<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File No. 0-20190
BITWISE DESIGNS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 14-1673067
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
Technology Center, Rotterdam Industrial Pk, Schenectady, NY, 12306
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (518) 356-9740
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the issuer (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No[ ]
7,382,663 shares of Common Stock, par value $.001 per share, were
outstanding at November 9, 1998.
Page 1 of 14
<PAGE> 2
BITWISE DESIGNS INCORPORATED
FORM 10-Q
INDEX
Page No.
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets -
September 30, 1998 and June 30, 1998 3-4
Consolidated Statements of Operations -
Three months ended September 30, 1998
and September 30, 1997 5
Consolidated Statements of Cash Flows -
Three months ended September 30, 1998
and September 30, 1997 6-7
Notes to Consolidated Financial Statements 8-9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-12
PART II OTHER INFORMATION
Item 6 Reports on Form 8-K 13
Safe Harbor Statement 13
Signatures 14
Page 2 of 14
<PAGE> 3
PART I FINANCIAL INFORMATION
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS September 30, June 30,
1998 1998
(unaudited)
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $2,212,831 $4,000,370
Accounts receivable, net of allowance
for doubtful accounts of $384,325 at Sept.
30, 1998 and $480,229 at June 30, 1998 4,591,302 4,609,807
Due from related parties 50,040 48,422
Inventories:
Finished goods 483,062 350,277
Purchased components & raw material 1,922,248 2,860,591
Income taxes receivable 2,791 3,291
Prepaid expenses and other current assets 279,002 266,237
------------ ------------
Total current assets 9,541,276 12,138,995
Property and equipment, net 849,665 776,925
------------ ------------
Other assets:
Software development costs, net 94,163 88,391
Other assets 37,779 37,508
Deferred financing costs 224,579 244,109
Excess of cost over net assets of
acquired companies, net 1,402,204 1,422,526
------------ ------------
Total assets $12,149,666 $14,708,454
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 3 of 14
<PAGE> 4
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY September 30, June 30,
1998 1998
(unaudited)
------------- -------------
<S> <C> <C>
Current liabilities:
Borrowings under lines of credit $ 406,242 $ 1,673,275
Accounts payable 1,485,817 2,294,192
Accrued expenses and other liabilities 630,773 822,429
------------ ------------
Total current liabilities 2,522,832 4,789,896
------------ ------------
Long-term debt, net of discount 3,472,852 3,440,332
------------ ------------
Total liabilities 5,995,684 8,230,228
------------ ------------
Shareholders' equity:
Preferred stock -$.10 par value,
5,000,000 shares authorized:
Series A -200 shares issued and outstanding 20 20
Common stock-$.001 par value; 20,000,000
shares authorized; shares issued:
7,410,745 7,411 7,411
Additional paid-in capital 19,846,126 19,822,159
Accumulated deficit (13,622,856) (13,274,645)
------------ ------------
6,230,701 6,554,945
Less cost of common shares in treasury,
28,082 shares (76,719) (76,719)
------------ ------------
Total shareholders' equity 6,153,982 6,478,226
------------ ------------
Total liabilities and shareholders' equity $12,149,666 $14,708,454
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 4 of 14
<PAGE> 5
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the 3 months ended
September 30, September 30,
1998 1997
(unaudited) (unaudited)
------------- -------------
<S> <C> <C>
Net sales $5,415,527 $9,368,855
Cost of goods sold 3,517,303 6,818,030
------------ ------------
Gross profit 1,898,224 2,550,825
Selling, general and
administrative expenses 2,086,754 2,911,956
Product development costs 68,278 43,103
------------ ------------
Operating loss (256,808) (404,234)
Other income (expense):
Interest expense (150,910) (131,414)
Interest and other income 60,007 53,191
------------ ------------
Loss before taxes (347,711) (482,457)
Income tax expense 500 30,099
------------ ------------
Net loss ($348,211) ($512,556)
============ ============
Per share amounts:
Net loss per common share ($0.05) ($0.07)
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 5 of 14
<PAGE> 6
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
For the 3 months ended
September 30, September 30,
1998 1997
(unaudited) (unaudited)
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($348,211) ($512,556)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 158,729 176,785
Provision for doubtful accounts (96,500) 18,370
Changes in operating assets and liabilities:
Accts. receivable & from related parties 113,388 (458,445)
Inventories 805,558 (277,837)
Prepaid expenses & other assets 11,202 (115,425)
Accounts payable and accrued expenses (1,000,031) 320,106
Income taxes 500 6,901
Other (709) (1)
------------ ------------
Net cash used in
operating activities (356,074) (842,102)
------------ ------------
Cash flows from investing activities:
Property and equipment expenditures (135,560) (188)
Software development costs (28,872) (24,886)
------------ ------------
Net cash used in investing
activities (164,432) (25,074)
------------ ------------
Cash flows from financing activities:
Incr/(Decr) borrowings on lines of credit, net (1,267,033) (853,998)
Borrowings of long-term debt, net of
deferred issuance costs 3,608,901
Principal payments - capital lease obligations (5,157)
------------ ------------
Net cash provided by
financing activities (1,267,033) 2,749,746
------------ ------------
Net increase(decrease) in cash & cash equivalents (1,787,539) 1,882,570
Cash and cash equivalents, beginning of year 4,000,370 2,863,847
------------ ------------
Cash and cash equivalents, end of period $2,212,831 $4,746,417
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 6 of 14
<PAGE> 7
BITWISE DESIGNS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CASH FLOW DISCLOSURES
<TABLE>
<CAPTION>
OTHER SUPPLEMENTAL INFORMATION: For the 3 months ended
September 30, September 30,
1998 1997
(unaudited) (unaudited)
------------- -------------
<S> <C> <C>
Interest Paid $195,006 $107,002
Income Taxes Paid $0 $26,000
Additional Paid in Capital Resulting
from
Issuance of Detachable Warrants
for Debt 650,411
Issuance of Warrants for Services $23,967
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 7 of 14
<PAGE> 8
BITWISE DESIGNS, INC.
