<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, 1997
- ------ 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
------ ------
7,369,720 shares of Common Stock, par value $.001 per share, were
outstanding at November 7, 1997.
Page 1 of 14
<PAGE> 2
BITWISE DESIGNS INCORPORATED
FORM 10-QSB
INDEX
Page No.
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets -
September 30, 1997 and June 30, 1997 3-4
Consolidated Statements of Operations -
Three months ended September 30, 1997
and September 30, 1996 5
Consolidated Statements of Cash Flows -
Three months ended September 30, 1997
and September 30, 1996 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 5 Other Information 12
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,
1997 1997
(unaudited) (audited)
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 4,746,417 $ 2,863,847
Accounts receivable, net of allowance
for doubtful accounts of $297,208 at Sept
30, 1997 and $189,126 at June 30, 1997 7,655,508 7,219,539
Due from related parties 220,571 216,465
Inventories 3,415,169 3,137,332
Income taxes receivable 1,749 8,650
Prepaid expenses and other current assets 437,789 176,338
----------- -----------
Total current assets 16,477,203 13,622,171
Property and equipment, net 922,155 998,781
----------- -----------
Other assets:
Software development costs, net 92,806 81,059
Other assets 38,994 39,822
Deferred financing costs 303,238
Excess of cost over net assets of
acquired companies, net 4,124,337 4,182,932
----------- -----------
Total assets $21,958,733 $18,924,765
=========== ===========
</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,
1997 1997
(unaudited) (audited)
------------- -------------
<S> <C> <C>
Current liabilities:
Borrowings under lines of credit $ 3,365,879 $ 4,219,877
Accounts payable 3,313,948 2,956,270
Accrued expenses and other liabilities 504,978 542,550
Current portion of long-term debt 1,082 1,601
Current portion of obligations under
capital leases 5,881 10,200
------------ ------------
Total current liabilities 7,191,768 7,730,498
------------ ------------
Long-term debt, net of current portion 3,367,772
Obligations under capital leases, net of
current portion 459 1,297
------------ ------------
Total liabilities 10,559,999 7,731,795
------------ ------------
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:
7,367,720 at September 30, 1997 and
at June 30, 1997 7,368 7,368
Additional paid-in capital 19,714,911 18,996,591
Accumulated deficit (8,323,142) (7,810,586)
------------ ------------
11,399,157 11,193,393
Less cost of common shares in treasury,
338 shares (423) (423)
------------ ------------
Total shareholders' equity 11,398,734 11,192,970
------------ ------------
Total liabilities and shareholders' equity $ 21,958,733 $ 18,924,765
============ ============
</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,
1997 1996
(unaudited) (unaudited)
------------- -------------
<S> <C> <C>
Net sales $ 9,368,855 $ 11,558,516
Cost of goods sold 6,818,030 9,127,647
----------- ------------
Gross profit 2,550,825 2,430,869
Selling, general and
administrative expenses 2,911,956 2,852,508
Product development costs 43,103 43,962
----------- ------------
Operating loss (404,234) (465,601)
Other income (expense):
Interest expense (131,414) (88,677)
Interest and other income 53,191 43,171
----------- ------------
Loss before taxes (482,457) (511,107)
Income tax expense 30,099 15,400
----------- ------------
Net loss $ (512,556) $ (526,507)
=========== ============
Per share amounts:
Net loss per common
share $ (0.07) $ (0.08)
=========== ============
</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,
1997 1996
(unaudited) (unaudited)
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (512,556) $ (526,507)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 176,785 167,308
Provision for doubtful accounts 18,370 14,652
Changes in operating assets and liabilities:
Accts. receivable & from related parties (458,445) (1,587,468)
Inventories (277,837) (795,030)
Prepaid expenses & other assets (115,425) (63,207)
Accounts payable and accrued expenses 320,106 1,505,198
Income taxes receivable 6,901 4,401
Other (1) (5,500)
----------- -----------
Net cash used in
operating activities (842,102) (1,286,153)
----------- -----------
Cash flows from investing activities:
Property and equipment expenditures (188) (150,656)
Software development costs (24,886) (25,264)
Notes receivable (2,466)
----------- -----------
Net cash used in investing
activities (25,074) (178,386)
----------- -----------
Cash flows from financing activities:
Incr/(Decr) borrowings on lines of credit, net (853,998) 177,469
Incr/(Decr) borrowings of long-term debt, net
of deferred issuance costs 3,608,901 (8,239)
Principal payments - capital lease obligations (5,157) (8,785)
Dividends (7,610)
Payment of deferred offering costs (25,000)
Exercise of common stock warrants 357,813
----------- -----------
Net cash provided by
financing activities 2,749,746 485,648
----------- -----------
Net increase(decrease) in cash & cash equivalents 1,882,570 (978,891)
Cash and cash equivalents, beginning of year 2,863,847 3,377,305
----------- -----------
Cash and cash equivalents, end of period $ 4,746,417 $ 2,398,414
=========== ===========
</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,
1997 1996
(unaudited) (unaudited)
------------- -------------
<S> <C> <C>
Interest Paid $107,002 $ 94,257
Income Taxes Paid $ 26,000 $ 11,800
Issuance of Detachable Warrants $650,411
</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, 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, 1997 and June 30, 1997 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, 1997 and
1996 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, 1997.
