<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: December 31, 1996
____ 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) 356-9741
________________________________________________________________________________
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 _____
7,331,193 Common Stock, par value $.001 per share, were outstanding at
February 7, 1997.
Page 1 of 13
<PAGE> 2
BITWISE DESIGNS INCORPORATED
FORM 10-QSB
INDEX
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets -
December 31, 1996 and June 30, 1996 3-4
Consolidated Statements of Operations -
Three and six months ended December 31, 1996
and December 31, 1995 5
Consolidated Statements of Cash Flows -
Six months ended December 31, 1996
and December 31, 1995 6-7
Notes to Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
PART II OTHER INFORMATION
Item 5 Other Information 12
Safe Harbor Statement 12
Signatures 13
Page 2 of 13
<PAGE> 3
PART I FINANCIAL INFORMATION
BITWISE DESIGNS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31, June 30,
1996 1996
----------- -----------
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 1,997,020 $ 3,377,305
Accounts receivable, net of allowance
for doubtful accounts of $197,269 at Dec.
31, 1996 and $215,000 at June 30, 1996 7,952,867 5,271,933
Due from related parties 86,211 124,136
Inventories 4,447,744 4,061,645
Income taxes receivable 8,810 16,810
Prepaid expenses and other current assets 343,756 249,893
----------- -----------
Total current assets 14,836,408 13,101,722
Property and equipment, net 1,029,049 946,931
----------- -----------
Other assets:
Due from related parties 133,055 128,123
Software development costs, net 58,173 36,275
Other assets 79,945 57,931
Excess of cost over net assets of
acquired companies, net 5,466,875 5,609,055
----------- -----------
Total assets $21,603,505 $19,880,037
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 3 of 13
<PAGE> 4
BITWISE DESIGNS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY December 31, June 30,
1996 1996
------------ ------------
Current liabilities:
<S> <C> <C>
Borrowings under lines of credit $ 3,957,073 $ 2,815,942
Current portion of long-term debt 4,478 20,205
Current portion of obligations under
capital leases 10,315 26,885
Accounts payable 4,810,753 3,968,248
Accrued expenses and other liabilities 521,264 403,569
----------- -----------
Total current liabilities 9,303,883 7,234,849
----------- -----------
Long-term debt, net of current portion 965 1,905
Obligations under capital leases, net of
current portion 6,453 9,268
Other liabilities -- 6,776
----------- -----------
Total liabilities 9,311,301 7,252,798
----------- -----------
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:
7,293,572 at December 31, 1996 and
6,754,606 at June 30, 1996 7,294 6,755
Additional paid-in capital 18,904,239 18,277,114
Accumulated deficit (6,618,926) (5,667,427)
----------- -----------
12,292,627 12,627,662
Less cost of common shares in treasury,
338 shares (423) (423)
----------- -----------
Total shareholders' equity 12,292,204 12,627,239
----------- -----------
Total liabilities and shareholders' equity $21,603,505 $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 For the 6 months ended
December 31, December 31, December 31, December 31,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 15,198,015 $ 6,641,168 $ 26,756,531 $ 13,544,144
Cost of goods sold 12,656,821 5,675,152 21,784,468 11,557,582
------------ ------------ ------------ ------------
Gross profit 2,541,194 966,016 4,972,063 1,986,562
Selling, general and
administrative expenses 2,814,303 1,378,561 5,666,811 2,542,000
Product development costs 43,808 27,164 87,770 35,446
------------ ------------ ------------ ------------
Operating loss (316,917) (439,709) (782,518) (590,884)
Other income (expense):
Interest expense (104,939) (42,393) (193,616) (89,467)
Interest and other income 14,457 23,230 57,628 42,267
------------ ------------ ------------ ------------
Loss before taxes (407,399) (458,872) (918,506) (638,084)
Income tax expense (17,593) (3,188) (32,993) (19,026)
------------ ------------ ------------ ------------
Net loss $ (424,992) $ (462,060) $ (951,499) $ (657,110)
============ ============ ============ ============
Per share amounts:
Net loss per common
share $ (0.06) $ (0.10) $ (0.13) $ (0.14)
============ ============ ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 5 of 13
<PAGE> 6
BITWISE DESIGNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
For the 6 months ended
December 31, December 31,
1996 1995
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (951,499) $ (657,110)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 332,202 217,350
Provision for doubtful accounts 30,662 4,750
Changes in operating assets and liabilities:
Accts. receivable and due from related
parties (2,678,603) (434,901)
Inventories (386,099) (604,392)
Prepaid expenses & other assets (93,948) (184,192)