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements include the accounts of Bitwise
Designs, Inc. and its wholly-owned subsidiary DJS Marketing Group, Inc. (the
Company). All significant intercompany accounts and transactions have been
eliminated in consolidation. The management of the Company believes the
accompanying unaudited consolidated financial statements contain all adjustments
necessary to fairly present the financial position as of September 30, 1998 and
June 30, 1998 and results of operations and cash flows for each of the periods
presented.
2. The results of operations for the three months ended September 30, 1998 and
1997 are not necessarily indicative of the results to be expected for the full
year.
3. Certain information and footnote disclosures normally included in the
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the annual
consolidated financial statements and notes thereto included in the Company's
Form 10-K for the fiscal year ended June 30, 1998.
4. In June 1998, Bitwise completed the sale of one of its subsidiaries, System
Solutions Technology, Inc. (SST) for $4,000,000. The transaction was in the form
of a sale of all of the stock of SST. The Company received approximately
$3,600,000 in cash and approximately $400,000 worth of inventory and accounts
receivable.
5. The Company adopted Statement of Financial Accounting Standards Board SFAS
130, "Reporting Comprehensive Income" in fiscal year 1999. There was no
comprehensive income to report, other than net income, for the three months
ended September 30, 1998 and 1997.
6. During the three months ended September 30, 1998, no common stock warrants
were exercised.
7. The Company adopted Statement of Financial Accounting Standards Board, SFAS
128, "Earnings per Share" in fiscal year 1998. The following represents the
reconciliation of the basic and diluted earnings per share amounts for the three
months ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------
1998 1997
---- ----
<S> <C> <C>
Net loss ($348,211) ($512,556)
Weighted average
shares 7,410,745 7,367,720
Basic and diluted EPS ($.05) ($.07)
</TABLE>
The impact of options, warrants and convertible notes was antidilutive to
the calculation of basic and dilutive loss per share and were accordingly
excluded from the calculation.
Page 8 of 14
<PAGE> 9
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information." SFAS
No. 131 requires expanded reporting of information about operating segments in
interim and annual financial statements, including certain descriptive
information about products and services, geographic areas, and major customers.
This statement will be effective for annual financial statements beginning the
fiscal year ending 1999, and for comparative interim periods beginning the
fiscal year ending 2000. The adoption of this standard is not expected to have a
significant impact on the Company's consolidated financial statements.
YEAR 2000 UPDATE
The Company has completed its company-wide Year 2000 Project (Project).
The Project addressed the issue by performing a survey on all desktop computers
and servers to ensure Year 2000 compliance. The survey concluded that all of the
Company's computer systems use hardware that is Year 2000 compliant. Most of the
Company's third party software and operating systems are Microsoft(TM) based and
believed to be Year 2000 compliant. The Project also included the evaluation of
it's third-party accounting systems. These systems have already been upgraded to
Year 2000 Versions purchased from the applicable vendors. The Company's document
imaging product, DocStar is hardware Year 2000 compliant and with the release of
Version 2.30 software later in 1998, the software will be fully Year 2000
compliant.
The Project also included the evaluation of the Company's third party
suppliers as Company operations could be affected by the interruption of
significant suppliers. This evaluation included discussions with each critical
vendor to ascertain their compliance with Year 2000 issues. The Company does not
believe any of it's critical vendors has a Year 2000 compliance problem and the
Company believes that alternate sources are available for substantially all
components the Company purchases.
The cost of the Project including software upgrades and hardware surveys
was immaterial (estimated to be less than $25,000).
