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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year 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 NUMBER 0-21541
BITSTREAM INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2744890
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(State or other jurisdiction of Employer Identification No.)
incorporation or organ(I.R.S.)
215 FIRST STREET, CAMBRIDGE, MASSACHUSETTS 02142
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(Address of principal executive offices, including Zip code)
(617) 497-6222
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 14, 1997 was approximately $26.3 million.
As of March 14, 1997, there were 5,506,771 shares of Class A Common Stock,
par value $0.01 per share, and 422,026 shares of Class B Common Stock, par value
$0.01 per share, outstanding.
Documents Incorporated by Reference
Portions of the Registrant's definitive proxy statement for the 1997 Annual
Meeting of Stockholders, to be filed with the Securities and Exchange
Commission, are incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
RECENT DEVELOPMENTS
MAINSTREAM ACQUISITION
On January 9, 1997, Bitstream Inc. (the "Company" or "Bitstream") purchased
substantially all of the assets of Mainstream Software Solutions, a corporation
organized under the laws of England primarily engaged in the business of
marketing, selling, distributing and supporting Bitstream type products in the
United Kingdom, for approximately $505,000. As a result, Bitstream will now
directly distribute its own products in the United Kingdom. The acquisition will
be accounted for as a purchase and will result in approximately $500,000 of
goodwill.
1997 STOCK PLAN
On March 10, 1997, the Board of Directors approved the 1997 Stock Plan
under which the Company is authorized to grant incentive stock options and
nonqualified stock options (including warrants) to purchase up to 1,000,000
shares of Class A Common Stock (however, in the event the Merger (described
below) is not consummated by September 30, 1997, such number of shares of Class
A Common Stock will be reduced to 500,000). Options granted under this plan
shall expire no later than 10 years from the date of the grant and vest over
periods of up to three years. The 1997 Stock Plan will be submitted for approval
of Bitstream's stockholders at the 1997 Annual Stockholders' Meeting.
ARCHETYPE ACQUISITION
On March 27, 1997, the Company entered into a Plan and Agreement of Merger
(the "Merger Agreement") with Archetype, Inc. ("Archetype"), a Delaware
corporation primarily engaged in the business of developing and marketing
server-based information management software for the graphic arts industry. The
Merger Agreement provides for the merger (the "Merger") of Archetype into
Archetype Acquisition Corporation, a newly organized wholly-owned subsidiary of
Bitstream. The Merger is intended to qualify as a tax free reorganization under
the Internal Revenue Code.
The Merger Agreement provides that, upon consummation of the Merger, each
Archetype stockholder will receive, in exchange for their shares of Archetype
capital stock, a certain amount of cash and Class A Common Stock (the "Merger
Consideration") depending on the class of Archetype capital stock exchanged
therefor. It is expected that the Merger Consideration will consist of
approximately $1.64 million in cash, in aggregate, and approximately 531,427
shares of Class A Common Stock, in aggregate, subject to certain adjustments. On
the closing of the Merger, it is expected that Bitstream will repay up to
$800,000, in aggregate, of indebtedness owed by Archetype to certain of its
stockholders. Additionally, following the Merger, the Company expects to issue
options or warrants (the "Options") to purchase up to approximately 650,000
shares of Class A Common Stock, in order to induce the former Archetype
employees and other persons receiving such Options to become employees of, or
perform certain services for, the Company and/or to replace certain outstanding
options and warrants issued by Archetype. Of these Options, 450,000 will be
issued at an exercise price of $.90 per share and the remaining 200,000 will be
issued at an exercise price per share equal to the fair market value of the
Class A Common Stock on the date of the consummation of the Merger. The
acquisition will be accounted for as a purchase with a significant portion of
the purchase price being allocated to, and expensed, as in process research and
development.
Through the acquisition of Archetype, by the third quarter of 1997,
Bitstream expects to begin to market Archetype's products to original equipment
manufacturers ("OEMs") and independent software vendors ("ISVs"), and to the
graphic arts/publishing market through the network of value added resellers
("VARs") that Archetype has established. Archetype's products include: (i)
MediaBank, a digital asset management product that allows for the cataloging,
archiving, and management of electronic images, text and documents; (ii)
InterSep OPI and InterSep Output Manager, advanced open prepress interface and
print management products for raster image processors and servers; and
(iii) NuDoc, an advanced document composition technology.
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Upon the consummation of the Merger, Bitstream expects to hire
substantially all of the employees of Archetype, thereby increasing the number
of Bitstream employees to approximately 90 people in the second quarter of 1997.
Consummation of the Merger is subject to various conditions and there can
be no assurance that the Merger will be consummated on the terms referenced
above if at all.
The foregoing statements are summaries of certain terms of the Merger and
the Merger Agreement and do not purport to be complete. The summaries are
subject to, and qualified in their entirety by reference to, the provisions of
the Merger Agreement, a copy of which is attached hereto as Exhibit 10.10.
GENERAL
Bitstream develops and markets software products and technologies to
enhance the creation, transport, viewing and printing of electronic text based
information. The Company's products and technologies consist of (i) type
products, such as libraries of type designs (fonts) and custom type products;
(ii) enabling technologies, which deliver typographic capabilities to hardware
output devices and software applications; and (iii) TrueDoc, a portable type
technology providing for the efficient distribution of text, with fidelity, in a
highly compact format. The Company's enabling technologies and TrueDoc allow
textbased digital information to maintain its intended appearance in any
computing environment. The Company primarily licenses its products and
technologies to OEM's and ISV's for inclusion in their output devices, embedded
systems, applications, Internet authoring tools, World Wide Web browsers and
other products.
Bitstream was founded in 1981 as a digital type supplier to computer
hardware and software developers. The Company's library of type products is used
by OEMs, ISVs and end users around the world in the creation of electronic
documents. The Company was also an early developer of typographic enabling
software for hardware and software developers. Its font processor products are
used to provide type scaling functionality to operating systems, network servers
and a wide variety of computer printers and other output devices. Recently, the
Company has focused its product development and marketing efforts on technology
solutions that address the font-related issues of document creation and
portability in the Internet and corporate intranets.
INDUSTRY BACKGROUND
The rapid growth in the use of personal computers, advanced software
applications and laser printers has dramatically transformed the document
creation, production and distribution process, giving rise to the widespread
use of word processing and desktop publishing applications. Underlying
the growth in word processing and desktop publishing were enabling technologies
such as page description languages, printer control languages and outline font
technologies. Adobe Systems Corporation's PostScript Type One format ("Type
One"), the original outline font technology, gained acceptance among graphic
artists and the high-end electronic publishing market due to the technology's
close links to high-resolution output devices used in service bureaus and
publishing houses. TrueType was developed by Apple Computer, Inc. ("Apple") as
an alternative outline font technology to Type One and is integrated into the
Windows and Macintosh operating systems. While capable of producing
high-quality printed images and documents, these technologies were designed to
operate as part of stand-alone systems. As a result, users were required to
invest in expensive hardware and software combinations to enable competing
technologies to co-exist and work together in the same environment. The
problems presented by such competing standards have been further complicated by
the adoption of multi-vendor client/server network architectures and the advent
of new distribution media, including the Internet, corporate intranets, and new
classes of information appliances.
The increased use of distributed client/server network architectures in the
1990s has resulted in complex computing environments comprised of mixed
operating systems and multiple networking protocols. To create, transport, view
and print text-based digital information in such an environment, while
preserving the appearance intended by the document's author, each individual
computer must have resident on it specific font software and hardware drivers to
display or print the document as the author intended. If a user's system should
lack a particular typeface used by the author or attempt to output a document to
a device that differs from the device on which the document was originally
created, the user's end-product often lacks the appearance intended by the
creator. For example, if an output device prints a document with a font used in
substitution of the author's original font, a complete loss of original
pagination or formatting within the document can often result. Such a result
would make it difficult, if not impossible, for multiple users to review and
comment collaboratively on the same document. Difficulties in retaining text
integrity can be further complicated when users try to incorporate non-Latin
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fonts such as Kanji, Greek or Hebrew, because font substitution for non-Latin
fonts is typically not available in most operating systems and output devices.
Currently, techniques used to present text and graphics are based on
existing desktop publishing technologies and, when used in new distribution
media, often result in a loss of visual integrity, degraded system performance,
or both. To efficiently deliver digital information that retains the author's
intended visual impression, computer systems must utilize enabling technologies
that reduce file size, minimize bandwidth consumption and operate reliably
across heterogeneous computing environments.
THE BITSTREAM SOLUTION
Bitstream markets products and technologies that provide the ability to
create, view, transport and print documents without regard to the specific
computing platforms, operating systems or resident applications used to create
or view the original document. The Company's enabling technologies and TrueDoc
allow text-based digital information to maintain its intended appearance in any
computing environment. Bitstream's enabling technologies and its TrueDoc
portable type technology allow OEMs and ISVs to embed compact, portable type
information into output devices, embedded systems, applications, Internet
authoring tools, World Wide Web browsers and other products.
STRATEGY
Bitstream's goal is to become the leading supplier of type products,
enabling technologies and portable document products for the creation,
transport, viewing and printing of electronic documents. Key elements of the
Company's strategy include the following:
MAINTAIN TECHNOLOGY LEADERSHIP. Since its founding over 15 years ago,
Bitstream has played a leading role in the development of industry-standard type
products and enabling technologies (e.g. font processing software). Recently,
Bitstream has been actively developing font portability and compaction
technology. The Company has built substantial expertise in digital type design
and production, technical font formats, and font portability and compression
software. Bitstream intends to continue to develop or acquire technology to
support its leadership position in these areas.
