<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the quarterly period ended: SEPTEMBER 30, 1999
------------------
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
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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.)
2165 Technology Dr., Schenectady, NY, 12308
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(518) 346-7799
-----------------------------
- --------------------------------------------------------------------------------
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
---- ----
9,448,436 shares of Common Stock, par value $.001 per share, were
outstanding at November 9, 1999.
Page 1 of 14
<PAGE> 2
BITWISE DESIGNS INCORPORATED
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
--------
PART I FINANCIAL INFORMATION
<S> <C>
Item 1 - Financial Statements
Consolidated Balance Sheets -
September 30, 1999 and June 30, 1999 3-4
Consolidated Statements of Operations -
Three months ended September 30, 1999
and September 30, 1998 5
Consolidated Statements of Cash Flows -
Three months ended September 30, 1999
and September 30, 1998 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 and exhibits 12
Safe Harbor Statement 12-13
Year 2000 Update 13-14
Signatures 14
</TABLE>
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,
1999 1999
(unaudited)
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $377,004 $549,097
Accounts receivable, net of allowance
for doubtful accounts of $428,937 at Sept,
30, 1999 and $421,018 at June 30, 1999 4,081,680 5,141,178
Due from related parties 55,256 48,094
Inventories:
Finished goods 1,708,240 2,627,195
Purchased components & raw material 1,881,229 1,197,192
Income taxes receivable 13,246 12,130
Prepaid expenses and other current assets 290,434 282,795
------------ ------------
Total current assets 8,407,089 9,857,681
Property and equipment, net 2,964,900 2,949,458
------------ ------------
Other assets:
Software development costs, net 180,755 129,993
Other assets 39,779 40,624
Deferred financing costs 146,459 165,989
Excess of cost over net assets of
acquired companies, net 1,320,916 1,341,239
------------ ------------
Total assets $13,059,898 $14,484,984
============ ============
</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,
1999 1999
(unaudited)
------------- -------------
<S> <C> <C>
Current liabilities:
Borrowings under lines of credit $1,212,452 $1,274,779
Accounts payable 2,950,776 3,852,032
Accrued expenses and other liabilities 373,513 1,075,374
Current portion of long-term debt 343,929 23,781
------------ ------------
Total current liabilities 4,880,670 6,225,966
------------ ------------
Convertible notes payable, net of discount 3,602,932 3,570,412
Long-term debt, net of current portion 1,368,409 1,210,712
Deferred grant 900,000 142,189
------------ ------------
Total liabilities 10,752,011 11,149,279
------------ ------------
Shareholders' equity:
Preferred stock -$.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:
7,460,745 7,461 7,411
Additional paid-in capital 19,925,748 19,846,126
Accumulated deficit (17,548,623) (16,441,133)
------------ ------------
2,384,606 3,412,424
Less cost of common shares in treasury,
28,082 shares (76,719) (76,719)
------------ ------------
Total shareholders' equity 2,307,887 3,335,705
------------ ------------
Total liabilities and shareholders' equity $13,059,898 $14,484,984
============ ============
</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
1999 1998
(unaudited) (unaudited)
------------ ------------
<S> <C> <C>
Net sales $3,071,766 $5,415,527
Cost of goods sold 2,482,323 3,517,303
------------ ------------
Gross profit 589,443 1,898,224
Selling, general and
administrative expenses 1,437,510 2,086,754
Product development costs 64,547 68,278
------------ ------------
Operating loss (912,614) (256,808)
Other income (expense):
Interest expense (192,979) (150,910)
Interest and other income (1,897) 60,007
------------ ------------
Loss before taxes (1,107,490) (347,711)
Income tax expense (benefit) 0 500
------------ ------------
Net loss ($1,107,490) ($348,211)
============ ============
Per share amounts:
Net loss per common
share ($0.15) ($0.05)
============ ============
</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
1999 1998
(unaudited) (unaudited)
------------- -------------
Cash flows from operating activities:
<S> <C> <C>
Net loss ($1,107,490) ($348,211)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 168,051 158,729
Provision for doubtful accounts 18,000 (96,500)
Non cash S,G&A expenses 36,042
Changes in operating assets and liabilities:
Accts. receivable and
due from related parties 1,034,336 113,388
Inventories 234,918 805,558
Prepaid expenses & other assets 33,730 11,202
Accounts payable and accrued expenses (1,603,117) (1,000,031)
Income taxes (1,116) 500
Other 399 (709)
------------ ------------
Net cash used in
operating activities (1,186,247) (356,074)
------------ ------------
Cash flows from investing activities:
Property and equipment expenditures (78,730) (135,560)
Software development costs (78,945) (28,872)
------------ ------------
Net cash used in investing
activities (157,675) (164,432)
------------ ------------
Cash flows from financing activities:
Incr/(Decr) borrowings on lines of credit, net (62,327) (1,267,033)
Borrowings of long-term debt, net 525,973
Principle payments on long-term debt (48,128)
Receipt of deferred revenue from economic
development grant 757,811
Payment of deferred offering and financing
costs (1,500)
------------ ------------
Net cash provided by/(used in)
financing activities 1,171,829 (1,267,033)
------------ ------------
Net decrease in cash & cash equivalents (172,093) (1,787,539)
Cash and cash equivalents, beginning of year 549,097 4,000,370
------------ ------------
Cash and cash equivalents, end of period $377,004 $2,212,831
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 6 of 14
1
<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
1999 1998
(unaudited) (unaudited)
------------- -------------
<S> <C> <C>
Interest Paid $37,448 $195,006
Income Taxes Paid $0 $0
Additional Paid in Capital Resulting
from
Issuance of Warrants for Services $45,130 $23,967
Issuance of Common Stock
for Services $36,042
</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 subsidiaries DJS Marketing Group, Inc. and
Authentidate.Com, 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, 1999 and June 30, 1999 and results of operations and cash flows
for each of the periods presented.