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failure will have a material impact on the Company's results of operations,
liquidity or financial condition. However, the Company believes that with the
implementation its Year 2000 Project that the possibility of significant
interruptions of normal operations should be reduced.
Page 9 of 14
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
ITEM 2. FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
consolidated financial statements and notes contained elsewhere in this Form
10-Q.
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1997.
The Company realized a consolidated net loss of $348,211 ($.05 per share)
and $512,556 ($.07 per share) for the three months ended September 30, 1998 and
1997, respectively. The Company had consolidated net sales of $5,415,527 and
$9,368,855 for the three months ended September 30, 1998 and 1997, respectively.
The consolidated sales decrease is due to the sale of one of the Company's
subsidiaries, System Solutions Technology, Inc. (SST) in June 1998. SST had
sales of $4,363,597 for the quarter ended September 30, 1997. The Company's
remaining businesses experienced a combined increase in sales of $410,269 for
the quarter ended September 30, 1998 compared to the prior year. Bitwise sales
of the DocStar product line experienced a 34% increase in sales from $2,220,156
for the quarter ended September 30, 1997 to $2,965,970 for the quarter ended
September 30, 1998. For the Company's subsidiary DJS Marketing Group, Inc. (DJS)
sales decreased from $2,785,102 for the quarter ended September 30, 1997 to
$2,449,557 for the quarter ended September 30, 1998.
The Company's current quarter loss is due to losses incurred by Bitwise
and its DocStar product line. DJS however, realized a pre-tax profit of $75,520
for the quarter ended September 30, 1998 compared to $23,735 for the same period
last year. Bitwise incurred a pre-tax loss of $423,231 for the quarter ended
September 30, 1998 compared to a pre-tax loss of $760,131 for the same period
last year. The DocStar product line has not yet achieved sufficient sales volume
to generate a profit. The Company expects to incur additional losses in the
short-term until the Company achieves a higher market acceptance resulting in
higher sales levels.
Consolidated gross profit for the three months ended September 30, 1998
and 1997, was $1,898,224 and $2,550,825, respectively. The consolidated profit
margin was 35.1% for the three months ended September 30, 1998 compared to 27.2%
for the same period last year. Gross profit margin is defined as gross profit as
a percentage of sales. The increase in gross profit margin is due to the sale of
SST and the continued growth of Bitwise and it's DocStar product which has
significantly higher gross profit margins than products and services provided by
both SST and DJS.
Page 10 of 14
<PAGE> 11
Selling, general and administrative expenses (S,G&A) consist of all other
Company expenses except product development costs and interest. S,G&A expenses
amounted to $2,086,754 and $2,911,956 for the three months ended September 30,
1998 and 1997, respectively, a decrease of $825,202. S,G&A expenses decreased by
$792,059 as a result of the sale of SST.
As a percentage of sales, S,G&A costs increased from 31.1% for the three
months ended September 30, 1997 to 38.5% for the three months ended September
30, 1998. This increase is due to the sale of SST. Bitwise historically has had
higher S,G&A expenses than any of the subsidiary companies because of it's
organization structure which includes sales, training and service personnel
stationed around the country to serve the national dealer network, this has
resulted in high payroll and travel and living expenses. In addition, Bitwise
incurs significant advertising and marketing costs to market DocStar nationally.
The subsidiaries typically sell in a localized area and only employ personnel in
their local region and incur minimal advertising and marketing costs.
Interest expense totaled $150,910 and $131,414 for the three months ended
September 30, 1998 and 1997, respectively. The increase is due to an offering
concluded in August 1997 with an offshore bank for $4,000,000 worth of term
convertible debt which accrues interest at 8% per annum. This new interest cost
was offset by reduced borrowings on the Company's line of credit during the
quarter ended September 30, 1998 as compared to the same period last year.
Interest rates were unchanged during the three months ended September 30, 1998
compared to the same period last year.
Product development expenses relate to software development for the
DocStar product line incurred by Bitwise. These costs increased from $43,103 for
the quarter ended September 30, 1997 to $68,278 for the quarter ended September
30, 1998. Bitwise has a policy of capitalizing qualified software development
costs and amortizing those costs over three years as product development
expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds to date have been the issuance of
equity and the incurrence of third party debt. The principal balance of
long-term debt at September 30, 1998 totaled $3,472,852, net of discounts.
The Company has a working capital line of credit facility totaling
$1,500,000, of which approximately $1,100,000 was available at September 30,
1998. The line is collateralized by accounts receivable, inventory and all other
assets of Bitwise. The interest rate is prime plus 2% per annum. The line of
credit agreement includes covenants which require the Company to maintain a
minimum tangible net worth, a maximum debt-to-tangible net worth and a minimum
amount of working capital on a consolidated basis. The Company believes that it
is in full compliance of all these covenants at September 30, 1998.
