||||
|
Write
off of acquisition costs
|
355,898
|
-
|
355,898
|
-
|
|||||||||
|
Stock
based compensation
|
-
|
-
|
-
|
180,000
|
|||||||||
|
Total
Expenses
|
386,236
|
34,281
|
502,170
|
266,146
|
|||||||||
|
Net
Loss
|
$
|
(375,697
|
)
|
$
|
(8,461
|
)
|
$
|
(462,475
|
)
|
$
|
(209,678
|
)
|
|
|
Weighted
average number of shares outstanding
|
24,988,051
|
17,515,524
|
24,988,051
|
16,258,769
|
|||||||||
|
Basic
and diluted net loss per share of Common Stock
|
$
|
(0.015
|
)
|
$
|
(0.001
|
)
|
$
|
(0.019
|
)
|
$
|
(0.012
|
)
|
|
|
See
accompanying notes to financial
statements
|
F-2
B.H.I.T.
Inc.
Statements
of Cash Flows
For
the Nine Months Ended September 30, 2008 and 2007
(Unaudited)
|
2008
|
2007
|
||||||
|
Operating
Activities
|
|||||||
|
Net
Loss
|
$
|
(462,475
|
)
|
$
|
(209,678
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|||||||
|
Stock
based compensation
|
-
|
180,000
|
|||||
|
Changes
in assets and liabilities:
|
|||||||
|
Interest
receivable on cash and cash equivalents
|
1,453
|
4,682
|
|||||
|
Prepaid
insurance and miscellaneous expenses
|
13,786
|
(4,356
|
)
|
||||
|
Accounts
payable and accrued expenses
|
51,811
|
(34,261
|
)
|
||||
|
Net
cash used in operating activities
|
(395,425
|
)
|
(63,613
|
)
|
|||
|
Investing
Activities
|
|||||||
|
Escrowed
funds for potential acquisition
|
(340,000
|
)
|
-
|
||||
|
Net
cash used in investing activities
|
(340,000
|
)
|
-
|
||||
|
Financing
Activities
|
|||||||
|
Sale
of Common Stock
|
-
|
1,000,000
|
|||||
|
Net
cash from financing activities
|
-
|
1,000,000
|
|||||
|
Net
increase (decrease) in cash
|
(735,425
|
)
|
936,387
|
||||
|
Cash
and cash equivalents at beginning of period
|
2,269,054
|
1,420,313
|
|||||
|
Cash
and cash equivalents at end of period
|
$
|
1,533,629
|
$
|
2,356,700
|
|||
See
accompanying notes to financial statements
F-3
B.H.I.T.
Inc.
Notes
to Financial Statements
Three
and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
Nature
of Operations
B.H.I.T.
Inc. (“BHIT,” “we,” “our” or the “company”) was originally organized under the
laws of the State of Massachusetts in 1985, under the name VMS Hotel Investment
Trust, for the purpose of investing in mortgage loans, principally to entities
affiliated with VMS Realty Partners. The company was subsequently reorganized
as
a Delaware corporation in 1987. We changed our name from Banyan Hotel Investment
Fund to B.H.I.T. Inc. in 1998.
Currently
BHIT is a shell company without significant operations or sources of revenues
other than interest on its investments. However, our management team is
aggressively investigating potential operating companies to acquire and
additional sources of financing. Currently we are focusing our efforts on
railroad track construction, repair and maintenance businesses, but we cannot
guarantee we will complete an acquisition in this industry and we may explore
potential acquisitions in other industries as well.
Basis
of Presentation
We
have
prepared the accompanying financial statements pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, these financial statements give effect to all normal recurring
adjustments necessary to present fairly the financial position of the company
as
of September 30, 2008 and December 31, 2007, and the results of operations
and
cash flows for the three and nine months ended September 30, 2008 and 2007.
The
financial information for the three and nine months ended September 30, 2008
and
2007 is unaudited.
Although
we believe that the disclosures included in our financial statements are
adequate to make the information presented not misleading, certain information
and footnote disclosures normally included in financial statements prepared
in
accordance with generally accepted accounting principles have been omitted.
Accordingly, the accompanying financial statements should be read in conjunction
with BHIT’s latest annual report on Form 10-KSB for the year ended December 31,
2007.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.