2. During the quarter ended September 30, 1999 the Company formed a new
subsidiary, Authentidate.Com, Inc. This Company is an Internet services company.
The service allows users to verify the authenticity of digital documents and
images by imbedding an unalterable date and time stamp into digital images. The
Company expects this technology accessed and sold over the Internet to be used
for contracts, notarized e-mail, medical records, wills etc.
3. The results of operations for the three months ended September 30, 1999 and
1998 are not necessarily indicative of the results to be expected for the full
year.
4. 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-KSB for the fiscal year ended June 30, 1999.
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, 1999 and 1998.
6. During the three months ended September 30, 1999, no common stock warrants
were exercised.
7. The following represents the reconciliation of the basic and diluted earnings
per share amounts for the three months ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------------------
1999 1998
---- ----
<S> <C> <C>
Net loss ($1,107,490) ($348,211)
Weighted average
shares 7,460,745 7,410,745
Basic and diluted EPS ($.15) ($.05)
</TABLE>
Page 8 of 14
<PAGE> 9
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.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board also issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
(SFAS 133). SFAS 133 establishes a new model for accounting for derivatives and
hedging activities. This statement is effective for fiscal years beginning July
1, 2000. The adoption of this standard is not expected to have a significant
impact on the Company's consolidated financial statements.
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-QSB.
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998.
The Company realized a consolidated net loss of $1,107,490 ($.15 per
share) for the three months ended September 30, 1999 compared to a consolidated
net loss of $348,211 ($.05 per share) for the three months ended September 30,
1998. The Company had consolidated net sales of $3,071,766 and $5,415,527 for
the three months ended September 30, 1999 and 1998, respectively.
The consolidated sales decrease for the quarter ended September 30, 1999
is primarily due to a decline in sales of DocStar document imaging systems due
to weak dealer demand during the quarter.
Consolidated gross profit for the three months ended September 30, 1999
and 1998 was $589,443 and $1,898,224, respectively. This reduction is due to the
decrease in sales of document imaging systems. The consolidated profit margin
was 19.2% and 35.1% for the three months ended September 30, 1999 and 1998,
respectively. Gross profit margin is defined as gross profit as a percentage of
sales. The decrease in gross profit margin is due the reduction in DocStar sales
because fixed overhead costs represent a larger percentage of sales when sales
decline.
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 $1,437,510 and $2,086,754 for the three months ended September 30,
1999 and 1998, respectively. S,G&A expenses declined as a result of cost cutting
on DocStar, which was offset somewhat by spending on Authentidate.Com, Inc., the
Company's new Internet Company.
As a percentage of sales, S,G&A costs increased from 38.5% for the three
months ended September 30, 1998 to 46.8% for the three months ended September
30, 1999. This increase is due to the fact that sales declined and during the
quarter S,G&A expenses represented a larger percentage of a smaller sales
amount.
Interest expense increased from $150,910 for the three months ended
September 30, 1998 to $192,979 for the three months ended September 30, 1999.
The increase was due to higher borrowing levels. Interest rates decreased
slightly during the three months ended September 30, 1999 compared to the same
period last year.
Page 10 of 14
<PAGE> 11
Product development expenses, excluding capitalized costs and including
amortization of capitalized costs, relate to software development for the
DocStar and Authentidate product lines incurred by Bitwise. These costs remained
about the same at $64,547 for the three months ended September 30, 1999 and
$68,278 for the three months 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 all
long-term debt at September 30, 1999 totaled $5,315,270, net of discounts;
$3,975,000 of this amount, undiscounted, relates to convertible notes payable
which mature on August 11, 2002 and $1,400,952 relates to a mortgage loan.