Accounts payable and accrued expenses 953,424 597,976
Income taxes receivable 8,000 16
Other (7,184)
----------- -----------
Net cash used in
operating activities (2,793,045) (1,060,503)
----------- -----------
Cash flows from investing activities:
Property and equipment expenditures (233,984) (63,719)
Software development costs (49,798) (12,966)
Trademarks (25,000)
----------- -----------
Net cash used in investing
activities (308,782) (76,685)
----------- -----------
Cash flows from financing activities:
Increase in borrowings under lines
of credit, net 1,141,130 95,097
Principal payments on long-term debt (16,667) (123,161)
Principal payments - capital lease obligations (19,385) (18,755)
Dividends (7,610) (15,220)
Payment of deferred offering costs (29,940)
Proceeds - exercise of common stock warrants 654,014
Proceeds from issuance of common stock, net 4,331,987
----------- -----------
Net cash provided by
financing activities 1,721,542 4,269,948
----------- -----------
Net increase(decrease) in cash & cash equivalents (1,380,285) 3,132,760
Cash and cash equivalents, beginning of year 3,377,305 2,058,498
----------- -----------
Cash and cash equivalents, end of period $ 1,997,020 $ 5,191,258
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 6 of 13
<PAGE> 7
BITWISE DESIGNS, INC.
SUPPLEMENTAL CASH FLOW DISCLOSURES
----------------------------------
<TABLE>
<CAPTION>
OTHER SUPPLEMENTAL INFORMATION: For the 6 months ended
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Interest Paid $182,738 $87,796
Income Taxes Paid $ 25,894 $19,009
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 7 of 13
<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 December 31, 1996 and June 30, 1996 and
results of operations and cash flows for each of the periods presented.
2. The results of operations for the three and six months ended December 31,
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 after all expenses.
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 six months ended December 31, 1996, 315,142 common stock warrants
were exercised with the proceeds totaling approximately $654,000.
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 7,210,674 and 7,050,788 for the three and six months ended
December 31, 1996, respectively and 4,848,939 and 4,661,300 for the three and
six months ended December 31, 1995.
Page 8 of 13
<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 AND SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THE THREE AND SIX
MONTHS ENDED DECEMBER 31, 1995.
The Company realized a consolidated net loss of $424,991 and $951,498
for the three and six months ended December 31, 1996, respectively. This
compares to a consolidated net loss of $462,060 and $657,110 for the three and
six months ended December 31, 1995. The Company had consolidated net sales of
$15,198,015 and $26,756,531 for the three and six months ended December 31,
1996, respectively. This compares to consolidated net sales of $6,641,168 and
$13,544,144 for the three and six months ended December 31, 1995, respectively.
The sales increase is due to the acquisition of DJS Marketing Group,
Inc. ("DJS") on March 8, 1996. DJS had sales of $4,546,254 and $7,155,455 for
the three and six months ended December 31, 1996, respectively. The consolidated
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
$1,935,971 and $3,632,098 for the three and six months ended December 31, 1996,
respectively; compared to $147,691 and $258,772 for the for the same two periods
last year.
DocStar was 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. The DocStar product line is sold nationally through the office
equipment dealer channel.
Gross profit for the three and six months ended December 31, 1996, was
$2,541,194 and $4,972,063, respectively. This compares to gross profit of
$966,016 and $1,986,562 for the same periods last year. The gross profit margin
was 16.7% and 18.6% for the three and six months ended December 31 , 1996 and
14.5% and 14.7% for the same periods last year. The gross profit margin (which
is defined as gross profit as a percentage of sales) increased during the first
six months of 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. Electrograph also experienced
limited improvement in gross profit margin during the six months ended December
31, 1996 compared to the same period last year due to the mix of products sold
during the period.
Page 9 of 13
<PAGE> 10
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 $2,814,303 and $5,666,811 for the three and six months
ended December 31, 1996, respectively; compared to $1,378,561 and $2,542,000 for
the same two periods in 1995. S,G&A expenses increased due to the addition of
DJS Marketing Group, Inc. which incurred S,G&A expenses of $332,944 and $751,002
during the three and six months ended December 31, 1996. In addition, the
Company incurred significant expenses related to the DocStar product line.
