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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
For the fiscal year ended December 31, 1997
or
[ ] 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.
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(Exact name of registrant as specified in its charter)
DELAWARE 04-2744890
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
215 FIRST STREET
CAMBRIDGE, MASSACHUSETTS 02142
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(Address of principal executive offices) (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
Not Applicable
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(Former name, former address and former fiscal year, if changed since
last report)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 229.405 of this chapter) is contained herein, and
will not be contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements 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 23, 1998 was approximately $11.9 million.
On March 23, 1998, there were 6,625,440 shares of Class A Common Stock, par
value $0.01 per share, and no 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 1998 Annual
Meeting of Stockholders, to be filed with the Securities and Exchange
Commission, are incorporated by reference into Part III of this Annual Report on
Form 10-K.
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INDEX
PAGE
NUMBERS
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PART I.
ITEM 1. BUSINESS............................................................. 3
ITEM 2. PROPERTIES........................................................... 10
ITEM 3. LEGAL PROCEEDINGS.................................................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................. 11
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................................ 12
ITEM 6. SELECTED FINANCIAL DATA.............................................. 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............................................. 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................... 18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................... 18
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................... 18
ITEM 11. EXECUTIVE COMPENSATION............................................... 19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT......................................................... 19
ITEM 13. CERTAIN REALTIONSHIPS AND RELATED TRANSACTIONS....................... 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...... 19
SIGNATURES............................................................... 22
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PART I
ITEM 1. BUSINESS
GENERAL
Bitstream Inc. ("Bitstream" or the "Company") develops, markets and supports
software products and technologies to enhance the creation, management and
transport of electronic documents. The Company is organized into two operating
divisions. The Type and Technology division primarily licenses its products,
including text imaging and page layout 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 Archetype Applications
division develops server-based publishing applications that are sold to
publishers, advertising agencies, and other major corporations.
The Company's products and technologies consist of: (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
for clients working with raster image processors and servers; (iii) NuDoc, an
advanced document composition technology; (iv) type products, such as libraries
of type designs (fonts) and custom type products; (v) enabling technologies,
which deliver typographic capabilities to hardware output devices and software
applications; and (vi) TrueDoc(R), a portable type technology providing for the
efficient distribution of text, with fidelity, in a highly compact format.
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. 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.
In January 1997, the Company purchased substantially all of the assets of
Mainstream Software Solutions Ltd., 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. As a result,
Bitstream directly distributes its own products in the United Kingdom.
In April 1997, the Company acquired Archetype, Inc. ("Archetype"), a
Delaware corporation primarily engaged in the business of developing and
marketing server-based information management computer software for the graphic
arts industry. Archetype was founded in 1985 to develop page layout technology
to capture the look of a document in a digital "archetype". In 1991, Archetype
built up a Value Added Reseller ("VAR") distributed product line for sale
primarily to end users. Archetype's first product was InterSep(TM), an advanced
open prepress interface and print management products for raster image
processors and servers. In late 1995, Archetype introduced its second product,
MediaBank(TM), a digital asset management product that allows for the
cataloging, archiving, and management of electronic images, text and documents.
INDUSTRY BACKGROUND
Type Industry
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.
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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
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.
Publishing Industry
The worldwide publishing industry is undergoing significant change in
response to competitive pressures. Publishers of newspapers and magazines are
consolidating into larger organizations with multiple titles, formats and
geographic locations. Publishing enterprises are also facing competition from
alternative publishing on new media such as the Internet. Increased competition
for subscribers has resulted in a trend toward more demographically targeted
editorial, feature and advertising content. As a result, publishers are
beginning to view their content assets, such as photos, graphics, illustrations,
text and captions, as key competitive differentiators. Publishers are seeking
ways to improve the management and utilization of that content both within their
organizations and with their customers, while continuing to meet demanding time
schedules and reduce costs.
Traditionally, publishers used highly labor-intensive systems for
production of printed materials, such as manual typesetting. As computer
technology evolved during the 1960's and 1970's, publishers invested in
mainframe-based computer equipment which automated and emulated these
traditional production processes. Mainframe systems shortened the production
process but were expensive, difficult to access, inflexible to use and required
significant training, support and service.
These limitations were addressed by the widespread adoption during the late
1980's of PC-based solutions for desktop publishing that were cost-effective,
easy to use and highly flexible. For the first time, personnel across the
editorial and production process could use software to perform typesetting and
page-making functions at the desktop, bringing reporters, writers and editors
closer to the final, printed product. This software also enabled users outside
the traditional publishing industry to publish and distribute high-quality
printed materials in-house.
THE BITSTREAM SOLUTION
Bitstream products and technologies enhance the creation, management and
transport of electronic documents. These products and technologies 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 including 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. The Company's
application products provide innovative solutions for accelerating prepress and
Internet publishing through advanced information object management. The
Company's products decrease production costs by organizing files on the network
and tracking jobs and page elements.
STRATEGY
Bitstream's goal is to become the leading supplier of 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:
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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). 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, ISV and VAR Distribution Channels. During 1997, the Company
concentrated its efforts on the development and sale of technology and products
to OEM and ISV customers and through Value Added Resellers (VARs). The Company
believes that marketing to OEMs and ISVs and distributing its application
products through VARs 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 and expanding its VAR channel.
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 (W3C) and the Unicode Consortium.
PRODUCTS
The Company's products and technologies consist of (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; (iii) NuDoc(TM), an advanced
document composition technology; (iv) type products, such as libraries of type
designs (fonts) and custom type products; (v) enabling technologies, which
deliver typographic capabilities to hardware output devices and software
applications; and (vi) TrueDoc, a portable type technology providing for the
efficient distribution of text, with fidelity, in a highly compact format.
Each of the Company's major products and technologies is described in greater
detail below.
MediaBank and MediaBank Enterprise
MediaBank is a server-based information and media asset management package
that archives and tracks images, pages, text, and multi-media files on a
network. It provides all members of a publishing or print production workgroup
permissioned access to any job or job elements regardless of whether they have
been archived or are still in process. The software package consists of the
server application which can be configured for five or more users and client
software which allows users to browse the database from Macintosh or Windows
platforms. It also offers a wide range of compatibility with server platforms
such as Windows NT, Sun, RS/6000, Silicon Graphics, and Apple Network Servers.