Subsequent to September 30, 1999 the Company's convertible debt holders
requested conversion of approximately $4.0 Million of debt into approximately
1.2 Million common shares. As a result of this conversion the Company's
interest expense on convertible debt will be reduced significantly.
The Company's subsidiary DJS Marketing Group, Inc. (DJS) has a wholesale
line of credit facility for $625,000 which is supported by a guaranty of
$250,000 furnished by one of DJS's vendors and expressly limited to purchases
from this vendor. At September 30, 1999, $423,351 was outstanding. The line is
non-interest bearing and payment terms are net 40. The line is collateralized
by all assets of DJS.
In May 1999, the Company's other line of credit for $1,500,000 was
terminated by its lender as a result of the Company not being in compliance with
all of its financial covenants. In October 1999, the Company entered into an
agreement with the lender whereby the Company paid the lender $600,000 and
agreed to pay off the remaining balance, approximately $612,000, in weekly
installments of $11,778 plus interest by September 30, 2000. Interest accrues at
the prime rate plus 4%. The agreement has been guaranteed by the President of
the Company and is collaterized by all of the Company's accounts receivable and
inventory.
In October and November 1999 the Company completed three private equity
offerings for approximately $2,100,000 (approximately $2,000,000 of net
proceeds). The investment was structured as follows. In the first offering the
Company sold 740,000 units for $740,000, each unit consisting of two shares of
common stock and two Series B common stock purchase warrants. Each warrant
entitles the holder to purchase one share of common stock at an exercise price
of $1.375 for five years.
In the second offering the Company sold 50,000 Series B convertible
cumulative preferred shares for $1,250,000. Dividends on the preferred shares
are payable at the rate of 10% per annum, semi-annually. Each of these preferred
shares is convertible into the Company's common stock or is converted into such
number of shares of common as shall equal $25 divided by the conversion price of
$1.875 per share subject to adjustment under certain circumstances.
Page 11 of 14
<PAGE> 12
In November 1999, the Company completed the third offering by selling a
20% interest in a new subsidiary, Authentidate.Com, Inc. through which the
Company will market its new Internet service which allows for the verification
of the authenticity of digital images. In addition, the Purchasers were issued
999,999 Series C common stock warrants. The warrants are divided in three
classes of 333,333 warrants per class which have varying exercise prices
starting at $1.50 per common share and increasing over time after a Registration
Statement covering the underlying shares is filed.
Property, plant and equipment expenditures totaled $78,730 and
capitalized software development expenditures totaled $82,706 for the three
months ended September 30, 1999, respectively. There were no purchase
commitments outstanding or contemplated.
The Company experienced a net loss of $1,107,490 during the three months
ended September 30, 1999. As of September 30, 1999 the Company's cash balance
was $377,004. 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 and Authentidate product lines, the
Company's ability to improve operating cash flow is highly dependent on the
market acceptance of DocStar and Authentidate and the Company's ability to
further reduce overhead expenses. If the Company is unable to attain projected
sales levels for these products or is unable to further reduce costs 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.
PART II OTHER INFORMATION
Item 6 Reports on Form 8-K
(a) The following Reports on Form 8-K were filed by the Company during the last
quarter:
None
(b) Exhibits
Exhibit 27 - financial data schedule
SAFE HARBOR STATEMENT
Certain statements in this Form 10-QSB, 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.
Page 12 of 14
<PAGE> 13
Forward-looking statements in this Form 10-QSB 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-KSB for the year ended June 30, 1999, 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.
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 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.
Page 13 of 14
<PAGE> 14
However, the Company believes that with the implementation its Year 2000
Project that the possibility of significant interruptions of normal operations
should be reduced.
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 15, 1999 /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-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 377,004
<SECURITIES> 0
<RECEIVABLES> 4,565,873
<ALLOWANCES> (428,937)
<INVENTORY> 3,589,469
<CURRENT-ASSETS> 8,407,089
<PP&E> 4,194,764
<DEPRECIATION> (1,229,864)
<TOTAL-ASSETS> 13,059,898
<CURRENT-LIABILITIES> 4,880,670
<BONDS> 0
0
20
<COMMON> 7,461
<OTHER-SE> 2,300,406
<TOTAL-LIABILITY-AND-EQUITY> 13,059,898
<SALES> 3,071,766
<TOTAL-REVENUES> 3,071,766
<CGS> 2,482,323
<TOTAL-COSTS> 3,984,380
<OTHER-EXPENSES> (1,897)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (192,979)
<INCOME-PRETAX> (1,107,490)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,107,490)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,107,490)
<EPS-BASIC> (.15)
<EPS-DILUTED> (.15)
</TABLE>