Page 11 of 14
<PAGE> 12
DJS has a wholesale line of credit facility for $625,000 which is
supported by a guaranty furnished by one of DJS's vendors and expressly limited
to purchases from this vendor. At September 30, 1998, $396,000 was outstanding.
The line is non-interest bearing and payment terms are net 40. The line is
collateralized by all assets of DJS.
In June 1998, the Company sold SST for $4,000,000. The Company received
approximately $3,600,000 in cash and approximately $400,000 in accounts
receivable and inventory. The proceeds were used for the working capital needs
of the Company.
Property, plant and equipment expenditures totaled $35,577 and software
development expenditures totaled $28,872 for the three months ended September
30, 1998, respectively. There were no purchase commitments outstanding or
contemplated. The Company is considering the construction of a new
office/production facility for approximately $2,500,000 in Schenectady, NY. The
Company has received and signed a Grant Disbursement Agreement with the Empire
State Development Corporation (an agency of New York state) for $1,000,000. The
Company has also received and signed a commitment letter with a local bank for a
construction loan and permanent mortgage of $1,400,000. Construction will not
commence until after the closing with the bank. The Grant stipulates that the
Company is obligated to achieve certain annual employment levels at the
Schenectady site between January 1, 2001 and January 1, 2005 or some or all of
the grant would have to be repaid.
The Company anticipates that cash expected to be provided by operations
together with the proceeds from the sale of SST, and borrowings under its lines
of credit will be sufficient to satisfy normal operating obligations.
The Company experienced a net loss of $348,211 during the three months
ended September 30, 1998. To date, the Company has been largely dependent on its
ability to sell additional shares of its common stock or other securities or
other financing to fund its operating deficits. Under its current operating plan
to obtain a national acceptance of the DocStar product line, the Company's
ability to improve operating cash flow is highly dependent on the market
acceptance of DocStar and the Company's ability to reduce overhead expenses. If
the Company is unable to attain projected sales levels for its DocStar systems,
is unable to implement cost reduction strategies, or comply with debt covenant
requirements it may be necessary to raise additional capital to fund operations
and meet its obligations. There is no assurance that such funding will be
available.
Page 12 of 14
<PAGE> 13
PART II OTHER INFORMATION
Item 6 Reports on Form 8-K
The following Reports on Form 8-K were filed by the Company during the
last quarter:
None
SAFE HARBOR STATEMENT
Certain statements in this Form 10-Q, including information set forth
under Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 (the Act). The Company
desires to avail itself of certain "safe harbor" provisions of the Act and is
therefore including this special note to enable the Company to do so.
Forward-looking statements in this Form 10-Q or hereafter included in other
publicly available documents filed with the Securities and Exchange Commission,
reports to the Company's stockholders and other publicly available statements
issued or released by the Company involve known and unknown risks, uncertainties
and other factors which could cause the Company's actual results, performance
(financial or operating) or achievements to differ from the future results,
performance (financial or operating) or achievements expressed or implied by
such forward-looking statements. Such future results are based upon management's
best estimates based upon current conditions and the most recent results of
operations. These risks include, but are not limited to risks associated with
the market acceptance of the DocStar product line, competition, pricing and
technological changes and other risks as discussed in the Company's filings with
the Securities and Exchange Commission, in particular its Annual Report on Form
10-K for the year ended June 30, 1998, and Registration Statement on Form S-3
declared effective on July 30, 1996 all of which risk factors could adversely
affect the Company's business and the accuracy of the forward-looking statements
contained herein.
Page 13 of 14
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BITWISE DESIGNS INCORPORATED
November 13, 1998 /s/ John T. Botti
- ----------------- -----------------
DATE JOHN T. BOTTI
PRESIDENT & CHIEF EXECUTIVE OFFICER
/s/ Dennis H. Bunt
------------------
DENNIS H. BUNT
CHIEF FINANCIAL OFFICER
Page 14 of 14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,212,831
<SECURITIES> 0
<RECEIVABLES> 5,025,667
<ALLOWANCES> (384,325)
<INVENTORY> 2,405,310
<CURRENT-ASSETS> 9,541,276
<PP&E> 1,924,312
<DEPRECIATION> (1,074,647)
<TOTAL-ASSETS> 12,149,666
<CURRENT-LIABILITIES> 2,522,832
<BONDS> 0
0
20
<COMMON> 7,411
<OTHER-SE> 6,146,551
<TOTAL-LIABILITY-AND-EQUITY> 12,149,666
<SALES> 5,415,527
<TOTAL-REVENUES> 5,415,527
<CGS> 3,517,303
<TOTAL-COSTS> 5,672,335
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (150,910)
<INCOME-PRETAX> (347,711)
<INCOME-TAX> 500
<INCOME-CONTINUING> (348,211)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (348,211)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