EXPAND OEM AND ISV DISTRIBUTION CHANNELS. During 1996, the Company
concentrated its efforts on the development and sale of technology and products
to OEM and ISV customers. The Company believes that marketing to OEMs and ISVs
provides it with the opportunity to build a base of revenue and to minimize
production, marketing and inventory costs. The Company plans to continue to
place significant emphasis on building its OEM and ISV customer base. If the
Merger is consummated, Bitstream will seek to expand the sale of Archetype's
products through its established VAR channel. See "Recent
Developments--Archetype Acquisition."
EXTEND TECHNOLOGY TO NEW MARKETS. The Company believes that certain
features of its products such as their small file and application size, high
typographic quality, performance, system scalability and cross-platform
portability will facilitate their adaptation to new and emerging markets. These
markets include the Internet, corporate intranets, embedded systems,
multi-function devices (e.g. combined printer/fax/copiers) and information
appliances. Bitstream is currently developing, adapting and marketing its
enabling technologies and type products to third parties whose products address
these new and developing markets.
SUPPORT INDUSTRY STANDARDS. Bitstream's products and technologies have been
designed to support existing technological and typographic standards, such as
Hypertext Markup Language ("HTML"), Standard Generalized Markup Language
("SGML"), UNICODE, TrueType and Type One, and to be embedded within
full-featured products produced by OEMs and ISVs. The Company's products have
also been designed to function in multi-platform computing environments,
including Windows, UNIX and Macintosh, OS/9 and Java. The Company plans to
continue to promote the use of its products in multivendor configurations and is
a member of the World Wide Web Consortium and the Unicode Consortium.
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PRODUCTS
The Company's products and technologies consist of (i) type products, such
as libraries of type designs (fonts) and custom type products; (ii) enabling
technologies, which deliver typographic capabilities to hardware output devices
and software applications; and (iii) TrueDoc, portable type technology providing
for the efficient distribution of text, with fidelity, in a compact format.
TYPE PRODUCTS
Bitstream has developed a library of over 1,400 digital typefaces
deliverable in industry-standard font formats (such as TrueType or Type One).
Approximately 1,200 of these typefaces are for use with English or other western
European language-based computer systems. This large number of typefaces is
necessary to support OEMs and ISVs focused on the graphic arts market, who are
accustomed to having a wide variety of type designs to choose from. The
remainder of the Company's type designs are non-western language typefaces such
as Kanji, Greek, Chinese, Korean, Russian, Hebrew and Arabic that are marketed
only to OEM and ISV customers. In addition to typefaces, the Company also offers
custom type services to its customers. Depending on the needs of the client, the
Company can digitize corporate logos, modify existing typeface designs, add
special characters to typefaces and create new typefaces. The Company's custom
type services are marketed to its OEM, ISV and large corporate customers.
Bitstream has developed its own proprietary type product design software
tools. These tools enable the Company's type product engineers to develop and
expand the Company's library of type products and to generate custom type
products in an efficient and cost-effective manner. By using its own tools,
Bitstream can largely avoid licensing or paying royalties for the use of third
party development tools. In addition, the Company believes that its design tools
improve its competitive position in the marketplace by assisting the Company in
adapting its products rapidly to the specific requirements of its customers.
In May 1996, the Company introduced a new multi-lingual type product called
Cyberbit. Cyberbit is a single typeface deliverable in TrueType format that
contain characters from the majority of the world's languages. Cyberbit allows
for the authoring, distributing, viewing and printing of multi-lingual
electronic documents on computer systems that typically do not incorporate
non-Western language fonts.
ENABLING TECHNOLOGIES
The Company's enabling technologies consist of font processors (also known
as type scalers or rasterizers) in a modular architecture that provide OEM and
ISV customers with a complete type processing subsystem for integration into
their hardware or software products. Font processors are a necessary component
in laser printers and operating systems because they interpret type information
stored within a document and generate the indicated characters in the required
size and resolution as determined by the application, the output device or
user-defined specifications.
The modular architecture of the Company's "4-in-1" enabling technology
provides software hooks to allow OEMs and ISVs to incorporate font scaling
technologies into their products. The four font scaling technologies provided
for are the two industry standard font formats (TrueType and Type One), the
resident fonts used in Hewlett-Packard Company LaserJet laser printers, and a
Bitstream TrueDoc-based type rasterizer that processes Bitstream-supplied
resident font sets. In addition, this 4-in-1 architecture includes software that
routes incoming typeface data to the appropriate processor, and prepares the
final rasterized characters for imaging by an output device or computer screen.
The Company markets this technology under the name "Bitstream 4-in-1 TrueDoc
Imaging System."
TRUEDOC
TrueDoc is a portable type compaction technology designed for the
distribution of electronic text based information. OEMs and ISVs license and
incorporate TrueDoc into their document creation and viewing products to achieve
the reliable, compact and efficient recording, transport, viewing and printing
of typographic information regardless of whether the fonts used for the original
creation of the document are resident on the recipient's system. TrueDoc has
been engineered to be small in file and application size, to comply with all
industry font standards, and to be cross-platform compatible.
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TrueDoc is composed of two main software components. The TrueDoc Character
Shape Recorder, approximately 75 kilobytes in size, captures character shapes
from a font processor, such as TrueType or Type One, and creates a portable font
resource ("PFR") that is transportable across networks or the Internet.
TrueDoc's Character Shape Player, approximately 65 kilobytes in size, recreates
the type shapes stored in the PFR and displays the text in a manner that
maintains the integrity of the original type shapes. The Company believes that
TrueDoc's small file size and efficient playback capabilities present advantages
in applications where limitations on bandwidth and memory are significant
factors.
In February 1997, the Company entered into a licensing agreement with
Netscape Communications Corporation ("Netscape"), pursuant to which Netscape
licensed TrueDoc's Character Shape Player (viewing component) and TrueDoc's
Character Shape Recorder (recording component) from the Company. The Company
anticipates that Netscape will integrate such TrueDoc technology into Netscape's
Communicator software, an integrated suite of applications that combine
electronic mail, browsing, Internet document composition and collaboration. The
Company is also pursuing, and has concluded, similar arrangements with other
Internet technology developers. In June 1996, Bitstream entered into separate
licensing agreements with Spyglass, Inc. ("Spyglass") and Oracle Corporation
("Oracle"), to include TrueDoc technology into their respective Internet
browsing technologies: the Spyglass Web Technology Kit and the Oracle
PowerBrowser. Spyglass' Web Technology Kit is an Internet enabling technology
for hardware manufacturers and continues to be marketed by Spyglass. Oracle's
PowerBrowser is not currently being marketed by Oracle.
Although the Company expects that it will receive no or only nominal
royalty payments under these agreements, the inclusion of TrueDoc viewing
technology into Netscape's and Spyglass' client products or World Wide Web
navigation tools will create an installed TrueDoc user base of these companies'
customers. The Company believes that this will stimulate demand by OEM's and
ISV's to license the recording component of TrueDoc, the Character Shape
Recorder, for use in their Internet and corporate intranet products or
applications on a royalty basis. There can, however, be no assurance that either
Netscape or Spyglass will include (or continue to include) TrueDoc in its
products or that the Company will achieve any commercial benefit from the
inclusion of TrueDoc in such products.
In September 1996, the relationship that developed between Oracle and
Bitstream led to a separate licensing agreement between Bitstream with Network
Computer, Inc., a subsidiary of Oracle, to provide full multilingual font
technology support for its Network Computer architecture. The Company is also
pursuing separate licensing arrangements with HTML authoring tool developers and
Internet compatible hardware manufacturers.
PORTABLE DOCUMENT PRODUCTS
Portable document products are software applications that provide users
with the ability to create electronic documents that can be shared, viewed,
annotated, indexed, searched and printed by other users regardless of the
computer system or application used to create the documents.
Pursuant to a license (the "Envoy License") the Company obtained from
Novell, Inc. ("Novell"), Novell granted the Company the exclusive right to
distribute Novell's proprietary portable document technology, Envoy, to
companies that incorporate Envoy in their own products, such as OEMs and ISVs
(other than Corel Systems Corporation, as to which Novell also has the rights to
distribute Envoy) and a non-exclusive rights to distribute Envoy to end users.
During the first quarter of 1997, the Company held discussions with Novell
as to various matters relating to Envoy and certain provisions of the Envoy
License. Such discussions resulted in the termination of the Envoy License
without any further obligation or liability of either party to the other. The
Company believes that such termination will not have an adverse effect on the
Company and is consistent with furthering the Company's presence in Internet
tools, Network Computers and set top boxes, where the emphasis appears to be on
developing technologies which are more open to industry standards, such as HTML,
SGML and Java.
FUTURE PRODUCTS
The Company has identified other emerging and complementary areas for which
it believes its products will be well suited. Bitstream is currently developing
products to enhance the performance of text-based document creation, transport,
viewing and printing within such markets. Products under development and future
markets being addressed include:
o Server-based products that supply typefaces and enabling technologies to
network devices including workstations and printers. Such products are
being developed to simplify network maintenance, improve application and
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performance and help simplify copyright compliance. The first of these
products, expected to commence shipment in late 1997, is the Bitstream
Advanced Font Services for Networks product. This product is expected to
work with Novell's Netware Distributed Print Services ("NDPS"). NDPS is
expected to ship in mid 1997.
o TrueDoc-based utilities for the graphic arts market that address font
portability issues in the electronic delivery of desktop publishing
documents.
o Type products, enabling technologies and versions of TrueDoc for
integration into new products and applications such as set-top boxes,
personal digital assistants and other information applications based on new
programming languages or operating systems, such as Sun Microsystems,
Inc.'s Java.
o If the Merger is consummated, products from Archetype, such as MediaBank,
InterSep OPI and InterSep Output Manager and NuDoc.