MediaBank Enterprise, expected to be released in 1998, is an enhanced version of
MediaBank that will run as an application server on a choice of high-end,
enterprise-level databases such as Microsoft SQL server or Oracle.
InterSep OPI and InterSep Output Manager
InterSep OPI Server is an advanced Open Prepress Interface and print
manager. It offers the acceleration of OPI processing, freeing up MacOS and
Windows workstations. InterSep Output Manager is a desktop print queue manager
focused on the effective coordination of PostScript output. It displays queues,
output devices and print status information on Mac or Windows client
workstations in an easy to learn graphical display.
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NuDoc
NuDoc is an advanced document composition engine. Leveraging
object-oriented technology, NuDoc is a reusable building block for document
processing applications. NuDoc SDK object classes provide an Application
Programming Interface (API) that supports the import, editing, display, or
printing of electronic documents. One of the strengths of NuDoc is its ability
to dynamically create layout intensive pages from separate content and style
file imports. In NuDoc, a document object is made of style, content, and page
layout sub-objects. A style object contains rules that govern the form (or
appearance) of the document. Content elements such as words, images, movies,
etc. are organized into a tagged tree structure that represents the logical
organization of the information (sections, sub-sections, etc.). The W3C's
extensible markup language (XML) is the default content data representation.
Styles are represented by a set of model objects. NuDoc uses a new style file
format called Template Style Language (TSL) to represent the model objects. The
TSL styles describe the colors, fonts, and geometric rules that govern how
structured content is formatted into its visual appearance. The TSL uses a
flexible container metaphor to describe how to adjust the sizes and positions of
text, images, and other containers to result in a well designed page.
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.
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."
Font Navigator(TM) is a powerful font management tool that allows users a
quick and easy way to find, install, and organize fonts into manageable groups.
This tool also features a way to view and print font samples.
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
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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.
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.
Bitstream JET
Java-based Extendible Typography (Bitstream JET(TM)) is a complete outline
font scaling and rasterization solution for Java applets, applications, and
information. Using Bitstream JET Java programs will have access to a rich
diversity of fonts without having to rely on native methods or extension APIs.
In developing Bitstream JET, Bitstream completely redesigned the scaling and
rasterizing of outline fonts. The resulting object-oriented architecture
modularizes these two processes so that new capabilities can be plugged in.
Bitstream JET works with TrueType(R) and Postscript(TM) Type 1 fonts via
Bitstream's TrueDoc technology. Direct font format rendering (including
OpenType) is planned for future releases.
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:
- - TrueDoc-based utilities for the graphic arts market that address font
portability issues in the electronic delivery of desktop publishing
documents.
- - 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.
- - PageFlex(TM), which is expected to be released in late 1998, is a variable
data front-end solution for driving digital presses built from modular
components and open standards. It is the first solution to use XML as the
intermediate data format between databases and the page composition
process. The output formatter is based on Bitstream's NuDoc page
composition engine. NuDoc offers control over the graphic design of page
templates while maintaining a strict separation of form from the input XML
content.
MARKETING AND SALES
The principal objective of the Company's marketing strategy is to continue
to expand the sale of (a) the Company's type products and software to OEMs and
ISVs who integrate the Company's software into their own products and (b) the
Company's application software to end users through its VAR channel. 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.
The Company's Type and Technology sales organization, as of March 23, 1998,
consisted of 13 people focused on OEM and ISV sales and four people focused on
corporate direct sales. The Company's Archetype Applications sales organization,
consisted of seven people focused on sales through the Company's VAR channel.
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 San Mateo,
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 sales personnel receive a base salary plus
commissions based on meeting annual sales targets, with additional commissions
for sales in excess of annual targets.
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The Company seeks to enhance its relationships with existing customers
through its 11 person training and 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 nine 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.
CUSTOMERS
The Company licenses type products, enabling technologies and TrueDoc to a
wide variety of OEM and ISV customers. The Company sells custom and other type
products directly to corporate customers. The Company licenses its application
products to publishers, advertising agencies, retailers, printers, service
bureaus and other major corporations. No single Bitstream customer accounted for
10% or more of the Company's revenues for the year ended December 31, 1997. 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. 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. The Company's major customers, which are representative of the
various industry groups served by the Company, include those listed below.
OEMS AND ISVS
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Apple Computer, Inc. Corel Systems Corporation DaiNippon Screen Mfg. Co. Ltd.
Digital Equipment Corporation Hewlett-Packard Company Kyocera Corp.
Ricoh Company, Ltd. Seiko Epson Corporation Sharp Electronics Corporation
Silicon Graphics, Inc. Sony Electronics Inc. Sun Microsystems, Inc.
CORPORATE END USERS
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CNA Insurance Company Kemper Financial Services Price Waterhouse L.L.P.
PUBLISHERS AND ADVERTISING AGENCIES
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MacMillan Publishing Reader's Digest Bronner, Slosberg and Humphrey
CATALOGERS AND RETAILERS
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Ames Department Store Coupon Clipper The May Co.
Cabela's J. Crew
PRINTERS AND SERVICE BUREAUS
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Graphics Express Quebecor RR Donnelly
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 advancing products and
technologies developed by the Archetype Applications division for sale through
its VAR channel. The Company maintains specific expertise in the areas of font
formats, multi-lingual fonts, font portability, font compression and font
processing technology, digital asset management, OPI server, composition and
media technology.
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 TrueDoc in platform specific format
are currently available for Windows and UNIX. While the Company had anticipated
releasing a Java version of TrueDoc in late 1997, the Company decided it was in
its best interest to redirect some of its research and development resources
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toward the development of other products during 1997. The Company currently
expects to have a Java version of TrueDoc that will work on all computing
platforms available in late 1998. There can, however, be no assurance that such
a version of TrueDoc will be completed in the late 1998, if at all.
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. The Company believes that
while it competes with no single organization across its entire product line, a
variety of companies offer products which compete some of its products. Certain
of the Company's competitors, including Adobe Systems Corporation 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.
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. The competition for the Company's sales
of its digital asset management software principally comes from Cascade Systems,
Inc., the Publishing Group at Imation Enterprises Corp. and MediaManager Inc.
The competition for the Company's OPI Server principally comes from the
Publishing Group at Imation Enterprises Corp., Helios Design Laboratories and
Xinet, Inc.