DocStar S,G&A expenses amounted to $1,277,745 and $2,610,340 for the three and
six months ended December 31, 1996 compared to $372,626 and $574,361 for the
same periods in 1995.
As a percentage of sales, S,G&A costs changed from 20.8% and 18.8% for
the three and six months ended December 31, 1995 to 18.5% and 21.2% for the
three and six months ended December 31, 1996, respectively. The increase in
percentage of expenses to sales during the six months ended December 31, 1996
compared to the prior year is due to the introduction of the DocStar product
line to the national market place. The Company incurred significant expenses for
sales, marketing and administrative staffing, including payroll costs, travel
and living costs and office costs as well as national marketing expenses.
Interest costs totaled $104,939 and $193,616 for the three and six
months ended December 31, 1996, respectively; and $42,393 and $89,467 for the
same periods last year. The increase in interest cost is due to the acquisition
of DJS which incurred interest on its line of credit borrowings. It is also due
to increased borrowings by all other operations of the Company under an existing
line of credit caused by an increase in sales. Interest rates decreased slightly
during the six months ended December 31, 1996 compared to the same period during
the prior year.
Product development expenses relate primarily to software development
of the Company's DocStar product line and increased from $27,164 and $35,446 for
the three and six months ended December 31, 1995 to $43,808 and $87,770 for the
three and six months ended December 31, 1996. 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 December 31, 1996 totaled $5,443.
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 December 31, 1996 the
total outstanding balance was $3,957,073. 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
Page 10 of 13
<PAGE> 11
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 December
31, 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 with gross proceeds of $5,000,000 in December 1995 under Section
4(2) of the Securities Act of 1933 or Regulation D; net proceeds approximated
$4,200,000, after expenses. The Company has 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 include staffing, advertising and
promotion, travel, consulting, office expansion, equipment, furniture and other
related costs.
In January 1997, the Company announced the signing of a letter of
intent for the private sale of $5,000,000 of senior convertible preferred stock
and common stock purchase warrants to an institutional private equity investor.
The letter of intent is subject to various conditions including the completion
of due diligence by the parties, negotiation and execution of definitive
agreements and final corporate approval by Bitwise and the investor. Accordingly
there can be no assurances the private sale will be consummated. The proceeds of
the private sale will be used to further the development, distribution and
marketing of the DocStar imaging system and for general working capital.
The Company has outstanding a standby letter of credit in the amount of
$350,000 as of December 31, 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 $233,984 for the six
months ended December 31, 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 $1,380,285 during the
six months ended December 31, 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
obligations.
Page 11 of 13
<PAGE> 12
PART II OTHER INFORMATION
Item 5 Other Information
In January 1997, the Company announced the signing of a letter of intent for the
private sale of $5,000,000 of senior convertible preferred stock and common
stock purchase warrants to an institutional private equity investor. The letter
of intent is subject to various conditions including the completion of due
diligence by the parties, negotiation and execution of definitive agreements and
final corporate approval by Bitwise and the investor. Accordingly there can be
no assurances the private sale will be consummated. The proceeds of the private
sale will be used to further the development, distribution and marketing of the
DocStar imaging system and for general working capital
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None
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 are 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, 1996, 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 12 of 13
<PAGE> 13
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
February 12, 1997 /s/ John T. Botti
- ----------------- -----------------
DATE JOHN T. BOTTI
PRESIDENT & CHIEF EXECUTIVE OFFICER
/s/ Dennis H. Bunt
------------------
DENNIS H. BUNT
CHIEF FINANCIAL OFFICER
Page 13 of 13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,997,020
<SECURITIES> 0
<RECEIVABLES> 8,039,078
<ALLOWANCES> 197,269
<INVENTORY> 4,447,744
<CURRENT-ASSETS> 14,836,408
<PP&E> 1,796,877
<DEPRECIATION> 767,828
<TOTAL-ASSETS> 21,603,505
<CURRENT-LIABILITIES> 9,303,883
<BONDS> 0
0
20
<COMMON> 7,294
<OTHER-SE> 12,284,890
<TOTAL-LIABILITY-AND-EQUITY> 21,603,505
<SALES> 26,756,531
<TOTAL-REVENUES> 26,756,531
<CGS> 21,784,468
<TOTAL-COSTS> 27,539,049
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 30,662
<INTEREST-EXPENSE> 193,616
<INCOME-PRETAX> (918,506)
<INCOME-TAX> (32,993)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (951,499)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.13)
</TABLE>