The Company has not determined the approximate time when such future
products, if completed, may be released for future sale, if at all. There can be
no assurance that any of the Company's planned or contemplated products will
reach commercialization or, if released for sale, will gain market acceptance,
or that the markets targeted by the Company will develop as anticipated, or that
the Merger with Archetype will be consummated. See "Recent
Developments--Archetype Acquisition."
MARKETING AND SALES
The principal objective of the Company's marketing strategy is to continue
to expand the sale of the Company's products and technologies to OEMs and ISVs
who integrate the Company's software into their own products. OEM and ISV
relationships range from the license of a small group of typefaces to agreements
whereby an entire range of type products and/or technologies are incorporated
into the customer's hardware or software products. As new opportunities arise,
particularly in the newly emerging areas of corporate intranets and portable
document software, the Company intends to evaluate other marketing approaches.
This may include marketing through the VAR channel serving the networking market
or increased direct corporate and international marketing. See "Recent
Developments--Archetype Acquisition."
The Company's sales organization, as of March 17, 1997, consisted of 9
people focused on OEM and ISV sales and 6 people focused on corporate direct
sales. The Company's sales efforts are managed from its corporate headquarters
in Cambridge, Massachusetts. In addition, the Company maintains a European sales
headquarters in Amsterdam, The Netherlands and sales offices in Burlingame,
California, Reading, England and Cheltenham, England. Finally, the Company has a
sales agent based in Tokyo to facilitate OEM sales to Japanese hardware
manufacturers. The Company's direct sales personnel receive a base salary plus
commissions based on meeting annual sales targets, with additional commissions
for sales in excess of annual targets.
The Company seeks to enhance its relationships with existing customers
through a four-person technical support team that works with customers or
prospects to support sales and to facilitate the implementation and use of the
Company's software products and technologies. Marketing activities are carried
out by a team of six people located at the Company's headquarters in Cambridge,
Massachusetts. In addition, the Company promotes its products through attendance
and exhibition at major industry trade shows. The Company intends to expand its
sales and marketing efforts in the future.
CUSTOMERS
The Company licenses type products, enabling technologies and TrueDoc to a
wide variety of OEM and ISV customers. In addition, the Company sells custom and
other type products directly to corporate customers. No single Bitstream
customer accounted for 10% or more of the Company's revenues for any of the
fiscal years ended September 30, 1994 through December 30, 1996. From time to
time, product sales to large customers during a single fiscal quarter may
constitute more than 10% of Company revenues for such quarter. See Note 13 to
Notes to Consolidated Financial Statements for information as to revenues
derived by the Company from sales outside of the United States. In the future,
the Company intends to broaden its customer base through expanded product
offerings and increased marketing efforts within the OEM/ISV, corporate and VAR
channels. Customers which are representative of the various industry groups
served by the Company include those listed below.
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ISVS
Application Developers Graphic Arts Operating Systems
Accent Software International Ltd. Barco Graphics N.V. Apple Computer, Inc.
Corel Systems Corporation DaiNippon Screen Manufacturing Co., Ltd. QNX Software Systems Ltd.
Hummingbird Communications Inc. Intergraph Corporation Silicon Graphics, Inc.
Macromedia, Inc. Interleaf, Inc. Sun Microsystems, Inc.
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OEMs
Printer Companies Broadcast Television
Hewlett-Packard Company Seiko Epson Corporation Victor Company of Japan (JVC)
Kyocera Corp. Sharp Electronics Corporation The Walt Disney Company
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Corporate End Users
CNA Insurance Company Kemper Financial Services TV Guide
Deluxe Corporation Price Waterhouse L.L.P.
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RESEARCH AND PRODUCT DEVELOPMENT
Bitstream is committed to developing innovative software to enhance
electronic document creation, transport, viewing and printing. To accomplish
this goal, the Company has invested, and expects to continue to invest,
significant resources in research and development. The Company's research and
development activities are centered around advancing the Company's software
products for its OEM, ISV and corporate customers and, if the Merger is
consummated, will include advancing products and technologies developed by
Archetype for sale through the VAR channel. The Company maintains specific
expertise in the areas of font formats, multi-lingual fonts, font portability,
font compression and font processing technology and, if the Merger is
consummated, this expertise will be expanded to include composition, media and
server technology. See "Recent Developments - Archetype Acquisition."
The Company emphasizes cross-platform portability, small file and
application size and extensibility to new technologies in its software
development. To support these design objectives, the Company employs advanced
software development techniques. For example, the Company is developing software
using the Java programming language to adapt its products to devices and
software applications written to take advantage of Java's advanced structure and
cross-platform portability. Java versions of True Doc in platform specific
format are currently available for Windows and UNIX. The Company expects to have
a Java version of TrueDoc that will work on all computing platforms available
in the last quarter of 1997. There can, however, be no assurance that such a
version of TrueDoc will be completed in the last quarter of 1997, if at all.
As of March 17, 1997, the Company employed 18 individuals who engage in
research and development activities. Of these, eight focus on type product
development, four on developing enabling technology, and three on TrueDoc. The
remainder focus on quality assurance and administration.
COMPETITION
The markets in which the Company participates are intensely competitive,
evolving and subject to rapid technological change. The Company expects
competition to persist and increase in the future. Certain of the Company's
competitors, including Adobe Systems Corporation ("Adobe") and Agfa Division,
Miles Inc. ("Agfa"), have greater name recognition, a larger customer base and
significantly greater financial, technical and marketing resources than the
Company. The Company's products compete with the solutions offered by a variety
of companies, including other suppliers of enabling technologies, software
application developers, and vendors of computer operating systems. Moreover, the
market for the Company's enabling technologies and products may be adversely
impacted to the extent that computer hardware, operating system and application
software vendors incorporate similar functionality or bundle competitive
offerings with their products and thereby reduce the market for the Company's
technology or products. The Company's markets are the subject of intense
industry activity, and it is likely that a number of software developers are
devoting significant resources to developing and marketing technology and
products that may compete with the Company's technology and products.
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The competition for the Company's sales of type products to OEM and ISV
customers generally comes from a number of comparably sized or smaller companies
offering their own type libraries and custom type services. Competition to the
Company's enabling technologies principally comes from Agfa with its Universal
Font Scaling Technology ("UFST"). UFST has a similar architecture to the
Company's 4-in-1 enabling technology product.
The competition for TrueDoc consists primarily of software from Agfa,
which includes a font compression technology known as MicroType Express. Until
recently, the Company also faced competition with respect to TrueDoc from the
former Ares Software Corporation, which was acquired by Adobe.
The Company also faces competition in its efforts to have TrueDoc accepted
and supported by Internet companies. In March 1996, Adobe and Netscape announced
their intention to integrate Adobe technology into Netscape products. The
Company's licensing agreement with Netscape does not preclude Netscape from
integrating Adobe technology into Netscape products. In addition, Microsoft
Corporation ("Microsoft") has announced an initiative to provide font
portability and compression in future versions of its Internet applications. The
Company believes that Microsoft has licensed Agfa's MicroType Express to provide
font compression for this initiative.
Future sales of the Company's products will depend upon the Company's
ability to develop or acquire, on a timely basis, new products or enhanced
versions of its existing products that compete successfully with products
offered by developers of competing technologies. There can be no assurance that
the Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, financial condition and results of
operations.
INTELLECTUAL PROPERTY
The Company relies on a combination of trade secret, copyright, patent, and
trademark laws and contractual restrictions to establish and protect proprietary
rights in its technology. The Company has entered into confidentiality and
invention assignment agreements with its employees, and when obtainable, enters
into non-disclosure agreements with its suppliers, distributors and others so as
to limit access to and disclosure of its proprietary information. There can be
no assurance that these statutory and contractual arrangements will prove
sufficient to deter misappropriation of the Company's technologies or that the
Company's competitors will not independently develop non-infringing technologies
that are substantially similar to or superior to the Company's technology. The
laws of certain foreign countries in which the Company's products are or may be
developed, manufactured or licensed may not protect the Company's products or
intellectual property rights to the same extent as do the laws of the United
States and thus make the possibility of piracy of the Company's technology and
products more likely. The Company believes that, because of the rapid pace of
technological change in the software and electronic commerce markets, legal
protection for its products will be a less significant factor in the Company's
future success than the knowledge, ability and experience of the Company's
employees, the frequency of product enhancements and the ability of the Company
to satisfy its OEM and ISV customers.
The Company's policy is to apply for U.S. patents with respect to its
technology and seek copyright registration of its technology or trademark
registration of its marks from time to time when management determines that it
is competitively advantageous and cost effective to do so. The Company has been
granted two patents and a third is pending before the United States Patent and
Trademark Office and each is directed to certain aspects or applications of the
Company's TrueDoc technology. Additionally, the Company has sought foreign
patent rights to certain aspects of its TrueDoc technology by filing an
International Application under the Patent Cooperation Treaty.