The Company believes that the principal competitive factors affecting its
market include product features and functionalities, such as scalability, ease
of integration, ease of implementation, ease of use, quality, performance,
price, customer service and support, and effectiveness of sales and marketing
efforts. Although the Company believes that it currently competes effectively
with respect to such factors, there can be no assurance that the Company will be
able to maintain its competitive position against current and potential
competitors.
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 customers.
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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 23, 1998, the Company employed 102 persons, including 33 in
sales and marketing, 48 in research and development and 21 in general
administrative functions. Of the Company's 102 employees, 98 are full time and 4
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 work
stoppages. The Company considers its employee relations to be good.
Bitstream(R) and TrueDoc(R) are federally registered trademarks of the
Company. All other trademarks, service marks or tradenames referred to in this
Annual Report are the property of their respective owners.
ITEM 2. PROPERTIES
The Company's corporate headquarters is located in Cambridge, Massachusetts
where it currently leases approximately 27,500 square feet, of which
approximately 17,200 square feet is under a lease expiring in October 1998, with
the right to renew for an additional five years, and approximately 10,300 square
feet is under a lease amendment expiring in October 2003. 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.
On December 10, 1997, in consideration of a payment of $560,000 by the
Company's insurance carrier, of which the Company contributed $56,000, the
Museum formally released all claims it had against Bitstream in such lawsuit.
The case was dismissed with prejudice by Bitstream and the Museum on December
30, 1997.
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 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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE COMPANY
The Company's executive officers and their ages as of March 23, 1998 are as
follows:
NAME AGE POSITION
- ----------------- --- -------------------------------------------------
Charles Ying 51 Chairman of the Board and Chief Executive Officer
John S. Collins 58 Vice President, Engineering
Wendy Darland 41 Vice President, Finance and Administration, and
Chief Financial Officer
Geoffrey W. Greve 40 Vice President, Product Development
Susan Robertson 36 Vice President and General Manager, Archetype
Applications Division
John L. Seguin 43 Vice President and General Manager, Type and
Technology Division
Paul Trevithick 38 Vice President, Marketing
- ----------
Charles Ying has been Chief Executive Officer of the Company since May 1997
and Chairman of the Board of Directors since April 1997. From January 1992 to
January 1996, Mr. Ying served as Chief Executive Officer of Information
International Inc., a corporation engaged in the business of designing,
manufacturing and marketing computer-based systems that automate document
production and publishing. Mr. Ying also serves as a member of the Board of
Directors of NodeWarrior Networks Inc., an Internet Service Provider located in
Los Angeles, California. Mr. Ying holds a B.S. and M.S. in Electrical
Engineering from Massachusetts Institute of Technology.
John S. Collins has been Vice President of Engineering 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.
Wendy Darland has been Vice President, Finance and Administration, and
Chief Financial Officer since September 1997. From September 1993 to August
1997, Ms. Darland served as President of Xitron Inc. ("Xitron"), a wholly-owned
subsidiary of Autologic Information International Inc., a provider of high
performance Rastor Image Processing Systems ("RIPs"), print servers and custom
interfaces for the publishing industry. Prior to joining Xitron in September
1993, Ms. Darland was a consultant assisting entrepreneurs in business plan
development and raising investment capital from October 1992 to August 1993.
From September 1988 to October 1992, Ms. Darland served as Vice President,
Finance and Administration, and Chief Financial Officer of Rastor Image
Processing Systems Inc., a manufacturer of high performance RIPs for OEM
manufacturers and end users. Ms. Darland holds a B.S. in Accounting from Arizona
State University and a M.S. in Accounting from the University of Colorado at
Denver. Ms. Darland is also a Certified Public Accountant in the State of
Colorado.
Geoffrey W. Greve has been Vice President, Product Development of the
Company since February 1998. Mr. Greve has been employed by the Company since
1987 and previously served as Director of Production Control from 1990 through
May 1995 and Vice President, Type Operations from May 1995 to February 1998.
Susan Robertson has been Vice President and General Manager of the
Archetype Applications Division since the Company's acquisition of Archetype,
Inc. ("Archetype") in April 1997. Ms. Robertson was employed by Archetype since
September 1987 and previously served as Executive Vice President from September
1994 to April 1997 and Chief Operating Officer from September 1995 to April
1997. She holds a Sc.B. in Computer Science from Brown University.
John L. Seguin has been Vice President and General Manager of the Type and
Technology Division since July 1997. From August 1994 to July 1997, Mr. Seguin
served as Bitstream's Vice President, Sales and Marketing. From July 1993
through July 1994, Mr. Seguin served as Vice President and General Manager of
XLI Corp., a corporation engaged in manufacturing printer
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enhancements. From November 1987 through July 1993, he was employed by Howtek,
Inc., a corporation engaged in manufacturing color imaging products, and most
recently served as its Vice President, Sales and Marketing. Mr. Seguin holds a
B.S. in Marketing from the University of Massachusetts at Dartmouth.
Paul Trevithick has been Vice President, Marketing since the Company's
acquisition of Archetype in April 1997. Mr. Trevithick founded and was President
of Archetype since 1985. Mr. Trevithick holds a B.S.E.E. from the
Massachusetts Institute of Technology.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Class A Common Stock, $.01 par value per share ("Class A
Common Stock"), 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 Bitstream's 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 from January 1, 1997 through December 31, 1997. Such information
reflects interdealer prices, without retail markup, markdown, or commission, and
may not represent actual transactions.
HIGH LOW
---- ---
First Quarter 6 3/16 3 7/8
Second Quarter 4 3/8 2 1/2
Third Quarter 3 1 1/2
Fourth Quarter 2 3/4 1 5/8
As of March 23, 1998, the Company's Class A Common Stock was held by
approximately 82 holders of record and the Company believes that the Company's
Class A Common Stock was beneficially held by more than 500 holders. As of March
23, 1998, the Company's Class B Common Stock was not held by any holders 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.
RECENT SALES 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. During the fiscal year ended December 31, 1997, the Company issued
an aggregate of 648,217 shares of Class A Common Stock in connection with the
exercise of 648,217 vested options and warrants issued under the Company's 1994
Stock Plan and 1996 Stock Plan.
