<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1996
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- ---- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-20190
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BITWISE DESIGNS, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 14-1673067
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(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
Technology Center, Rotterdam Industrial Pk, Schenectady, NY, 12306
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (518) 356-9741
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- -----------------------------------------------------------------------------
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
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7,181,751 Common Stock, par value $.001 per share, were outstanding at
November 11, 1996.
Page 1 of 12
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BITWISE DESIGNS INCORPORATED
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets -
September 30, 1996 and June 30, 1996 3-4
Consolidated Statements of Operations -
Three months ended September 30, 1996
and September 30, 1995 5
Consolidated Statements of Cash Flows -
Three months ended September 30, 1996 and
September 30, 1995 6-7
Notes to Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-12
PART II OTHER INFORMATION
None
Safe Harbor Statement 12
Signatures 12
</TABLE>
Page 2 of 12
<PAGE> 3
PART I FINANCIAL INFORMATION
BITWISE DESIGNS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS September 30, June 30,
1996 1996
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<S> <C> <C>
Current Assets:
Cash and cash equivalents $2,398,414 $3,377,305
Accounts receivable, net of allowance
for doubtful accounts of $170,679 at Sept.
30, 1996 and $215,000 at June 30, 1996 6,874,711 5,271,933
Due from related parties 94,174 124,136
Inventories 4,856,675 4,061,645
Income taxes receivable 12,409 16,810
Prepaid expenses and other current assets 313,071 249,893
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Total current assets 14,549,454 13,101,722
Property and equipment, net 1,017,174 946,931
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Other assets:
Due from related parties 130,589 128,123
Software Development costs, net 50,339 36,275
Other assets 56,947 57,931
Excess of cost over net assets of
acquired companies, net 5,539,873 5,609,055
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Total assets $21,344,376 $19,880,037
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 3 of 12
<PAGE> 4
BITWISE DESIGNS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY September 30, June 30,
1996 1996
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<S> <C> <C>
Current liabilities:
Borrowings under lines of credit $2,993,412 $2,815,942
Current portion of long-term debt 12,429 20,205
Current portion of obligations under
capital leases 22,356 26,885
Accounts payable 5,340,104 3,968,248
Accrued expenses and other liabilities 540,072 403,569
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Total current liabilities 8,908,373 7,234,849
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Long-term debt, net of current portion 1,442 1,905
Obligations under capital leases, net of
current portion 5,012 9,268
Other liabilities 3,614 6,776
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Total liabilities 8,918,441 7,252,798
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Shareholders' equity:
Preferred stock - $.10 par value, 5,000,000
shares authorized:
Series A -200 shares issued and outstanding 20 20
Series B convertible preferred-112,003 shares
issued and outstanding at June 30, 1996 11,200
Common stock-$.001 par value; 20,000,000
shares authorized; shares issued:
7,099,609 at September 30, 1996 and
6,754,606 at June 30, 1996 7,100 6,755
Additional paid-in capital 18,613,172 18,277,114
Accumulated deficit (6,193,934) (5,667,427)
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12,426,358 12,627,662
Less cost of common shares in treasury,
338 shares (423) (423)
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Total shareholders' equity 12,425,935 12,627,239
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Total liabilities and shareholders' equity $21,344,376 $19,880,037
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 4 of 12
<PAGE> 5
BITWISE DESIGNS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the 3 months ended
September 30, September 30,
1996 1995
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<S> <C> <C>
Net sales $11,558,516 $6,902,976
Cost of goods sold 9,127,647 5,882,430
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Gross profit 2,430,869 1,020,546
Selling, general and
administrative expenses 2,852,508 1,163,439
Product development costs 43,962 8,282
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Operating income (loss) (465,601) (151,175)
Other income (expense):
Interest expense (88,677) (47,074)
Interest and other income 43,171 19,037
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Income (loss) before taxes (511,107) (179,212)
Income tax (expense)/benefit (15,400) (15,838)
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Net income (loss) ($526,507) ($195,050)
============ ============
Per share amounts:
Net income (loss) per
common share ($0.08) ($0.04)
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 5 of 12
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BITWISE DESIGNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
For the 3 months ended
September 30, September 30,
1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($526,507) ($195,050)
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Depreciation and amortization 167,308 106,257
Provision for doubtful accounts 14,652 2,750
Changes in operating assets and liabilities:
Accts. receivable and due from related
parties (1,587,468) (885,262)
Inventories (795,030) 16,739
Prepaid expenses & other assets (63,207) (79,434)
Accounts payable and accrued expenses 1,505,198 (22,920)
Income taxes receivable 4,401 (2,672)
Other (5,500)
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Net cash used in
operating activities (1,286,153) (1,059,592)
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Cash flows from investing activities:
Property and equipment expenditures (150,656) (6,408)
Software development costs (25,264) (2,880)
Notes receivable (2,466)
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Net cash used in investing
activities (178,386) (9,288)
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Cash flows from financing activities:
Increase (Decrease) in borrowings under
lines of credit, net 177,469 261,307
Principal payments on long-term debt (8,239) (116,655)
Principal payments - capital lease obligations (8,785) (9,431)
Dividends (7,610) (7,610)
Payment of offering costs (25,000)
Proceeds - exercise of common stock warrants 357,813
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Net cash provided by
financing activities 485,648 127,611
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Net decrease in cash and cash equivalents (978,891) (941,269)
Cash and cash equivalents, beginning of year 3,377,305 2,058,498
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Cash and cash equivalents, end of period $2,398,414 $1,117,229
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 6 of 12
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BITWISE DESIGNS, INC.