EMPLOYEES
As of March 17, 1997, the Company employed 66 persons, including 29 in
sales and marketing, 18 in research and development and 19 in general
administrative functions. Of the Company's 66 employees, 64 are full time and 2
are part time. The Company also retains consultants from time to time to assist
it with particular projects for limited periods of time. The Company believes
that its future success will depend in part on its ability to attract, motivate
and retain highly qualified personnel. None of the Company's employees is
represented by a labor union and the Company has not experienced any
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work stoppages. The Company considers its employee relations to be good. See
"Recent Developments--Archetype Acquisition."
DELAWARE REINCORPORATION
The Company was reincorporated in Delaware on May 21, 1996 by merging
Bitstream Inc., a Massachusetts corporation ("Bitstream-Massachusetts") into the
Company, which was a wholly-owned subsidiary of Bitstream-Massachusetts. In
connection with the Delaware Reincorporation, each three outstanding shares of
stock of Bitstream-Massachusetts was converted into two shares of the same class
of stock of the Company. Such conversion is referred to herein as the "2-for-3
Conversion."
Bitstream(R) and TrueDoc(R) are federally registered trademarks of the
Company; the Company claims trademark rights in Cyberbit(TM). All other
trademarks, service marks or tradenames referred to in this Report are the
property of their respective owners.
ITEM 2. PROPERTY
The Company's corporate headquarters is located in Cambridge, Massachusetts
where it currently leases approximately 25,000 square feet under a lease
expiring in 1998, with the right to renew for an additional five years.
Management believes that these facilities are adequate for the Company's current
needs and that suitable additional space, should it be needed, will be available
to accommodate expansion of the Company's operations on commercially reasonable
terms.
ITEM 3. LEGAL PROCEEDINGS
On May 26, 1995, The Friends of the Museum of Printing, Inc. (the "Museum")
filed a lawsuit in the Middlesex County Superior Court of Massachusetts against
the Company in connection with a letter agreement (the "Letter") dated July 23,
1992 from the Company to the Museum concerning storage of certain font materials
for the Museum. The Letter provided that the Company would have no liability to
the Museum, over and above the proceeds of insurance, for damage or loss of any
of the font materials, and that neither the Company nor the Museum would incur
any liability to the other for any loss or damage arising out of their
respective rights and obligations set forth in the Letter. The Museum alleges
that after the two-year storage period had expired, the Company disposed of the
font materials and that such conduct by the Company breached the terms of the
Letter and violated Chapter 93A of the Massachusetts General Laws, which
provides, among other things, that persons found to have engaged in an unfair or
deceptive act in the conduct of a trade or business may be liable for double or
treble damages and attorney fees. The Museum further demanded an accounting of
royalties the Museum claims are due from the Company for use of the font
materials.
Although the Company cannot determine an estimate of the possible loss
associated with this matter, it believes that its available insurance will cover
any liability incurred in connection with the lawsuit, except for certain
potential liabilities, up to a maximum of $1.01 million, subject to a $10,000
deductible. The Company further believes that in the event that the claim
exceeds $1.01 million its available insurance will cover one-half of any
liability incurred by the Company in excess of $1.01 million up to a maximum of
$1.8 million. The Company's insurer is currently paying all of the costs
incurred by the Company in defending this lawsuit.
The Company cannot ensure that current reserves and insurance coverage will
be sufficient to cover any liability incurred by the Company in this lawsuit.
The Company has reserved the $10,000 deductible in the accompanying
consolidated financial statements as of December 31, 1996.
On November 22, 1996, Mr. Robert S. Friedman, a former director and officer
of the Company, and Mr. Gordon Greer, and Ms. Faith G. Friedman, as trustees of
the Robert S. Friedman Family Trust, filed a lawsuit in the Middlesex County
Superior Court of Massachusetts against the Company, asserting that the Company
has breached certain obligations the plaintiffs allege are due to them under a
separation agreement dated May 22, 1991 (the "Separation Agreement") between Mr.
Friedman and the Company. The plaintiffs are seeking monetary damages from the
Company based on their claim that, in connection with the 1994 recapitalization
of the Company, the Company allegedly made adjustments to the stock and options
of the officers of the Company and that a provision in the Separation Agreement
entitled the plaintiffs to equivalent
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adjustments with respect to the stock and options of the Company held by them.
The plaintiffs further allege that the breach by the Company resulted in a loss
to them of stock and options valued at $2.2 million. The Company believes that
these claims are without merit and intends to vigorously contest their validity.
The Company is self-insured for health costs to its employees up to an
annual aggregate amount of approximately $270,000, after which the Company's
insurance carrier pays for all additional claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 22, 1996, prior to the effective date of the Company's initial
public offering of its Class A Common Stock (the "IPO"), a majority of the
stockholders of each class of Bitstream's common stock and preferred stock voted
by written consent to amend the certificate of incorporation of the Company to
eliminate the shares of the Company's authorized Class A Preferred Stock and
Class B Preferred Stock remaining outstanding after all shares of such Class A
Preferred Stock and Class B Preferred Stock were automatically converted to
Class A Common Stock and Class B Common Stock, respectively, on the effective
date of the IPO.
On October 22, 1996, 2,782,575 shares, 391,162 shares, 288,646 shares and
30,884 shares of Bitstream's Class A Preferred Stock, Class B Preferred Stock,
Class A Common Stock and Class B Common Stock, respectively, were outstanding
and a total of 2,475,074 shares, 391,162 shares, 206,340 shares and 30,884
shares of Class A Preferred Stock, Class B Preferred Stock, Class A Common Stock
and Class B Common Stock, respectively, voted for the amendment to the Company's
Certificate of Incorporation.
EXECUTIVE OFFICERS OF THE COMPANY
The Company's executive officers and their ages as of March 15, 1997 are as
follows:
Name Age Position
- --------------------- ------ --------------------------------------------
C. Raymond Boelig 43 President and Chief Executive Officer
James D. Hart 39 Vice President, Finance and Administration,
Treasurer and Chief Financial Officer
John S. Collins 57 Vice President, Engineering and Development
Geoffrey W. Greve 39 Vice President, Type Operations
John S. Seguin 42 Vice President, Sales and Marketing
C. Raymond Boelig has been Chairman of the Board of Directors of the
Company since December 6, 1996, a director of the Company since May 1, 1996 and
President and Chief Executive Officer of the Company since September 1993. Mr.
Boelig has been employed by the Company since December 1987 and has served most
recently as Chief Operating Officer from July 1993 through September 1993, Vice
President of OEM Sales and Marketing from February 1992 through July 1993 and
Director of OEM Sales and Marketing from January 1990 through February 1992.
James D. Hart has been Vice President, Finance and Administration and Chief
Financial Officer of the Company since May 1, 1996 and Treasurer of the Company
since March 1994. From March 1994 until May 1, 1996, Mr. Hart also served as
Secretary and acting Chief Financial Officer of the Company. Prior to May 1,
1996, Mr. Hart was a Vice President of Interfid Ltd. ("Interfid"), a private
investment advisory firm, and his services were provided to the Company on an as
needed basis by Interfid. Mr. Hart was a Vice President of Interfid from 1990
until May 1, 1996 and was responsible for selecting, evaluating, monitoring and
negotiating the terms of venture capital investments made and proposed to be
made by Interfid's clients, principally in high technology areas.
John S. Collins has been Vice President of Engineering and Development
since 1988. Mr. Collins has been employed by the Company since 1986. Mr. Collins
was the inventor or a co-inventor in respect of a number of the patents held by
the Company relating to font imaging technology. He is the principal inventor of
the Company's TrueDoc technology. Mr. Collins holds a B.Sc. and a PhD in
Electrical Engineering from the University of London.
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Geoffrey W. Greve has been Vice President of Type Operations of the Company
since May 1995. Mr. Greve has been employed by the Company since 1987 and
previously served as Director of Production Control from 1990 through May 1995.
John S. Seguin has been Vice President of Sales and Marketing since August
1994. Mr. Seguin served as Vice President and General Manager of XLI Corp., a
corporation engaged in manufacturing printer enhancements, from July 1993
through July 1994, and as Vice President of Sales and Marketing of Howtek, Inc.,
a corporation engaged in manufacturing color imaging products, from November
1987 through July 1993.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Class A Common Stock of the Company began trading publicly on the
Nasdaq National Market tier of The Nasdaq Stock Market on October 30, 1996 under
the symbol "BITS." Prior to October 30, 1996, there was no public market for the
Class A Common Stock. The following table sets forth the high and low closing
sale prices of the Company's Class A Common Stock as reported on the Nasdaq
National Market for the period commencing October 30, 1996 through December 31,
1996. Such information reflects interdealer prices, without retail markup,
markdown, or commission, and may not represent actual transactions.
- --------------------------------- ---------------------------------------
HIGH LOW
----------------- ----------------
October 30 through December 31 6 1/2 4 5/8
As of March 14, 1997, the Company's Class A Common Stock was held by
approximately 34 holders of record and the Company believes that the Company's
Class A Common Stock was beneficially held by more than 400 holders. The
Company's Class B Common Stock was held by 1 holder beneficially and of record.
DIVIDENDS
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain earnings, if any, to support its growth
strategy and does not anticipate paying cash dividends on its capital stock in
the foreseeable future.
SALE OF UNREGISTERED SECURITIES
During the fiscal year ended December 31, 1996, the Company issued an
aggregate of 6,833 shares of Class A Common Stock in connection with the
exercise of 6,833 vested options and warrants issued under the Company's 1994
Stock Plan.