The sales and issuances of securities in the transactions described above
were 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. In addition, on
September 30, 1997, the Company filed a Registration Statement on Form S-8 under
the Securities Act of 1933, as amended, registering up to an aggregate of
3,500,000 shares of the Company's Class A Common Stock which may be issued upon
exercise of stock options and warrants granted or which may be granted under the
Company's 1997 Stock Plan, 1996 Stock Plan and 1994 Stock Plan.
USE OF PROCEEDS
As of December 31, 1997, the net proceeds of the Company's initial public
offering (IPO) of its Class A Common Stock pursuant to its Registration
Statement on Form S-1, Commission File No. 333-11519, declared effective October
30, 1996, have been used as follows: (i) approximately $200,000 for the buildout
of Bitstream's leased facilities in Cambridge, Massachusetts to accommodate the
additional personnel that joined the Company as result of the acquisition of
Archetype; (ii) approximately $4,141,000 for the acquisition of Mainstream
Software Solutions Ltd. and Archetype, Inc.; (iii) approximately $1,500,000 for
the repayment of indebtedness, of which
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approximately $548,000 was paid to officers, directors and 10% stockholders of
the Company and approximately $762,000 of which was paid to third parties; (iv)
approximately $404,000 for royalty payments to others; and (v) approximately
$286,000 for the purchase and installation of equipment. The remaining net
proceeds of the IPO remain invested in short-term, interest-bearing,
investment-grade securities.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of and for the
years ended December 31, 1997, 1996, and 1995, as of and for the three months
ended December 31, 1995 and as of and for the year ended September 30, 1995 have
been derived from, and are qualified by reference to the Company's audited
consolidated financial statements included elsewhere herein. The selected
consolidated financial data presented below as of and for the years ended
September 30, 1994 and 1993 have been derived from, and are qualified by
reference to, the Company's audited financial statements, which are not included
herein. 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 herein. 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 this period. 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, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Report, and other financial data
appearing elsewhere herein.
SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED THREE MONTHS ENDED YEAR ENDED
(In thousands except per share data) DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
----------------------- --------------------- ------------------------------
1997 1996 1995(1) 1994(1) 1995 1994 1993
---------- ---------- ---------- ------- ----------- ------ -------
(UNAUDITED)
Consolidated Statements of Operations Data:
Revenues .................................... $ 13,102 $ 10,551 $ 2,355 $2,276 $ 8,970 $9,832 $17,430
Cost of revenues ............................ 1,518 1,858 411 273 1,579 2,299 6,276
---------- ---------- ---------- ------ ----------- ------ -------
Gross profit .............................. 11,584 8,693 1,944 2,003 7,391 7,533 11,154
---------- ---------- ---------- ------ ----------- ------ -------
Operating expenses:
Marketing and selling ..................... 6,621 4,386 978 740 3,264 3,334 9,080
Research and development .................. 2,826 1,512 331 255 1,071 1,534 3,536
General and administrative ................ 2,104 1,533 385 266 1,261 1,281 3,006
Acquired in-process research and development 4,930 -- -- -- -- -- --
Severance and other nonrecurring
compensation ............................ 1,371 -- -- -- -- -- --
Restructuring charge ...................... -- -- -- -- -- 365
---------- ---------- ---------- ------ ----------- ------ -------
Total operating expenses ............... 17,852 7,431 1,694 1,261 5,596 6,514 15,622
Operating income (loss) ..................... (6,268) 1,262 250 742 1,795 1,019 (4,468)
Other income (expense), net ................. 510 (19) 17 (2) 11 (40) (18)
Provision for (benefit from) income taxes ... 232 (94) (471) 17 118 133 319
---------- ---------- ---------- ------ ----------- ------ -------
Net income (loss) ........................... $ (5,990) $ 1,337 $ 738 $ 723 $ 1,688 $ 846 $(4,805)
========== ========== ========== ====== =========== ====== =======
Basic net income (loss) per share (2) ........ $ (0.95) $ 1.07 $ 2.36 $ 1.11
========== ========== ========== ==========
Basic weighted average shares
outstanding (2) ........................... 6,303,216 1,248,118 312,677 1,518,138
========== ========== ========== ==========
Diluted net income (loss) per share (2) ..... $ (0.95) $ 0.25 $ 0.16 $ 0.31
========== ========== ========== ==========
Weighted average common shares outstanding
and dilutive potential common shares (2) .. 6,303,216 5,404,351 4,729,976 5,008,850
========== ========== ========== ==========
(IN THOUSANDS)
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
-------------------------------- ----------------------------------
1997 1996 1995(1) 1995 1994 1993
------------------------------------------------------------------------
Consolidated Balance Sheet Data:
Cash and cash equivalents................... $ 6,364 $11,718 $ 390 $ 523 $ 654 $ 1,068
Working capital (deficit)................... 9,212 14,220 1,245 881 (920) (2,266)
Total assets................................ 17,009 17,477 4,328 3,194 2,640 5,029
Long-term obligations....................... 73 99 210 124 125 17
Mandatorily redeemable convertible
preferred stock ........................... -- -- -- -- 2,311 1,204
Stockholders' equity (deficit) ............. $12,683 $15,359 $1,806 $1,066 $ (3,041) $(2,803)
- ---------------------
(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 4 of Notes to the Consolidated
Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company develops, markets and supports software products and
technologies to enhance the creation, management and transport of electronic
documents. The Company is organized into two operating divisions. The Type and
Technology division primarily licenses its products, including text imaging and
page layout 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 Archetype Applications division develops
server-based publishing applications that are sold to publishers, advertising
agencies, and other major corporations.
In January 1997, the Company purchased substantially all of the assets
of Mainstream Software Solutions Ltd.("Mainstream"), a corporation organized
under the laws of England primarily engaged in the business of marketing,
selling, distributing and supporting the Company's type products in the United
Kingdom, for approximately $505,000. As a result, the Company directly
distributes its own products in the United Kingdom. The acquisition has been
accounted for as a purchase and approximately $450,000 of goodwill was recorded.
In April 1997, the Company acquired Archetype, Inc. ("Archetype" and
together with Mainstream, the "Acquired Subsidiaries"), a Delaware corporation
primarily engaged in the business of developing and marketing server-based
information management computer software for the graphic arts industry.