4. In April 1997, Bitwise completed the sale of one of its subsidiaries,
Electrograph Systems, Inc. for $2,522,361 plus other consideration. The sale was
structured as an asset sale and all liabilities were assumed by the purchaser.
In addition, Bitwise received $646,912 to satisfy intercompany payables owed to
Bitwise by Electrograph.
5. In March 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
$1,140,000.
6. In August 1997, the Company concluded an offering with an offshore bank for
$4,000,000 in gross proceeds $(3,600,000 in net proceeds after expenses) in the
form of unsecured, convertible, bearer notes with 400,000 detachable Common
Stock Purchase Warrants. The notes accrue interest at 8%, payable semiannually,
in arrears. The holder of $50,000 principal amount or more may convert the notes
into common stock commencing November 1, 1997 until August 11, 2002 at the rate
of $3.25 per share. The Warrants are exercisable at $3.25 per share of common
stock from November 1, 1997 until August 11, 2002.
7. During the three months ended September 30, 1997, no common stock warrants
were exercised.
Page 8 of 14
<PAGE> 9
8. Net income/(loss) per share of 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 7,367,720 and 6,890,652 for the three months ended
September 30, 1997 and 1996, respectively.
9. In October 1997, the Company announced the signing of a letter of intent to
sell two subsidiaries, DJS Marketing Group, Inc. and System Solutions, Inc. to
MSTC, Inc. The letter of intent contemplates a sale price of $6,000,000 with
$4,000,000 payable in cash and $2,000,000 payable in a promissory note. The
transaction as presently contemplated, will be in the form of a stock sale and
MSTC will be assuming all liabilities of the subsidiaries. Consummation of the
transaction is subject to completion of due diligence by MSTC, Inc., negotiation
and execution of a definitive agreement, approval of the board of directors of
each entity and approval of the stockholders of Bitwise, Inc.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share". SFAS No. 128 amends the requirements of APB Opinion
No. 15, "Earnings per Share" by replacing the presentation of primary earnings
per share with basic earnings per share. It also requires dual presentation of
basic and diluted earnings per share on the face of the income statement and
requires a reconciliation of the numerator and the denominator of the diluted
earnings per share computation. This statement will be effective for the fiscal
year ended June 30, 1998. The adoption of this standard will not significantly
impact the Company's consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 requires reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements. This
statement will be effective for annual and interim financial statements
beginning the fiscal year ending 1999, and will require reclassification of
prior periods. The adoption of this standard is not expected to have a
significant impact on the Company's consolidated financial statements.
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 interim periods beginning the fiscal year
ending 1999. 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, 1997 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1996.
The Company realized a consolidated net loss of $512,556 $(.07 per share)
and $526,507 ($.08 per share) for the three months ended September 30, 1997 and
1996, respectively. The Company had consolidated net sales of $9,368,855 and
$11,558,516 for the three months ended September 30, 1997 and 1996,
respectively.
The sales decrease is due to the sale of one of the Company's
subsidiaries, Electrograph Systems, Inc. in April 1997. Electrograph had sales
of $4,546,657 for the quarter ended September 30, 1996. The Company's remaining
divisions and subsidiaries experienced an increase in sales for the quarter
ended September 30, 1997 compared to the prior year. The Imaging Division
experienced a 31% increase in sales from $1,696,127 for the quarter ended
September 30, 1996 to $2,220,156 for the quarter ended September 30, 1997.
The Company's current quarter loss is due to losses incurred by the
Company's Imaging Division, which markets the DocStar product line. The DocStar
product line has not yet achieved sufficient sales volume to generate a profit.
This product line is sold nationally through the office equipment dealer
channel. The Company continues to recruit new dealers across the country which
results in significant personnel, advertising, marketing and travel
expenditures. The Company expects to incur additional losses during the
short-term as a result of the significant start-up costs associated with
marketing a new product on a national basis. In comparing the loss to the prior
year, the prior year loss would have been significantly larger if Electrograph's
results had not been included in the first quarter of last year.
Gross profit for the three months ended September 30, 1997 and 1996, was
$2,550,825 and $2,430,869, respectively. The gross profit margin was 27.2% for
the three months ended September 30, 1997 compared to 21.0% for the same period
last year. The gross profit margin (which is defined as gross profit as a
percentage of sales) increased during the current fiscal year compared to the
prior year due to the growth of the Company's DocStar product line which has
significantly higher margins than other product lines of the Company. The
increase is also due to the sale of Electrograph which historically had a
relatively low gross profit margin compared to other divisions of the Company.
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 $2,911,956 and $2,852,508 for the three months ended September 30,
1997 and 1996, respectively. S,G&A expenses decreased by about $322,000 as a
result of the sale of Electrograph. This decrease was offset by increases in
S,G&A expenses in other divisions as a result of sales increases. The Imaging
Division had S,G&A expenses of $1,522,278 during the quarter ended September 30,
1997 compared to $1,332,595 for the prior year.