The sales and issuances of securities in the transactions described above
are deemed to be exempt from registration under the Securities Act of 1933, as
amended, by virtue of Rule 701 promulgated thereunder, in that they were issued
either pursuant to written compensatory benefits plans or pursuant to a written
contract relating to compensation, as provided by Rule 701.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of September
30, 1994 and 1995 and December 31, 1995 and 1996 and for each of the two years
in the period ended September 30, 1995, the three months ended December 31,
1995, and the year in the period ended December 31, 1996 have been derived from,
and are qualified by reference to, the Company's consolidated financial
statements which have been audited by Arthur Andersen LLP, independent public
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accountants, whose report thereon is included elsewhere in this Report. The
selected consolidated financial data presented below as of September 30, 1992
and 1993 and for each of the two years in the period ended September 30, 1993
have been derived from, and are qualified by reference to, the Company's audited
financial statements, which are not included in this Report. The selected
consolidated statement of operations data for the three months ended December
31, 1994 have been derived from the unaudited consolidated financial statements
of the Company, which are not included in this Report. In the opinion of
management, the unaudited financial statements of the Company have been prepared
on the same basis as the audited consolidated financial statements and include
all adjustments, consisting only of normal recurring adjustments, necessary for
the fair presentation of financial position and results of operations for these
periods. The selected consolidated financial data set forth below should be read
in conjunction with, and are qualified by reference to, the Consolidated
Financial Statements of the Company and Notes thereto, with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Report, and other financial data appearing elsewhere
herein.
Three Months Ended Year Ended
Year Ended September 30, December 31, December 31,
--------------------------------------------- --------------------------------
1992 1993 1994 1995 1994(1) 1995(1) 1996(1)
------- ------ ------ ------ --------- --------- --------
(In thousands, except per share data) (Unaudited)
Consolidated Statements of Operations Data:
Revenues...................................... $20,548 $17,430 $ 9,832 $8,970 $2,276 $2,355 $10,551
Cost of revenues.............................. 5,433 6,276 2,299 1,579 273 411 1,858
------- ------- ------- ------- ------ ------ -------
Gross profit................................ 15,115 11,154 7,533 7,391 2,003 1,944 8,693
------- ------- ------- ------- ------ ------ -------
Operating expenses:
Marketing and selling....................... 10,531 9,080 3,334 3,264 740 978 4,386
Research and development.................... 5,686 3,536 1,534 1,071 255 331 1,512
General and administrative.................. 2,237 3,006 1,281 1,261 266 385 1,533
Restructuring charge........................ -- -- 365 -- -- -- --
------- ------- ------- ------- ------ ------ -------
Total operating expenses.................. 18,454 15,622 6,514 5,596 1,261 1,694 7,431
------- ------- ------- ------- ------ ------ -------
Operating income (loss)....................... (3,339) (4,468) 1,019 1,795 742 250 1,262
------- ------- ------- ------- ------ ------ -------
Other income (expense), net................... (107) (18) (40) 11 (2) 17 (97)
------- ------- ------- ------- ------ ------ -------
Provisions for (benefit from) income taxes.... 178 319 133 118 17 (471) (94)
------- ------- ------- ------- ------ ------ -------
Net income (loss)............................. $(3,624) $(4,805) $ 846 $1,688 $ 723 $738 $1,337
======== ======== ======= ======= ====== ====== =======
Pro forma net income per common and common
equivalent share (2)........................ $ .38 $ .17 $ .27
======= ====== =======
Pro forma weighted average common and common
equivalent shares outstanding(2)......... 4,984 4,705 5,041
===== ====== ======
As of September 30, As of December 31,
---------------------------------------------- -------------------------
1992 1993 1994 1995 1995(1) 1996(1)
---- ---- ---- ---- ------- -------
(In thousands)
Consolidated Statements of Operations Data:
Cash and cash equivalents................. $ 347 $ 1,068 $ 654 $ 523 $ 390 $11,718
Working capital (deficit)................. (976) (2,266) (920) 881 1,254 14,220
Total assets.............................. 7,895 5,029 2,640 3,194 4,328 17,477
Long-term obligations..................... 566 17 125 124 210 .99
Mandatorily redeemable convertible preferred -- 1,204 2,311 -- -- --
Stock Stockholders' equity (deficit)...... 153 (2,803) (3,041) 1,066 1,806 15,359
- ------------------
(1) Effective December 31, 1995, the Company changed its fiscal year end from a
fiscal year end of September 30 to a calendar year end. The fiscal year
ended December 31, 1996 commenced January 1, 1996. Because of this change
in fiscal year, the Company is presenting certain consolidated statement of
operations data for the three months ended December 31, 1994 and December
31, 1995, as well as consolidated balance sheet data as of December 31,
1995.
(2) Calculated on the basis described in Note 3 of Notes to the Consolidated
Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company develops and markets software products and technologies to
enhance the creation, transport, viewing and printing of electronic documents.
The Company primarily licenses its products and technologies to OEMs and ISVs
for
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inclusion in their output devices, embedded systems, applications, Internet
authoring tools, World Wide Web browsers and other products.
The Company derives revenues principally from the following sources: (i)
licensing fees and royalty payments paid by OEM and ISV customers; (ii) direct
sales of custom and other type products to end users such as graphic artists,
desktop publishers and corporations; and (iii) sales of type products to foreign
customers primarily through distributors. Royalty payments due from OEM and ISV
customers, who generally pay specified minimums or fixed fees for the right to
include the Company's products as a component of a larger product for a
specified time period or volume limit, are generally recognized as revenue at
the time the software is delivered to the OEM or ISV customer. If the royalty
payments are to be received over a period of time greater than one year, the
amount recognized is discounted to the present value of the future minimum
payments. Certain OEM and ISV customers pay royalties only upon the sublicensing
of the Company's products to end users. Royalties due from these OEM and ISV
customers are recognized when such sublicenses are reported to the Company by
the OEM or ISV customer. Revenues from sales to end users and foreign
distributors are generally recognized at the time the software products are
delivered to the customer.
Cost of revenues is comprised of direct costs of licenses and royalties, as
well as direct costs of product sales to end users. Included in cost of licenses
and royalties are fees paid to third parties for the development or license of
rights to technology and/or unique typeface designs and the costs incurred in
the fulfillment of custom orders from OEM and ISV customers. Included in cost of
product sales to end users and distributors are the direct costs associated with
the duplication, packaging and shipping of products, and any royalty fees paid
to third parties for rights to license typefaces.
Operating expenses consist primarily of sales and marketing expenses
(principally sales compensation and commissions), research and development
expense and general and administrative expenses.
Except for the historical information contained herein, this Annual Report
on Form 10-K may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Investors are cautioned that
forward-looking statements are inherently uncertain. Actual performance and
results of operations may differ materially from those projected or suggested in
the forward-looking statements due to certain risks and uncertainties,
including, without limitation, market acceptance of the Company's products,
including its TrueDoc enabling technology, competition, the timely introduction
of new products, and when and on what terms the Merger might be consummated, if
at all. Additional information concerning certain risks and uncertainties that
would cause actual results to differ materially from those projected or
suggested in the forward-looking statements is contained in the Company's
filings with the Securities and Exchange Commission, including those risks and
uncertainties discussed in the Company's final Prospectus, dated October 30,
1996, included as part of the Company's Registration Statement on Form S-1
(333-11519), in the section entitled "Risk Factors." The forward-looking
statements contained herein represent the Company's judgment as of the date of
this report, and the Company cautions readers not to place undue reliance on
such statements.
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues represented by
certain items reflected in the Company's Statements of Operations Data for the
periods presented.
Three Months Ended Year Ended
Year Ended September 30, December 31, December 31,
------------------------- ----------------------- -----------
1994 1995 1994 1995 1996
-------- ------- ------- -------- ----
(Unaudited)
Revenues ........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues ................................... 23.4 17.6 12.0 17.5 17.6
----- ----- ----- ----- -----
Gross profit ...................................... 76.6 82.4 88.0 82.5 82.4
----- ----- ----- ----- -----
Operating expenses
Marketing and selling ............................. 33.9 36.4 32.5 41.5 41.6
Research and development .......................... 15.6 11.9 11.2 14.1 14.3
General and administrative ........................ 13.0 14.0 11.7 16.4 14.5
Restructuring charge .............................. 3.7 -- -- -- --
----- ----- ----- ----- -----
Total operating expenses ...................... 66.2 62.3 55.4 72.0 70.4
----- ----- ----- ----- -----
Operating income (loss) ........................... 10.4 20.1 32.6 10.5 12.0
----- ----- ----- ----- -----
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Three Months Ended Year Ended
Year Ended September 30, December 31, December 31,
------------------------- ------------------------ ----------------
1994 1995 1994 1995 1996
---- ---- ---- ---- ----
Other income (expense), net................... (0.4) -- (0.1) 0.8 (0.2)
----- ------ ----- ----- -----
Provision for (benefit from) income taxes..... 1.4 1.3 0.8 (20.0) (0.9)
----- ------- ----- ----- -----
Net income (loss)............................. 8.6% 18.8% 31.7% 31.3% 12.7%
===== ======= ====== ===== ======
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED SEPTEMBER 30, 1995
Revenues. Revenues for the fiscal year ended December 31, 1996 increased by
approximately $1.6 million, or 17.6%, to approximately $10.6 million, compared
to approximately $9.0 million for the fiscal year ended September 30, 1995.