Archetype's products include: MediaBank, a digital asset management product that
allows for the cataloging, archiving, and management of electronic images, text
and documents; InterSep OPI and InterSep Output Manager, advanced open prepress
interface and print management products for raster image processors and servers;
and NuDoc, an advanced document composition technology. The merger was accounted
for as a purchase, and accordingly, the purchase price has been allocated to the
assets acquired. The operating results of Archetype have been included in the
accompanying consolidated financial statements since the date of the
acquisition.
The Company derives revenues principally from the following sources: (i)
licensing fees and royalty payments paid by OEM and ISV customers for text
imaging and page layout technologies; (ii) direct and indirect sales of software
publishing applications for the creation, enhancement, management, transport,
viewing and printing of electronic information; (iii) direct sales of custom and
other type products to end users such as graphic artists, desktop publishers and
corporations; and (iv) 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 compensation and marketing programs), research and development
expenses and general and administrative expenses.
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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,
competition and the timely introduction of new products. 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 (Commission File No. 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
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
------------------------ -------------- -------------
1997 1996 1995 1995
----- ----- ----- -----
Revenues........................ 100.0% 100.0% 100.0% 100.0%
Cost of revenues................ 11.6 17.6 17.5 17.6
----- ----- ----- -----
Gross profit.................. 88.4 82.4 82.5 82.4
----- ----- ----- -----
Operating expenses:
Marketing and selling......... 50.5 41.6 41.5 36.4
Research and development...... 21.6 14.3 14.1 11.9
General and administrative.... 16.1 14.5 16.4 14.0
Acquired in-process research and development 37.6 -- -- --
Severance and other nonrecurring compensation 10.5 -- -- --
----- ----- ----- -----
Total operating expenses... 136.3 70.4 72.0 62.3
Operating income (loss)......... (47.9) 12.0 10.5 20.1
Other income (expense), net..... 3.9 (0.2) 0.8 --
----- ----- ----- -----
Provision for (benefit from) income taxes 1.8 (0.9) (20.0) 1.3
----- ----- ----- -----
Net income (loss)............... (45.7)% 12.7% 31.3% 18.8%
===== ===== ===== =====
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Revenues for the fiscal year ended December 31, 1997 increased by
approximately $2.6 million, or 24.5%, to approximately $13.2 million compared to
approximately $10.6 million for the fiscal year ended December 31, 1996.
Revenues from product sales to OEM and ISV customers for the fiscal year ended
December 31, 1997 increased by approximately $300,000, or 3.4%, to approximately
$9.0 million, from approximately $8.7 million for the fiscal year ended December
31, 1996, as a result of an increase in the licensing of the Company's
application products to OEM and ISV customers of the Company's Acquired
Subsidiaries. Revenues from product sales to end users and distributors for the
fiscal year ended December 31, 1997 increased by $2.2 million, or 122.2%, to
$4.0 million, from $1.8 million for the fiscal year ended December 31, 1996, as
a direct result of the revenues produced by the Company's Acquired Subsidiaries.
Gross Profit. Gross profit for the fiscal year ended December 31, 1997
increased by approximately $2.9 million, or 33.3%, to approximately $11.6
million, compared to approximately $8.7 million for the fiscal year ended
December 31, 1996. The increase in gross profit was primarily a result of the
addition of the revenues of the Company's Acquired Subsidiaries as well as a
decrease in third party royalties paid on type technologies.
Marketing and Selling. Marketing and selling expenses for the fiscal year
ended December 31, 1997 increased by approximately $2.2 million, or 50.0%, to
approximately $6.6 million, compared to approximately $4.4 million for the
fiscal year ended December 31, 1996 due to the addition of the sales, marketing
and support programs of the Acquired Subsidiaries.
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Research and Development. Research and development expenses for the fiscal
year ended December 31, 1997 increased by approximately $1.3 million, or 86.7%,
to approximately $2.8 million, compared to approximately $1.5 million for the
fiscal year ended December 31, 1996. This increase reflects the costs associated
with the addition of engineering personnel from Archetype to support the
application products and the expanded development of the Company's enabling
technologies. Research and development expenses consist primarily of personnel
costs, consulting fees and fees paid for outside software development. 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, 1997 increased by approximately $600,000, or 40%,
to approximately $2.1 million, compared to $1.5 million for the fiscal year
ended December 31, 1996. This increase mainly reflects $334,000 of goodwill
amortization related to the purchase of the Acquired Subsidiaries and an
increase in professional fees of $249,000 for public filing requirements and
litigation. General and administrative expenses principally consist of payroll
costs to executives, office, MIS and accounting personnel, as well as outside
professional fees and the amortization of goodwill of the Acquired Subsidiaries.
Acquired In-Process Research and Development. In connection with the
acquisition of Archetype, the Company allocated approximately $4.9 million of
the purchase price to in-process research and development. The in-process
research and development is related to Archetype projects that had not yet
reached technological feasibility and that, until completion of the development,
have no alternative future use. These projects were deemed to require
substantial high risk development and testing by the Company prior to reaching
technological feasibility which resulted in the determination to write-off the
acquisition costs of these projects.
Severance and Other Non-Recurring Expenses. Operating expenses for the
twelve months ended December 31, 1997 reflect $1.4 million for severance and
other non-recurring compensation expenses incurred in connection with the
acquisition of Archetype and certain severance arrangements between the Company
and certain executives.
Accounts Receivable, Net of Allowance for Doubtful Accounts. Accounts
receivable at December 31, 1997 was approximately $3.7 million as compared to
approximately $1.6 million at December 31, 1996. This $2.1 million increase
primarily includes the addition of the accounts receivable of the Acquired
Subsidiaries in 1997 and the effect of a 1996 single significant multiyear sale
which was paid earlier than standard terms within the same year.
Other Income and Expense. In the year ended December 31, 1997, the Company
recorded $510,000 of net interest income for investing cash balances acquired
from the IPO. In the year ended December 31, 1996, the Company recorded net
interest expense of $19,000.
The Company recorded a tax provision for the year ended December 31, 1997
of $232,000. This provision consists mainly of foreign tax liabilities of
$190,000 relating to sales to customers in Japan and minimum income tax
provisions of $42,000. For the fiscal year ended December 31, 1996, the Company
recorded a tax benefit of $94,000.