As a percentage of sales, S,G&A costs increased from 24.7% for the three
months ended September 30, 1996 to 31.1% for the three months ended September
30, 1997. The increase is due to the sale of Electrograph which historically has
had a relatively low S,G&A cost to sales percentage.
Interest expense totaled $131,414 and $88,677 for the three months ended
September 30, 1997 and 1996, respectively. The increase is due to increased
borrowings by all operations of the Company under an existing line of credit
caused by an increase in sales and related increases in inventory and accounts
receivable. Interest rates increased slightly during the three months ended
September 30, 1997 compared to the same period last year.
Product development expenses relate primarily to software development of
the Company's DocStar product line and remained unchanged during the quarter
ended September 30, 1997 ($43,103) compared to the prior year ($43,962). The
Company has a policy of capitalizing 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, 1997 totaled $3,375,194.
The Company also has two working capital lines of credit totaling
$6,500,000 which are collateralized by all accounts receivable, inventory and
all other assets of the Company and its subsidiaries. At September 30, 1997 the
total outstanding balance was $3,365,879. One of the credit lines, in the
principal amount of $3,500,000, may only be utilized by DJS. The other line of
credit of $3,000,000 may be utilized by Bitwise and System Solutions Technology,
Inc. (SST). Each company's availability under the $3,000,000 line is based on a
formula of accounts receivable and inventory and may not exceed $3,000,000 in
total.
The debt accrues interest at rates ranging from the prime rate plus 1.75%
to 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, a certain annual profitability level
and for DJS a minimum tangible current ratio. They also require delivery of
periodic financial information and quarterly audits conducted by the lender.
Page 11 of 14
<PAGE> 12
At September 30, 1997 Management believes that the Company was in
compliance with all of the above mentioned financial covenants.
In April 1997, the Company sold substantially all of the assets of
Electrograph for $2,522,361 plus $646,912 to satisfy intercompany payables owed
to Bitwise by Electrograph. All liabilities were assumed by the purchaser as
well.
In August 1997, the Company received $4,000,000 in gross proceeds for the
issuance of unsecured, convertible debt with Common Stock Purchase Warrants. Net
proceeds totaled approximately $3,600,000 after expenses.
Property, plant and equipment expenditures totaled $188 for the three
months ended September 30, 1997. There were no purchase commitments outstanding
or contemplated.
The Company anticipates that cash expected to be provided by operations
together with the proceeds from the sale of Electrograph, the August 1997
private offering and borrowings under its lines of credit will be sufficient to
satisfy normal operating obligations.
The Company experienced a net loss of $512,556 during the three months
ended September 30, 1997. To date, the Company has been largely dependent on its
ability to sell additional shares of its common stock or other securities 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 obligations.
PART II OTHER INFORMATION
Item 5 Other Information
In October 1997, the Company announced the signing of a letter of intent
to sell two subsidiaries, DJS Marketing Group, Inc. and System Solutions
Technology, Inc. to MSTC, Inc. The letter of intent contemplates a sale price of
$6,000,000 with $4,000,000 payable in cash and $2,000,000 payable in a
promissory note. The transaction, as presently contemplated, will be in the form
of a stock sale and MSTC will be assuming all liabilities of the subsidiaries.
The parties contemplate closing the transaction early in 1998. Consummation of
the transaction is subject to completion of due diligence by MSTC, Inc.,
negotiation and execution of a definitive agreement, approval of the board of
directors of each entity and approval of the stockholders of Bitwise Designs,
Inc. There can be no assurance that the transaction will be consummated upon the
terms set forth in the letter of intent.
Page 12 of 14
<PAGE> 13
Item 6 Reports on Form 8-K
The following Reports on Form 8-K were filed by the Company during the
last quarter:
a. Form 8-K dated July 8, 1997 under Item 4 reporting the retention of
Coopers & Lybrand as the Company's independent accountants.
b. Form 8-K dated August 11, 1997 under Item 9 Sale of Securities pursuant
to Regulation S reporting the completion of a Regulation S offering by the
Company through Banca del Gottardo.
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 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, 1997, 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 14, 1997 /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-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,746,417
<SECURITIES> 0
<RECEIVABLES> 7,952,716
<ALLOWANCES> 297,208
<INVENTORY> 3,415,169
<CURRENT-ASSETS> 16,477,203
<PP&E> 1,869,602
<DEPRECIATION> 947,447
<TOTAL-ASSETS> 21,958,733
<CURRENT-LIABILITIES> 7,191,768
<BONDS> 0
0
20
<COMMON> 7,368
<OTHER-SE> 11,391,346
<TOTAL-LIABILITY-AND-EQUITY> 21,958,733
<SALES> 9,368,855
<TOTAL-REVENUES> 9,368,855
<CGS> 6,818,030
<TOTAL-COSTS> 9,773,089
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 18,370
<INTEREST-EXPENSE> 131,414
<INCOME-PRETAX> (482,457)
<INCOME-TAX> 30,099
<INCOME-CONTINUING> (512,556)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (512,556)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> 0
</TABLE>