SUPPLEMENTAL CASH FLOW DISCLOSURES
<TABLE>
<CAPTION>
OTHER SUPPLEMENTAL INFORMATION: For the 3 months ended
September 30, September 30,
1996 1995
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<S> <C> <C>
Interest Paid $94,257 $37,849
Income Taxes Paid 11,800 18,509
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 7 of 12
<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, Electrograph Systems, Inc.,
System Solutions Technology, Inc. and 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, 1996 and 1995 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,
1996 and 1995 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-KSB for the fiscal year ended June 30, 1996.
4. On March 8, 1996, Bitwise completed its acquisition of DJS Marketing
Group, Inc. (DJS). The shareholders of DJS received $80,000 in cash and 200,000
shares of restricted common stock of Bitwise in exchange for 4,000 outstanding
shares of DJS common stock. The cost of the acquisition was $1,130,000.
5. In December 1995, the Company completed a private equity offering
exempt from registration under Regulation D of the Securities Act of 1933. The
offering consisted of units, each unit comprised of common stock and redeemable
common stock warrants of $5,000,000. Net proceeds of the offering approximated
$4,200,000.
6. In connection with the acquisition of SST, 112,003 shares of preferred
stock designated as Series B Convertible Preferred Stock were issued. In August
1996, all of the Series B shareholders elected to convert their shares into
common stock.
7. During the quarter ended September 30, 1996, 233,000 common stock
warrants were exercised with the proceeds totaling approximately $358,000.
8. Net income/(loss) per share on common stock is computed using the
weighted average number of shares of common stock outstanding during each year.
The weighted average number of shares of common stock used in calculating
earnings per share was 6,890,652 for the three months ended September 30, 1996,
and 4,473,323 the three months ended September 30, 1995.
Page 8 of 12
<PAGE> 9
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, 1996 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1995.
The Company realized a consolidated net loss of $526,507, $.08 per
share for the quarter ended September 30, 1996. This compares to a net loss of
$195,050, $.04 per share for the quarter ended September 30, 1995. The Company
had consolidated net sales of $11,558,516 and $6,902,976 for the quarters ended
September 30, 1996 and 1995, respectively.
The sales increase is due to the acquisition of DJS Marketing Group,
Inc. ("DJS") on March 8, 1996 as DJS had sales of $2,609,201 during the quarter
ended September 30, 1996. The sales increase is also due to the growth in the
Company's DocStar product line, which is a document imaging and retrieval
system. DocStar sales totaled $1,696,127 for the quarter ended September 30,
1996 compared to $111,081 for the same quarter last year. DocStar was recently
introduced to the national market place, in January 1996, previously it was only
test marketed in the Albany NY region. During the current and prior fiscal year
the Company has incurred and expects to continue to incur significant costs to
build a management and sales team, establish a distribution network and to
advertise and promote DocStar; as well as continued R&D expenditures.
Gross profit for the three months ended September 30, 1996, was
$2,430,869. This compares to gross profit of $1,020,546 for the three months
ended September 30, 1995. The gross profit margin was 21.0% and 14.8% for the
three months ended September 30 , 1996 and September 30, 1995, respectively. The
gross profit margin (which is defined as gross profit as a percentage of sales)
increased due to the growth of the Company's DocStar product line which has
significantly higher margins than other product lines of the Company. System
Solutions and Electrograph also experienced some improvement in gross profit
margin during the quarter ended September 30, 1996 compared to the same quarter
last year due to the mix of products sold during the quarter.
Selling, general and administrative expenses (S,G&A) consist of all
other Company expenses except product development costs and interest. These
costs increased from $1,163,439 for the quarter ended September 30, 1995 to
$2,852,508 for the quarter ended September 30, 1996. S,G&A expenses increased
due to the addition of DJS Marketing Group, Inc. which incurred S,G&A expenses
of $418,058 during the quarter ended September 30, 1996. In addition, the
Company incurred significant expenses related to the DocStar product line.
DocStar S,G&A expenses amounted to $1,332,595 for the quarter ended September
30, 1996 compared to $201,735 for the same quarter last year.
Page 9 of 12
<PAGE> 10
As a percentage of sales, S,G&A costs increased from 16.9% for the
quarter ended September 30, 1995 to 24.7% for the quarter ended September 30,
1996. This increase in percentage of expenses to sales is due to the
introduction of the DocStar product line to the national market place. The
Company incurred significant expenses for sales and administrative staffing,
including payroll costs, travel and living costs and office costs. The Company
also incurred significant national advertising and promotional expenses.