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.
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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%.
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
indebtedness.
In November 1996, the Company completed an initial public offering ("IPO")
of 2,415,000 shares of its Class A Common Stock. 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 used cash of $477,000 for the year ended
December 31, 1997 and provided cash of $487,000 for the year ended December 31,
1996. The Company's investing activities used cash of approximately $4.9
million for year ended December 31, 1997 and used cash of $866,000 for the year
ended December 31, 1996. Investing activities for the year ended December 31,
1997 consisted of approximately $4.1 million used in the acquisition of
businesses and $752,000 for the purchase of property and equipment to support
the growing employee base and corporate infrastructure.
For the year ended December 31, 1997, cash from financing activities was
approximately $16,000. For the year ended December 31, 1996, cash from
financing activities was approximately $11.7 million, including approximately
$12.2 million from the net proceeds of the IPO. As of December 31, 1997, the
Company had cash and cash equivalents of approximately $6.4 million, a decrease
of approximately $5.3 million from $11.7 million at December 31, 1996 primarily
attributable to cash paid in connection with the purchase of the Acquired
Subsidiaries and increased accounts receivable. Working capital was
approximately $9.2 million at December 31, 1997, as compared to approximately
$14.2 million at December 31, 1996.
On August 27, 1997, the Company amended its July 14, 1995 working capital
line-of-credit agreement maturing on July 15, 1998 with a bank to provide for
borrowings up to $2 million based on a percentage of qualified accounts
receivable, as defined. This line bears interest at various per annum rates
between the prime rate (8.5% as of December 31, 1997) plus 1% to 2%, as defined.
As a component of this agreement, the Company can obtain up to $250,000 in
letters of credit. Substantially all of the Company's assets are collateralized
under this agreement. No balance was outstanding under this line as of December
31, 1997.
The Company believes that the cash anticipated to be generated 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
17
18
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.
The Company does not project significant capital expenditures for the year
ending December 31, 1998.
IMPACT OF YEAR 2000 ISSUE
The Year 2000 issue results from computer programs that do not
differentiate between the year 1900 and the year 2000 because they are written
using two digits rather than four to define the applicable year. If not
corrected, many computer applications could fail or create erroneous results by
or at the year 2000. The Company is in the process of updating its accounting
and information systems, where applicable, to ensure that its computer systems
are Year 2000 compliant. In addition, the Company maintains a Year 2000 expert
on its staff. The financial impact to the Company of its Year 2000 compliance
programs has not been and is not anticipated to be material to its financial
position or results of operations in any given year. While the Company does not
believe it will suffer any major effects from the Year 2000 issue, it is
possible that such effects could materially impact future financial results, or
cause reported financial information not to be necessarily indicative of future
operating results or future financial condition.
RECENT DEVELOPMENTS
On March 13, 1998, the Company made a $500,000 equity investment in
DiamondSoft, Inc., a California corporation primarily engaged in the business of
developing, marketing and distributing software tools to a variety of
professional markets. This equity investment involved the purchase of 250,000
shares of DiamondSoft's Series A Convertible Preferred Stock, which represented
twenty-five (25%) of the outstanding capital stock of Diamondsoft on an as
converted basis, at a price of $2.00 per share. In addition, pursuant to a
letter agreement with DiamondSoft dated March 17, 1998, the Company will market
DiamondSoft's FontReserve software to hardware and software developers and
DiamondSoft will license the Company's Font Navigator software to retailers and
corporate users.
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-21.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K and instruction 3 to Item
401(b), the information required by this item concerning executive officers,
including certain information incorporated herein by reference to the
information appearing in the Company's definitive Proxy Statement concerning
Directors, is incorporated by reference to the sections entitled "Proposal No. 1
- - Election of Directors" and "Board of Directors" in the Registrant's definitive
Proxy Statement for its Annual Meeting of Stockholders to be held June 9, 1998.
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.
There is incorporated herein by reference to the discussion under
"Principal and Management Stockholders - Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in the Company's definitive Proxy Statement
for its Annual Meeting of Stockholders to be held June 9, 1998, the information
with respect to any delinquent filings of reports pursuant to Section 16(a) of
the Securities Exchange Act of 1934.
18
19
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is incorporated herein by reference to the
information appearing in the Company's definitive Proxy Statement for its Annual
Meeting of Stockholders to be held on June 9, 1998 under the heading "Executive
Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated herein by reference to the
information appearing in the Company's definitive Proxy Statement for its Annual
Meeting of Stockholders to be held on June 9, 1998 under the heading "Principal
and Management Stockholders."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated herein by reference to the
information appearing in the Company's definitive Proxy Statement for its Annual
Meeting of Stockholders to be held on June 9, 1998 under the heading "Certain
Relationships and Related Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1. Financial Statements.
(a) The following documents are included as part of this report:
(1) Financial Statements
Report of Independent Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
None.
(3) Exhibits.
Certain of the exhibits listed hereunder have been previously filed
with the Commission as exhibits to certain registration statements and
periodic reports and are incorporated herein by reference pursuant to
Rule 411 promulgated under the Securities Act and Rule 24 of the
Commission's Rules of Practice. The location of each document so
incorporated by reference is indicated in parenthesis.
3 CERTIFICATE OF INCORPORATION AND BYLAWS
3.1.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1, Registration No.
333-11519, filed on September 6, 1996).
3.1.2 Certificate of Amendment to Restated Certificate of
Incorporation of the Company (incorporated by reference to
Exhibit 3.1.2 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996).
19
20
3.2 Bylaws of the Company (incorporated by reference to Exhibit
3.2 to the Company's Registration Statement on Form S-1,
Registration No. 333-11519, filed on September 6, 1996).
4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
4.1 Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on Form
S-1, Registration No. 333-11519, filed on September 6, 1996).
10 MATERIAL CONTRACTS
10.1 1996 Stock Plan Certificate (incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form
S-1, Registration No. 333-11519, filed on September 6, 1996).
10.2 1994 Stock Plan Certificate (incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form
S-1, Registration No. 333-11519, filed on September 6, 1996).
10.3 Agreement and Plan of Recapitalization dated October 28, 1994
(incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1, Registration No.
333-11519, filed on September 6, 1996).
10.4 Lease between Athenaeum Group and the Company dated March 17,
1992 (incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1, Registration No.