Revenues from product sales to OEM and ISV customers for the fiscal year ended
December 31, 1996 increased by approximately $2.4 million, or 38%, to
approximately $8.7 million, from approximately $6.3 million for the fiscal year
ended September 30, 1995, as a result of the continuing acceptance of the
Company's type products and enabling technologies by OEM and ISV customers, as
well as the license by additional OEM and ISV customers of the Company's TrueDoc
technology. Revenues from product sales to end users and distributors for the
fiscal year ended December 31, 1996 declined by $700,000, or 27%, to $1.9
million, from $2.6 million for the fiscal year ended September 30, 1995, as a
result of the Company's withdrawal from the computer software reseller channel
beginning in fiscal year 1993.
Gross Profit. Gross profit for the fiscal year ended December 31, 1996
increased by approximately $1.3 million, or 17.6%, to approximately $8.7
million, compared to approximately $7.4 million for the fiscal year ended
September 30, 1995. The increase in gross profit was due primarily to the
increase in revenues. Gross profit as a percentage of revenues remained
approximately the same for both fiscal years.
Marketing and Selling. Marketing and selling expenses for the fiscal year
ended December 31, 1996 increased by approximately $1.1 million, or 33.3%, to
approximately $4.4 million, compared to approximately $3.3 million for the
fiscal year ended September 30, 1995, due to higher levels of sales commissions
and higher levels of promotional activities in support of new product
introductions.
Research and Development. Research and development expenses for the fiscal
year ended December 31, 1996 increased $441,000, or 41.2%, to approximately $1.5
million, compared to approximately $1.1 million for the fiscal year ended
September 30, 1995. This increase reflects the costs associated with the
addition of engineering personnel to support expanded development of the
Company's enabling technologies. Research and development expenses consist
primarily of personnel costs and fees paid for outside software development and
consulting fees. The Company expects to increase research and development
expenditures in absolute dollars in future periods to support development of
current and future products and technologies.
General and Administrative. General and administrative expenses for the
fiscal year ended December 31, 1996 increased by $272,000, or 22%, to $1.5
million, compared to $1.3 million for the fiscal year ended September 30, 1995.
General and administrative expenses principally consist of payroll costs to
executives, office, MIS and accounting personnel, as well as outside
professional fees. The Company expects to increase general and administrative
expenses in absolute dollars in the future to support the Company's growth and
infrastructure.
The Company recorded a tax benefit for the year ended December 31, 1996 of
$94,000. This benefit consisted of a reduction of the valuation allowance for
deferred tax assets of $268,000, partially offset by a current tax provision of
$174,000. The reduction to the valuation allowance is primarily based upon
estimated future utilization of net operating loss carryforwards and federal tax
credits. For the fiscal year ended September 30, 1995, the Company recorded a
tax provision of $118,000, reflecting an effective tax rate of 6.5%.
THREE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1994
Revenues. Revenues for the three months ended December 31, 1995 increased
by $79,000, or 3.5%, to approximately $2.4 million, compared to $2.3 million for
the three months ended December 31, 1994. This increase is due to the 18.0%
increase in revenues from product sales to OEM and ISV customers, from
approximately $1.5 million to $1.8 million, offset by a 26.8% decrease in
product sales to end users and distributors to $540,000 from $738,000.
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Gross Profit. Gross profit for the three months ended December 31, 1995
decreased by $59,000, or 2.9%, to approximately $1.9 million, compared to
approximately $2.0 million for the three months ended December 31, 1994. Gross
profit as a percentage of revenues for the three months ended December 31, 1995
declined to 82.5%, compared to 88.0% for the three months ended December 31,
1994. The decrease in gross profit as a percentage of revenues reflects an
increase in third party royalties and development fees.
Marketing and Selling. Marketing and selling expenses for the three months
ended December 31, 1995 increased by $238,000, or 32.2%, to $978,000, from
$740,000 for the three months ended December 31, 1994 as a result of additional
sales personnel and marketing programs needed to support new products.
Research and Development. Research and development expenses for the three
months ended December 31, 1995 increased by $76,000, or 29.8%, to approximately
$331,000, from approximately $255,000 for three months ended December 31, 1994.
The increase in research and development costs was due to higher outside
consulting fees and the hiring of an additional person into the Company's
software engineering group.
General and Administrative. General and administrative expenses for the
three months ended December 31, 1995 increased by $119,000, or 44.7%, to
$385,000, from $266,000 for the three months ended December 31, 1994 reflecting
an increase in payroll related costs in the three months ended December 31,
1995.
The Company recorded a tax benefit of $471,000 for the three months ended
December 31, 1995. This benefit consisted of the recognition of a net deferred
tax asset, of $600,000 partially offset by a current tax provision of $129,000.
The recognized deferred tax asset is based primarily upon estimated future
utilization of net operating loss carryforwards and federal tax credits. See
Note 4 to Notes to the Consolidated Financial Statements.
YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO YEAR ENDED SEPTEMBER 30, 1994
Revenues. Revenues for the fiscal year ended September 30, 1995 decreased
by $862,000, or 8.8%, to approximately $9.0 million, compared to approximately
$9.8 million for the fiscal year ended September 30, 1994. Revenues from product
sales to OEM and ISV customers for the fiscal year ended September 30, 1995
increased by $568,000, or 9.9%, to approximately $6.3 million, from
approximately $5.8 million for the fiscal year ended September 30, 1994, as a
result of the continuing acceptance of the Company's type products and enabling
technologies by OEM and ISV customers, as well as the license by eight OEM and
ISV customers of the Company's TrueDoc technology. Revenues from product sales
to end users and distributors for the fiscal year ended September 30, 1995
declined by approximately $1.4 million, or 35.2%, to $2.6 million, from $4.1
million for the fiscal year ended September 30, 1994, as a result of the
Company's withdrawal from the computer software reseller channel beginning in
fiscal year 1993.
Gross Profit. Gross profit for the fiscal year ended September 30, 1995
decreased by $142,000, or 1.2%, to approximately $7.4 million, compared to
approximately $7.5 million for the fiscal year ended September 30, 1994. Gross
profit as a percentage of revenues for the fiscal year ended September 30, 1995
increased to 82.4%, compared to 76.6% for the fiscal year ended September 30,
1994. The increase in gross profit as a percentage of revenue reflects the
decline in the costs of product sales to end users and distributors in the
fiscal year ended September 30, 1995 to $500,000, compared to approximately $1.4
million in the fiscal year ended September 30, 1994, arising from a decline in
royalties paid on products sold in the domestic computer software reseller
channel. The Company also realized a reduction in expenses resulting from the
closing of its Clinton, Massachusetts disk duplication and distribution
facility.
Marketing and Selling. Marketing and selling expenses for the fiscal year
ended September 30, 1995 remained relatively constant at approximately $3.3
million, compared to fiscal year ended September 30, 1994, although a greater
percentage of marketing and selling expenses in the fiscal year ended September
30, 1995 were in the area of OEM and ISV sales and marketing activities than in
the fiscal year ended September 30, 1994.
Research and Development. Research and development expenses for the fiscal
year ended September 30, 1995 decreased by $463,000, or 30.2%, to approximately
$1.1 million, compared to approximately $1.5 million for the fiscal year ended
September 30, 1994. The decrease in research and development expenses was due to
the full year impact of the Company's decision to restructure its type design
group in the prior fiscal year. The decrease in research and development
expenses related to the design of new type products was offset in part by an
increase in personnel in the Company's
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engineering group, which is responsible for developing software products such as
the Company's enabling technologies and TrueDoc.
General and Administrative. General and administrative expenses for the
fiscal year ended September 30, 1995 decreased by $20,000, or 1.6%, and remained
at approximately $1.3 million for the fiscal year ended September 30, 1995 as
compared to the fiscal year ended September 30, 1994.
The Company's effective tax rate for the fiscal year ended September 30,
1995 was 6.5% compared to 13.6% for the fiscal year ended September 30, 1994,
reflecting foreign withholding taxes and its utilization of available net
operating loss and tax credit carryforwards for federal and state income tax
purposes. At September 30, 1995, the Company had available net operating loss
carryforwards for income tax purposes of approximately $10.3 million and federal
tax credit carryforwards of approximately $2.0 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily through the public and
private sale of equity securities, cash flow from operations, and certain bank
and stockholder indebtedness.
In November 1996, the Company completed an initial public offering ("IPO")
of 2,415,000 shares of its Class A Common Stock at $6.00 per share. Net proceeds
from the IPO were approximately $12.2 million, of which approximately $1.5
million was used to repay outstanding indebtedness.
The Company's operating activities provided cash of $339,000 and $248,000
for the fiscal years ended September 30, 1994 and 1995, respectively, used cash
of $304,000 for the three months ended December 31, 1995, and provided cash of
$487,000 for the fiscal year ended December 31, 1996. The Company's investing
activities used cash of $65,000 and $137,000 for the fiscal years ended
September 30, 1994 and 1995, respectively, used cash of $115,000 for the three
months ended December 31, 1995, and used cash of $866,000 for the fiscal year
ended December 31, 1996. Investing activities consisted principally of the
purchase of property and equipment to support the growing employee base and
corporate infrastructure.