The
results of operations for the three and nine months ended September 30, 2008
are
not necessarily indicative of the results to be expected for the full 2008
year.
Stock
Offering
On
June
8, 2007, the company sold an aggregate of 10.0 million shares of its common
stock in a private placement to a total of 36 accredited investors, primarily
existing stockholders of the company. The shares were sold at a price of $0.10
per share for a total of $1.0 million.
F-4
B.H.I.T.
Inc.
Notes
to Financial Statements
Three
and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
Stock-Based
Compensation
The
company has stock option agreements with its directors that provide for the
issuance of a total of 2.0 million shares of common stock. We entered into
stock
option agreements for the purchase of a total of 1.0 million shares with our
directors on March 2, 2007, with an exercise price of $0.15 a share, as
compensation for serving on the board in 2007. We entered into stock option
agreements for the purchase of an additional 1.0 million shares on October
23,
2007, with an exercise price of $0.35 a share, as compensation for serving
on
the board in 2008. The number of options issued and the grant dates were
determined at the discretion of the company’s board. Grantees vested in the
options immediately. The options are exercisable for a period not to exceed
three years. No options were exercised during 2007 or during the nine months
ended September 30, 2008.
The
fair
values of the stock options issued during 2007 have been estimated using the
Black-Scholes method, whereby the valuation model takes into account variables
such as volatility, dividend yield, and the risk free interest rate. Management
has determined that the March 2, 2007 options have a value of $0.18 per share
($180,000 in total) and the October 23, 2007 options have a value of $0.25
per
share ($250,000 in total) resulting in total compensation expense for the year
ended December 31, 2007 of $430,000.
Expected
volatility rate was estimated using the average volatility rates of fourteen
public companies in the financial and business services industry. The weighted
average assumptions used in the option-pricing models during 2007 were as
follows:
|
4.28
|
%
|
|||
|
Expected
life (years)
|
3
|
|||
|
69.67
|
%
|
|||
|
Dividend
yield
|
0
|
The
stock
options are not considered in calculating diluted earnings per share because
they are anti-dilutive.
New
Accounting Pronouncements
In
February 2007, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities-including an amendment of FASB
Statement No. 115.” SFAS 159 allows companies to choose to elect measuring
eligible financial instruments and certain other items at fair value that are
not required to be measured at fair value. SFAS 159 requires that unrealized
gains and losses on items for which the fair value option has been elected
be
reported in earnings at each reporting date. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. The company did not elect to measure
eligible items at fair value.
F-5
B.H.I.T.
Inc.
Notes
to Financial Statements
Three
and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
defines fair value, provides a framework for measuring fair value, and expands
the disclosures required for fair value measurements. SFAS 157 applies to other
accounting pronouncements that require fair value measurements; it does not
require any new fair value measurements. SFAS 157 was to be effective for BHIT
on January 1, 2008. However, in February 2008, the FASB released a FASB Staff
Position (FSP FAS 157-2 — Effective Date of FASB Statement No. 157) which
delayed the effective date of SFAS No. 157 for companies like BHIT to January
1,
2009. We are currently evaluating the impact of the adoption of SFAS 157 on
the
company’s financial condition and operating results.
Subsequent
Events
On
July
24, 2008 we entered into an asset purchase agreement with L.A. Colo, LLC and
Iron Rail Group, LLC, the current owner of Colo, pursuant to which we agreed
to
purchase substantially all of the assets of Colo for $15.0 million, subject
to
adjustment. Colo provides railroad maintenance and construction services to
short line railroads and industrial customers. We expected to complete the
Colo
acquisition by the end of September, but the transaction was delayed due to
deteriorating financial and economical conditions. We subsequently elected
not
to proceed with the acquisition.
BHIT
had
placed $350,000 in a purchase money escrow for the Colo acquisition. Iron Rail
has demanded payment of this amount in full in connection with the termination
of the purchase agreement. We have authorized the distribution of $10,000 of
the
escrow to Iron Rail, but dispute that Iron Rail is entitled to the remaining
$340,000. Because of the nature of the circumstances surrounding the termination
of the acquisition, the company believes it is entitled to the return of the
escrowed funds. Accordingly, no provision for loss of the escrowed funds has
been provided. The parties are currently in discussions to resolve this matter,
but there can be no guaranty that they will be able to do so.
F-6