333-11519, filed on September 6, 1996).
10.4.1 First Lease Amendment between Athenaeum Group and the Company
dated September 7, 1993 (incorporated by reference to Exhibit
10.4.1 to the Company's Registration Statement filed on Form
S-1, Registration No. 333-11519, on September 6, 1996).
10.4.2 Second Lease Amendment between Athenaeum Group and the Company
dated July 13, 1994 (incorporated by reference to Exhibit
10.4.2 to the Company's Registration Statement on Form S-1,
Registration No. 333-11519, filed on September 6, 1996).
10.4.3 Third Lease Amendment between Athenaeum Group and the Company
dated July 15, 1996 (incorporated by reference to Exhibit
10.4.3 to the Company's Registration Statement on Form S-1,
Registration No. 333-11519, filed on September 6, 1996).
10.4.4 Fourth Lease Amendment between Athenaeum Property LLC and the
Company dated March 3, 1997 (incorporated by reference to
Exhibit 10.4.4 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996).
10.4.5 Fifth Amendment to Lease between Athenaeum Property LLC and
the Company dated April 15, 1997 (incorporated by reference to
Exhibit 10.4.5 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997).
10.4.6 Sixth Amendment to Lease between Athenaeum Property LLC and
the Company dated June 6, 1997 (incorporated by reference to
Exhibit 10.4.6 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997).
10.5 First Amendment to Credit Agreement dated August 29, 1997
between BankBoston, N.A. and Company (incorporated by
reference to Exhibit 10.4.6 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997).
10.5.1 Amended and Restated Revolving Credit Note dated August 29,
1997 between BankBoston, N.A. and the Company (incorporated by
reference to Exhibit 10.4.6 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997).
10.6 Bridge Loan Agreement, dated February 22, 1996 among the
Company and certain bridge lenders named therein (incorporated
by reference to Exhibit 10.5 to the Company's Registration
Statement on Form S-1, Registration No. 333-11519, filed on
September 6, 1996).
10.6.1 Amendment to Loan Agreement and to Waiver and Subordination
Agreements dated August 22, 1996 among the Company and certain
bridge lenders named therein. Agreements dated August 22, 1996
among the Registrant and certain bridge lenders named therein
(incorporated by reference to Exhibit 10.5.1 to the Company's
Registration Statement on Form S-1, Registration No.
333-11519, filed on September 6, 1996).
10.6.2 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 (incorporated
by reference to Exhibit 10.5.2 to Pre-effective Amendment No.
1 to the Company's Registration Statement on Form S-1,
Registration No. 333-11519, filed on October 15, 1996).
#10.7 Software License Agreement between Novell, Inc. and the
Company, dated as of September 6, 1996 (incorporated by
reference to Exhibit 10.6 to the Company's Registration
Statement on Form S-1, Registration No. 333-11519, filed on
September 6, 1996).
20
21
#10.8 Agreement between Tumbleweed Software Corporation and the
Company dated as of June 10, 1996 (incorporated by reference
to Exhibit 10.6 to the Company's Registration Statement on
Form S-1, Registration No. 333-11519, filed on September 6,
1996).
10.9 Agreement dated as of May 1, 1996 among the Company and James
D. Hart (incorporated by reference to Exhibit 10.8 to the
Company's Registration Statement on Form S-1, Registration No.
333-11519, filed on September 6, 1996).
10.10 Form of Indemnification Agreement between the Company, its
directors and certain of its officers (incorporated by
reference to Exhibit 10.9 to Pre-effective Amendment No. 1 to
the Company's Registration Statement on Form S-1, Registration
No. 333-11519, filed on October 15, 1996).
10.11 Agreement and Plan of Merger dated as of March 27, 1997 among
the Company, Archetype Acquisition Corporation and Archetype,
Inc. (incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996).
10.12 1997 Stock Plan (incorporated by reference to Exhibit 10.11 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996).
11 COMPUTATION OF EARNINGS PER SHARE
*11.1 Computation of Earnings Per Share
21 SUBSIDIARIES OF REGISTRANT
*21.1 Subsidiaries of the Company
27 FINANCIAL DATA SCHEDULE
*27.1 Financial Data Schedule
# Pursuant to Rule 406 under the Securities Act, the Company requested
confidential treatment as to certain provisions.
* Filed herewith.
(b) REPORTS ON FORM 8-K
None.
21
22
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
Cambridge, Commonwealth of Massachusetts on this 31st day of March, 1998.
BITSTREAM INC.
By: /s/ Charles Ying
---------------------------
Charles Ying
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Charles Ying Chairman of the Board, Director and March 31, 1998
- ------------------------------- Chief Executive Officer (Principal
Charles Ying Executive Officer)
/s/ Wendy Darland Vice President, Finance and March 31, 1998
- ------------------------------- Administration, Chief Financial
Wendy Darland Officer, Treasurer and Assistant
Secretary (Principal Financial
Officer and Principal Accounting
Officer)
/s/ Amos Kaminski Director March 31, 1998
- -------------------------------
Amos Kaminski
/s/ David G. Lubrano Director March 31, 1998
- -------------------------------
David G. Lubrano
/s/ George B. Beitzel Director March 31, 1998
- -------------------------------
George B. Beitzel
22
23
INDEX TO FINANCIAL STATEMENTS
PAGE
CONSOLIDATED FINANCIAL STATEMENTS OF BITSTREAM INC. AND SUBSIDIARIES
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets as of December 31,1997
and December 31, 1996................................................. F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997 and 1996, Three Months Ended December 31, 1995
and for the Year Ended September 30, 1995............................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) .............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996, Three Months Ended December 31, 1995
and for the Year Ended September 30, 1995............................ F-6
Notes to Consolidated Financial Statements.............................. F-7
F-1
24
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, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years ended December 31, 1997 and December 31, 1996, for the
three-month period ended December 31, 1995 and for the year ended September 30,
1995. 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, 1997 and 1996, and the results of their
operations and their cash flows for the years ended December 31, 1997 and
December 31, 1996, for the three-month period ended December 31, 1995 and for
the year ended September 30, 1995, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
-------------------------
Arthur Andersen LLP
Boston, Massachusetts
March 2, 1998
(Except for the matters
discussed in Note 17
for which the date is
March 13, 1998).