The Company's financing activities used cash of $688,000 and $242,000 for
the fiscal years ended September 30, 1994 and 1995, respectively, to fund a net
reduction of outstanding indebtedness. For the year ended December 31, 1996,
cash flow from financing activities was approximately $11.7 million, including
approximately $12.2 million from the net proceeds of the IPO. As of December 31,
1996, the Company had cash and cash equivalents of approximately $11.7 million,
an increase of approximately $11.3 million from $390,000 at December 31, 1995.
Working capital was approximately $14.2 million at December 31, 1996, as
compared to approximately $1.3 million at December 31, 1995.
The Company believes that the cash generated from the proceeds of the IPO,
cash from operations and current cash balances will be sufficient to meet the
Company's operating and capital requirements for at least the next 12 months.
There can be no assurance, however, that the Company will not require additional
financing in the future. If the Company were required to obtain additional
financing in the future, there can be no assurance that sources of capital will
be available on terms favorable to the Company, if at all.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The index to Financial Statements appears on page F-1, the Independent
Auditors' Report appears on page F-2, and the Financial Statements and Notes to
Financial Statements appear on pages F-3 to F-12.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item is incorporated by reference herein
to the definitive Proxy Statement to be filed by the Company pursuant to
Regulation 14A within 120 days after the close of the 1996 fiscal year. Certain
information with regard to the executive officers of the Company is contained in
Item 4 hereof and is incorporated by reference in this Part III.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is incorporated herein by reference
to the definitive Proxy Statement to be filed by the Company pursuant to
Regulation 14A within 120 days after the close of the 1996 fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is incorporated herein by reference
to the definitive Proxy Statement to be filed by the Company pursuant to
Regulation 14A within 120 days after the close of the 1996 fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is incorporated herein by reference
to the definitive Proxy Statement to be filed by the Company pursuant to
Regulation 14A within 120 days after the close of the 1996 fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS.
An index to Financial Statements appears on page F-1.
2. SCHEDULES.
None.
3. EXHIBITS.
3 Certificate of Incorporation and Bylaws
*3.1.1 Certificate of Incorporation of the Company
++3.1.2 Certificate of Amendment to Certificate of
Incorporation of the Company
*3.2 Bylaws of the Company.
4 Instruments Defining the Rights of Security Holders
*4.1 Specimen Common Stock Certificate.
10 Material Contracts
*10.1 1996 Stock Plan
*10.2 1994 Stock Plan
*10.3 Agreement and Plan of Recapitalization dated October 28, 1994
*10.4 Lease between Athenaeum Group and the Company dated
March 17, 1992
*10.4.1 First Lease Amendment between Athenaeum Group and the
Company dated September 7, 1993
*10.4.2 Second Lease Amendment between Athenaeum Group and the
Company dated July 13, 1994
*10.4.3 Third Lease Amendment between Athenaeum Group and the
Company dated July 15, 1996
++10.4.4 Fourth Lease Amendment between Athenaeum Property LLC
and the Company dated March 3, 1997
18
19
*10.5 Bridge Loan Agreement, dated February 22, 1996 among
the Company and certain bridge lenders named therein
*10.5.1 Amendment to Loan Agreement and to Waiver and
Subordination Agreements dated August 22, 1996 among
the Company and certain bridge lenders named therein
*10.5.2 Amendment No. 2 to Loan Agreement and to Waiver and
Subordination Agreements dated October 9, 1996 among
the Company and certain bridge lenders named therein
#10.6 Software License Agreement between Novell, Inc. and
the Company, dated as of September 6, 1996
#10.7 Agreement between Tumbleweed Software Corporation
and the Company dated as of June 10, 1996
*10.8 Agreement dated as of May 1, 1996 among the
Company and James D. Hart
*10.9 Form of Indemnification Agreement between the
Company, its directors and certain of its officers
++10.10 Agreement and Plan of Merger dated as of March 27, 1997
among the Company, Archetype Acquisition Corporation
and Archetype, Inc.
++10.11 1997 Stock Plan
21 Subsidiaries of Registrant
++21.1 Subsidiaries of the Company
27 Financial Data Schedule
++27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the year
ended December 31, 1996.
- ----------
++ Filed herewith.
* Previously filed.
# Previously filed in redacted form subject to a request for confidential
treatment pursuant to Rule 406 under the Securities Act. The confidential
information that has been omitted has been filed separately with the Securities
and Exchange Commission with the request for confidential treatment.
19
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Boston,
Commonwealth of Massachusetts on this 31 day of March, 1997.
BITSTREAM INC.
By: /s/ C. Raymond Boelig
---------------------
C. Raymond Boelig
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities indicated
below on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ C. Raymond Boelig Chairman of the Board, Director, President March 31, 1997
- ----------------------------------------- and Chief Executive Officer (Principal
C. Raymond Boelig Executive Officer)
/s/ James D. Hart Vice President, Finance and March 31, 1997
- ----------------------------------------- Administration, Treasurer and Chief
James D. Hart Financial Officer (Principal Financial and
Accounting Officer)
/s/ Amos Kaminski Director March 31, 1997
- -----------------------------------------
Amos Kaminski
/s/ David G. Lubrano Director March 31, 1997
- -----------------------------------------
David G. Lubrano
/s/ George B. Beitzel Director March 31, 1997
- -----------------------------------------
George B. Beitzel
20
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Bitstream Inc.:
We have audited the accompanying consolidated balance sheets of Bitstream
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1995 and 1996,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the two years in the period ended September
30, 1995, the three-month period ended December 31, 1995 and for the year ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bitstream
Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the two years in the period ended
September 30, 1995, the three-month period ended December 31, 1995, and for the
year ended December 31, 1996, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Boston, Massachusetts
February 11, 1997
F-2
22
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------
1995 1996
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 390,000 $ 11,718,000
Accounts receivable, net of allowance for doubtful accounts ............... 1,846,000 1,552,000
Current portion of long-term accounts receivable and extended plan accounts
receivable, net of allowance for doubtful accounts ...................... 536,000 1,667,000
Deferred income taxes ..................................................... 600,000 868,000
Other current assets ...................................................... 194,000 434,000
------------ ------------
Total current assets .............................................. 3,566,000 16,239,000
------------ ------------
Property and equipment, net ................................................. 530,000 924,000
------------ ------------
Other assets
Long-term accounts receivable, net of current portion ..................... 228,000 123,000
Other assets .............................................................. 4,000 191,000
------------ ------------
232,000 314,000
------------ ------------
Total assets ...................................................... $ 4,328,000 $ 17,477,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ............................................................. $ 300,000 $ --
Current maturities of capital lease obligations ........................... 134,000 36,000
Accounts payable .......................................................... 466,000 513,000
Accrued expenses .......................................................... 1,412,000 1,470,000
------------ ------------
Total current liabilities ......................................... 2,312,000 2,019,000
------------ ------------
Capital lease obligations, less current maturities .......................... 184,000 79,000
------------ ------------
Other long-term liabilities ................................................. 26,000 20,000
------------ ------------
Commitments and contingent liabilities (Notes 7 and 8)
Stockholders' equity
Convertible preferred stock ............................................... 32,000 --
Common stock .............................................................. 3,000 59,000
Additional paid-in capital ................................................ 14,449,000 26,637,000
Accumulated deficit ....................................................... (12,630,000) (11,293,000)
Cumulative translation adjustment ......................................... (48,000) (44,000)
------------ ------------
Total stockholders' equity ........................................ 1,806,000 15,359,000
------------ ------------
Total liabilities and stockholders' equity ........................ $ 4,328,000 $ 17,477,000
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
23
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months
Years Ended September 30, Ended Year Ended
----------------------------- December 31, December 31,
1994 1995 1995 1996
------------ ------------ ------------ ------------
Revenues ........................................................ $ 9,832,000 $ 8,970,000 $ 2,355,000 $ 10,551,000
Cost of revenues ................................................ 2,299,000 1,579,000 411,000 1,858,000
------------ ------------ ------------ ------------
Gross profit .................................................. 7,533,000 7,391,000 1,944,000 8,693,000
------------ ------------ ------------ ------------
Operating expenses:
Marketing and selling ......................................... 3,334,000 3,264,000 978,000 4,386,000
Research and development ...................................... 1,534,000 1,071,000 331,000 1,512,000
General and administrative .................................... 1,281,000 1,261,000 385,000 1,533,000
Restructuring charge .......................................... 365,000 -- -- --
------------ ------------ ------------ ------------
Total operating expenses .................................... 6,514,000 5,596,000 1,694,000 7,431,000
------------ ------------ ------------ ------------
Operating income ............................................ 1,019,000 1,795,000 250,000 1,262,000
------------ ------------ ------------ ------------