Previously DocStar was only marketed in the Albany, New York region.
Interest costs totaled $88,677 and $47,074 for the quarters ended
September 30, 1996 and 1995, respectively. The increase in interest cost is
mainly due to the acquisition of DJS which incurred interest on its line of
credit borrowings. It is also due to increased borrowings by System Solutions
and Electrograph under an existing line of credit caused by an increase in sales
and a need for additional working capital. Interest rates decreased slightly
during the quarter ended September 30, 1996 compared to the same quarter during
the prior year.
Product development expenses relate primarily to software development
of the Company's DocStar product line and increased from $8,282 for the quarter
ended September 30, 1995 to $43,962 for the quarter ended September 30, 1996.
The Company has a policy of capitalizing software development costs and
amortizing those costs over three years.
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, 1996 totaled $13,871.
The Company also has two working capital lines of credit totaling
$4,800,000 which are collateralized by all accounts receivable, inventory and
all other assets of the Company and its subsidiaries. At September 30, 1996 the
total outstanding balance was $2,993,412. One of the credit lines, in the
principal amount of $2.3 million, may only be utilized by DJS. The other line of
credit may be utilized by Bitwise, Electrograph and System Solutions and under
the terms of this line of credit, Bitwise may borrow up to $500,000,
Electrograph may borrow up to $900,000 and System Solutions may borrow up to
$1,100,000 The debt accrues interest at rates ranging from the prime rate plus
1.75% and 2% per annum. The line of credit agreements include various covenants
which require the Company and the subsidiaries to maintain a minimum tangible
net worth, maximum debt to tangible net worth and for DJS a minimum tangible
current ratio. They also require delivery of periodic financial information and
quarterly audits conducted by the lender. At September 30, 1996 the Company was
in compliance with all of the above mentioned financial covenants.
The Company completed a private equity offering including common stock
and warrants of gross proceeds of $5,000,000 in December 1995 under the
Securities Act of 1933, with net proceeds of approximately $4,200,000, after
expenses. The Company has
Page 10 of 12
<PAGE> 11
used and anticipates using most of the proceeds to fund sales, marketing and
distribution of its DocStar product line on a national basis. These expenditures
will include staffing, advertising and promotion, travel, consulting, office
expansion, equipment, furniture and other related costs.
The Company has outstanding a standby letter of credit in the amount of
$350,000 as of September 30, 1996. The letter of credit expires on June 30, 1997
and requires the Company to maintain a restricted cash deposit of $350,000.
Property, plant and equipment expenditures totaled $150,656 for the
quarter ended September 30, 1996. There were no purchase commitments outstanding
or contemplated.
The Company anticipates that cash expected to be provided by operations
together with borrowings under its lines of credit will be sufficient to satisfy
normal operating obligations over the remainder of the fiscal year, based on
current forecasts.
The Company experienced a negative cash flow of approximately $979,000
during the quarter ended September 30, 1996. To date, the Company has been
largely dependent on its ability to sell additional shares of its common stock
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. If the Company is unable to attain projected sales levels for its
DocStar systems, it may be necessary to raise additional capital to fund
operations and meet its objectives.
PART II OTHER INFORMATION
(a) Exhibits
None
(b) Reports on Form 8-K
None
Page 11 of 12
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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.
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 and technological
changes and other risks detailed in the Company's Securities and Exchange
Commission filings, including its Annual Report on Form 10-KSB for the year
ended June 30, 1996, and Registration Statement on Form S-3 declared effective
on July 30, 1996 each of which could adversely affect the Company's business and
the accuracy of the forward-looking statements contained herein.
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 12, 1996 /s/ John T. Botti
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DATE JOHN T. BOTTI
PRESIDENT & CHIEF EXECUTIVE OFFICER
/s/ Dennis H. Bunt
-----------------------------------
DENNIS H. BUNT
CHIEF FINANCIAL OFFICER
Page 12 of 12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,398,414
<SECURITIES> 0
<RECEIVABLES> 6,968,885
<ALLOWANCES> 170,676
<INVENTORY> 4,856,675
<CURRENT-ASSETS> 14,549,454
<PP&E> 1,784,302
<DEPRECIATION> 767,128
<TOTAL-ASSETS> 21,344,376
<CURRENT-LIABILITIES> 8,908,373
<BONDS> 0
0
20
<COMMON> 7,100
<OTHER-SE> 12,418,815
<TOTAL-LIABILITY-AND-EQUITY> 21,344,376
<SALES> 11,558,516
<TOTAL-REVENUES> 11,558,516
<CGS> 9,127,647
<TOTAL-COSTS> 12,024,117
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 14,652
<INTEREST-EXPENSE> 88,677
<INCOME-PRETAX> (511,107)
<INCOME-TAX> 15,400
<INCOME-CONTINUING> (526,507)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (526,507)
<EPS-PRIMARY> (1.08)
<EPS-DILUTED> 0
</TABLE>