F-2
25
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------------
1997 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 6,364,000 $11,718,000
Accounts receivable, net of allowance for doubtful accounts ...... 3,694,000 1,552,000
Current portion of long-term accounts receivable and extended
plan accounts receivable, net of allowance for doubtful accounts 1,855,000 1,667,000
Deferred income taxes ............................................ 868,000 868,000
Other current assets ............................................. 684,000 434,000
----------- -----------
Total current assets ........................................ 13,465,000 16,239,000
----------- -----------
Property and equipment, net ........................................ 1,399,000 924,000
----------- -----------
Other assets
Long-term accounts receivable, net of current portion ............ 39,000 123,000
Goodwill, net of amortization .................................... 1,948,000 --
Other assets ..................................................... 158,000 191,000
2,145,000 314,000
----------- -----------
Total assets ................................................ $17,009,000 $17,477,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of capital lease obligations................ 28,000 36,000
Accounts payable............................................... 753,000 513,000
Accrued expenses............................................... 3,472,000 1,470,000
----------- -----------
Total current liabilities................................. 4,253,000 2,019,000
----------- -----------
Capital lease obligations, less current maturities............... 54,000 79,000
----------- -----------
Other long-term liabilities...................................... 19,000 20,000
----------- -----------
Stockholders' equity
Common stock................................................... 65,000 59,000
Additional paid-in capital..................................... 29,940,000 26,637,000
Accumulated deficit............................................ (17,283,000) (11,293,000)
Cumulative translation adjustment.............................. (39,000) (44,000)
----------- -----------
Total stockholders' equity.................................. 12,683,000 15,359,000
----------- -----------
Total liabilities and stockholders' equity................ $17,009,000 $17,477,000
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
26
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS YEAR
ENDED ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1996 1995 1995
----------- ----------- ---------- -----------
Revenues .......................................... $13,102,000 $10,551,000 $2,355,000 $ 8,970,000
Cost of revenues.................................. 1,518,000 1,858,000 411,000 1,579,000
----------- ----------- ---------- -----------
Gross profit................................... 11,584,000 8,693,000 1,944,000 7,391,000
Operating expenses:
Marketing and selling.......................... 6,621,000 4,386,000 978,000 3,264,000
Research and development....................... 2,826,000 1,512,000 331,000 1,071,000
General and administrative..................... 2,104,000 1,533,000 385,000 1,261,000
Acquired in-process research and development... 4,930,000 -- --
Severance and other nonrecurring compensation.. 1,371,000 -- -- --
----------- ----------- ---------- -----------
Total operating expenses................... 17,852,000 7,431,000 1,694,000 5,596,000
Operating income (loss)........................... (6,268,000) 1,262,000 250,000 1,795,000
Other income (expense), net....................... 510,000 (19,000) 17,000 11,000
----------- ----------- ---------- -----------
Income (Loss) before provision for
(benefit from) income taxes................... (5,758,000) 1,243,000 267,000 1,806,000
Provision for (benefit from) income taxes........ 232,000 (94,000) (471,000) 118,000
----------- ----------- ----------- -----------
Net income (loss)......................... $(5,990,000) $ 1,337,000 $ 738,000 $ 1,688,000
=========== =========== ========== ===========
Basic net income (loss) per share................ $ (0.95) $ 1.07 $ 2.36 $ 1.11
=========== =========== ========== ===========
Weighted average shares outstanding.............. 6,303,216 1,248,118 312,677 1,518,138
=========== =========== ========== ===========
Diluted net income (loss) per share.............. $ (0.95) $ 0.25 $ 0.16 $ 0.31
=========== =========== ========== ===========
Weighted average common shares outstanding and
dilutive common share equivalents............. 6,303,216 5,404,351 4,729,976 5,008,850
=========== =========== ========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
27
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
----------------- -------------------- ADDITIONAL CUMULATIVE
NUMBER $.01 NUMBER $.01 PAID-IN ACCUMULATED TRANSLATION
OF SHARES PAR VALUE OF SHARES PAR VALUE CAPITAL DEFICIT ADJUSTMENT
--------- --------- --------- --------- ------- ------- ----------
BALANCE,
SEPTEMBER 30, 1994 ....... 3,052,647 $31,000 1,759,230 $18,000 $12,277,000 $(15,056,000) $(50,000)
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 ............... -- -- -- -- -- 1,688,000 --
---------- ------- ---------- ------- ----------- ----------- -------
BALANCE,
SEPTEMBER 30, 1995 ........ 3,173,737 32,000 312,677 3,000 14,449,000 (13,368,000) (50,000)
Cumulative translation
adjustment ............. -- -- -- -- -- -- 2,000
Net income ............... -- -- -- -- -- 738,000 --
---------- ------- ---------- ------- ----------- ----------- -------
BALANCE,
DECEMBER 31, 1995 ......... 3,173,737 32,000 312,677 3,000 14,449,000 (12,630,000) (48,000)
Exercise of stock options
and warrants ........... -- -- 6,833 -- 5,000 -- --
Cumulative translation
adjustment ............. -- -- -- -- -- -- 4,000
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
$1,269,000 .............. -- -- 2,415,000 24,000 12,183,000 -- --
Net income ................ -- -- -- -- -- 1,337,000 --
---------- ------- ---------- ------- ----------- ----------- -------
BALANCE,
DECEMBER 31, 1996 .......... -- -- 5,908,247 59,000 26,637,000 (11,293,000) (44,000)
---------- ------- ---------- -------- ------------ ------------ ---------
Exercise of stock options
and warrants ............ -- -- 137,895 1,000 124,000 -- --
Issuance of Class A common
stock upon merger ........ -- -- 510,322 5,000 1,602,000 -- --
IPO related expenses ...... -- -- -- -- (68,000) -- --
Issuance of options
upon merger ............. -- -- -- -- 1,400,000 -- --
Options issued for
severance .............. -- -- -- -- 245,000 -- --
Cumulative translation
adjustment ............ -- -- -- -- -- -- 5,000
Net loss .................. -- -- -- -- -- (5,990,000) --
---------- ------- ---------- -------- ------------ ------------ ---------
BALANCE,
DECEMBER 31, 1997 .......... -- $ -- 6,556,464 $ 65,