Other income (expense) , net .................................... (40,000) 11,000 17,000 (19,000)
------------ ------------ ------------ ------------
Income before provision for (benefit from) income taxes ..... 979,000 1,806,000 267,000 1,243,000
Provision for (benefit from) income taxes ....................... 133,000 118,000 (471,000) (94,000)
------------ ------------ ------------ ------------
Net income .................................................... $ 846,000 $ 1,688,000 $ 738,000 $ 1,337,000
============ ============ ============ ============
Pro forma net income per common and common
equivalent share ................................................ $ .38 $ .17 $ .27
============ ============ ============
Pro forma weighted average common and common equivalent
shares outstanding
4,983,678 4,704,805 5,041,054
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
24
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
CONVERTIBLE PREFERRED
STOCK COMMON STOCK
-------------------- ---------------------- ADDITIONAL
NUMBER $.01 NUMBER $.01 PAID-IN
OF SHARES PAR VALUE OF SHARES PAR VALUE CAPITAL
---------- -------- ---------- -------- ------------
BALANCE,
SEPTEMBER 30, 1993 ..... 3,052,647 $ 31,000 1,759,163 $ 18,000 $ 13,391,000
Exercise of stock
options ............. -- -- 67 -- --
Accretion of Series H
and Series I
mandatorily
redeemable
convertible
preferred
stock to redemption
value ............... -- -- -- -- (1,107,000)
Transfer of notes
receivable into
treasury stock ...... -- -- -- -- --
Reduction of notes
receivable .......... -- -- -- -- --
Cancellation of notes
receivable and Series
H convertible
preferred stock...... -- -- -- -- (7,000)
Cumulative translation
adjustment .......... -- -- -- -- --
Net income ............ -- -- -- -- --
---------- -------- ---------- -------- ------------
BALANCE,
SEPTEMBER 30, 1994 .... 3,052,647 31,000 1,759,230 18,000 12,277,000
Accretion of Series H
and Series I
mandatorily
redeemable
convertible
preferred
stock to redemption
value ............... -- -- -- -- (133,000)
Net adjustment to
reflect the
recapitalization of
the Company ......... 121,090 1,000 (1,446,553) (15,000) 2,305,000
Net income ............. -- -- -- -- --
---------- -------- ---------- -------- ------------
BALANCE,
SEPTEMBER 30, 1995 .... 3,173,737 32,000 312,677 3,000 14,449,000
Cumulative translation
adjustment .......... -- -- -- -- --
Net income ............. -- -- -- -- --
---------- -------- ---------- -------- ------------
BALANCE,
DECEMBER 31, 1995 ..... 3,173,737 32,000 312,677 3,000 14,449,000
Exercise of stock
options and
warrants ............ -- -- 6,833 -- 5,000
Cumulative translation
adjustment .......... -- -- -- -- --
Conversion of
convertible
preferred stock into
common stock ........ (3,173,737) (32,000) 3,173,737 32,000 --
Sale of 2,415,000
shares of common stock
in initial public
offering, net of
issuance costs
of $1,369,000........ -- -- 2,415,000 24,000 12,183,000
Net income ............ -- -- -- -- --
---------- -------- ---------- -------- ------------
BALANCE,
DECEMBER 31, 1996 ...... -- $ -- 5,908,247 $ 59,000 $ 26,637,000
========== ======== ========== ======== ============
TOTAL
CUMULATIVE STOCKHOLDERS'
ACCUMULATED TRANSLATION TREASURY NOTES EQUITY
DEFICIT ADJUSTMENT STOCK RECEIVABLE (DEFICIT)
------------ -------- --------- --------- ------------
SEPTEMBER 30, 1993 ..... $(15,902,000) $(32,000) $ (17,000) $(292,000) $ (2,803,000)
Exercise of stock
options ............. -- -- -- -- --
Accretion of Series H
and Series I
mandatorily
redeemable
convertible
preferred
stock to redemption
value ............... -- -- -- -- (1,107,000)
Transfer of notes
receivable into
treasury stock ...... -- -- (230,000) 230,000 --
Reduction of notes
receivable .......... -- -- -- 41,000 41,000
Cancellation of notes
receivable and Series
H convertible
preferred stock...... -- -- -- 7,000 --
Cumulative translation
adjustment .......... -- (18,000) -- -- (18,000)
Net income ............ 846,000 -- -- -- 846,000
------------ -------- --------- --------- ------------
BALANCE,
SEPTEMBER 30, 1994 .... (15,056,000) (50,000) (247,000) (14,000) (3,041,000)
Accretion of Series H
and Series I
mandatorily
redeemable
convertible
preferred
stock to redemption
value................ -- -- -- -- (133,000)
Net adjustment to
reflect the
recapitalization of
the Company ......... -- -- 247,000 14,000 2,552,000
Net income ............. 1,688,000 -- -- -- 1,688,000
------------ -------- --------- --------- ------------
BALANCE,
SEPTEMBER 30, 1995 .... (13,368,000) (50,000) -- -- 1,066,000
Cumulative translation
adjustment .......... -- 2,000 -- -- 2,000
Net income ............ 738,000 -- -- -- 738,000
------------ -------- --------- --------- ------------
BALANCE,
DECEMBER 31, 1995 ..... (12,630,000) (48,000) -- -- 1,806,000
Exercise of stock
options and
warrants ............ -- -- -- -- 5,000
Cumulative translation
adjustment .......... -- 4,000 -- -- 4,000
Conversion of
convertible
preferred stock into
common stock -- -- -- -- --
Sale of 2,415,000
shares of common stock
in initial public
offering, net of
issuance costs of
$1,269,000 -- -- -- -- 12,207,000
Net income ........... $ 1,337,000 -- -- -- 1,337,000
------------ -------- --------- --------- ------------
BALANCE,
DECEMBER 31, 1996 ...... $(11,293,000) $(44,000) $ -- $ -- $ 15,359,000
============ ======== ========= ========= ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
25
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS
ENDED YEAR ENDED
YEARS ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
------------- ------------ ----------- ------------
Cash Flows from Operating Activities:
Net income.................................................. $ 846,000 $ 1,688,000 $ 738,000 $ 1,337,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities --
Depreciation and amortization............................. 476,000 214,000 36,000 292,000
Deferred income tax benefit............................... -- -- (600,000) (268,000)
Net loss (gain) on disposal of property and equipment, net.... 51,000 (14,000) (22,000) (7,000)
Issuance of common stock for services rendered............ -- 108,000 -- --
Changes in assets and liabilities --
Accounts receivable..................................... 1,272,000 (754,000) (613,000) 294,000
Long-term and extended plan accounts receivable......... (277,000) 96,000 205,000 (1,026,000)
Other current assets.................................... 554,000 24,000 (34,000) (240,000)
Accounts payable........................................ (2,553,000) (453,000) (333,000) 47,000
Accrued expenses........................................ (30,000) (661,000) 319,000 58,000
------------- ------------ ----------- ------------
Net cash provided by (used in) operating activities..... 339,000 248,000 (304,000) 487,000
------------- ------------ ----------- ------------
Cash Flows from Investing Activities:
Purchase of property and equipment.......................... (68,000) (197,000) (140,000) (679,000)
Proceeds from sale of property and equipment................ -- 60,000 24,000 --
Decrease in other assets.................................... 3,000 -- 1,000 (187,000)
------------- ------------ ----------- -------------
Net cash used in investing activities................. (65,000) (137,000) (115,000) (866,000)
------------- ------------ ----------- ------------
Cash Flows from Financing Activities:
Proceeds from long-term debt and capital lease obligations -- -- 300,000 324,000
Proceeds from line of credit................................ -- -- -- 100,000
Payments on line of credit.................................. (194,000) -- -- (400,000)
Proceeds from debt to stockholders.......................... -- -- -- 600,000
Payments on debt to stockholders............................ -- -- -- (600,000)
Payments on long-term debt and capital lease obligations.... (496,000) (244,000) (26,000) (527,000)
Change in other long-term liabilities....................... (3,000) 2,000 12,000 (2,000)
Receipts of payments on notes receivable.................... 5,000 -- -- --
Proceeds from sale of common stock.......................... -- -- -- 12,207,000
Proceeds from the exercise of stock options and warrants... -- -- -- 5,000
------------- ------------ ----------- ------------
Net cash provided by (used in) financing activities... (688,000) (242,000) 286,000 11,707,000
------------- ------------ ----------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents......... (414,000) (131,000) (133,000) 11,328,000
Cash and Cash Equivalents, beginning of period................ 1,068,000 654,000 523,000 390,000
------------- ------------ ----------- ------------
Cash and Cash Equivalents, end of period...................... $ 654,000 $ 523,000 $ 390,000 $11,718,000
============= ============ =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest...................................... $ 72,000 $ 16,000 $ 6,000 $ 29,000
============= ============ =========== ============
Cash paid for income taxes.................................. $ -- $ 5,000 $ 93,000 $ 41,000
============= ============ =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
26
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Bitstream Inc. and subsidiaries (the "Company") develop and market software
products and technologies to enhance the creation, transport, viewing and
printing of electronic documents.
The Company primarily licenses its products and technologies to original
equipment manufacturers ("OEMs"), and independent software vendors ("ISVs") for
inclusion in their output devices, embedded systems, applications, Internet
authoring tools, World Wide Web browsers and other products. The Company
generally enters into a license with such customers and charges a combination of
licensing fees and royalty payments. In addition, Bitstream sells custom and
other type products directly to end users such as graphic artists, desktop
publishers and corporations.
In fiscal year 1993, the Company decided to curtail product distribution
through the computer software reseller channel and to concentrate the efforts of
the Company on the development and sale of technology and products to OEM and
ISV customers. In conjunction with this shift in strategic focus, the Company
reorganized its operations, changed its senior management and restructured the
Company's type design group. During November 1994 the Company consummated a plan
of recapitalization (see Note 9(a)).
The Company is subject to risks common to technology-based companies,
including dependence on key personnel, rapid technological change, competition
from alternative product offerings and larger companies, and challenges to the
development and marketing of commercial products and services.
The accompanying consolidated financial statements reflect the application
of certain accounting policies as described in this note and elsewhere in the
accompanying consolidated financial statements and notes. The preparation of the
accompanying consolidated financial statements required the use of certain
estimates by management in determining the Company's assets, l