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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, 1998
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.
(Exact name of registrant as specified in its charter)
Delaware 04-2744890
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
215 First Street
Cambridge, Massachusetts 02142
(Address of principal executive offices) (Zip Code)
(617) 497-6222
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $0.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of 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 25, 1999 was approximately $12.2 million.
On March 25, 1999, there were 7,131,783 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 1999
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.
INDEX
PAGE
NUMBERS
-------
PART I.
ITEM 1. BUSINESS.......................................................... 4
ITEM 2. PROPERTIES........................................................11
ITEM 3. LEGAL PROCEEDINGS.................................................11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............12
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.......................................21
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................21
ITEM 11. EXECUTIVE COMPENSATION............................................21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.....................................................21
ITEM 13. CERTAIN REALTIONSHIPS AND RELATED TRANSACTIONS....................21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..21
SIGNATURES........................................................25
PART I
ITEM 1. Business
General
Bitstream develops, markets and supports software products and
technologies to enhance the creation, management and transport of electronic
documents. The Company's products and technologies consist of: (i) type
products, such as libraries of type designs (fonts) and custom type products;
(ii) enabling technologies, which deliver typographic capabilities to hardware
output devices and software applications; (iii) TrueDoc(R), a portable type
technology providing for the efficient distribution of text, with fidelity, in a
highly compact format; (iv) T2K(TM), a font engine software component providing
high-quality text rendering; (v) WebFont Maker(TM), a web publishing tool that
allows web page designers to embed their selected typefaces in web page
designs; (vi) Pageflex(TM), an on-demand publishing server enabling the design
and automatic production of customized print documents that are targeted at a
narrow segment or an individual reader; (vii) NuDoc(TM), an advanced document
composition engine; (viii) Tropix(TM), a workflow application to automate
repetitive steps in electronic publishing production; (ix) Mixxer(TM), a color
correction filter for Adobe Photoshop; and (x) Apertura(TM), an application
which enables Adobe Photoshop to open one or more smaller portions of most
popular image formats.
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 original equipment manufacturers ("OEMs"), independent software vendors
("ISVs") and end users around the world in the creation of electronic documents.
The Company was also an early developer of typographic enabling software for
hardware and software developers. Its font processor products are used to
provide type scaling functionality to operating systems, network servers and a
wide variety of computer printers and other output devices. Recently, the
Company has focused its product development and marketing efforts on technology
solutions that address the font-related issues of document creation and
portability on the Internet and corporate intranets.
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 established a Value Added Reseller (VAR) distributed product
line. 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. In August 1998, the Company sold the MediaBank and InterSep
product lines to Inso Providence Corporation.
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 ("Adobe") PostScript Type One format ("Type One"),
the original outline font technology, gained acceptance among graphic artists
and the high-end electronic publishing market due to the technology's close
links to high-resolution output devices used in service bureaus and publishing
houses. TrueType was developed by Apple Computer, Inc. ("Apple") as an
alternative outline font technology to Type One and is integrated into the
Windows and Macintosh operating systems. While capable of producing high-quality
printed images and documents, these technologies were designed to operate as
part of stand-alone systems. As a result, users were required to invest in
expensive hardware and software combinations to enable competing technologies to
co-exist and work together in the same environment. The problems presented by
such competing standards have been further complicated by the adoption of
multi-vendor client/server network architectures and the advent of new
distribution media, including the Internet, corporate intranets, and new classes
of information appliances.
The increased use of distributed client/server network architectures in
the 1990s has resulted in complex computing environments comprised of mixed
operating systems and multiple networking protocols. To create, transport, view
and print text-based digital information in such an environment, while
preserving the appearance intended by the document's author, each individual
computer
must have resident on it specific font software and hardware drivers to display
or print the document as the author intended. If a user's system should lack a
particular typeface used by the author or attempt to output a document to a
device that differs from the device on which the document was originally
created, the user's end-product often lacks the appearance intended by the
creator. For example, if an output device prints a document with a font used in
substitution of the author's original font, a complete loss of original
pagination or formatting within the document can often result. Such a result
would make it difficult, if not impossible, for multiple users to review and
comment collaboratively on the same document. Difficulties in retaining text
integrity can be further complicated when users try to incorporate non-Latin
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. Small publishing organizations are
consolidating into larger organizations with multiple titles, formats and
geographic locations. Publishing enterprises are facing competition from
alternative publishing on new media such as the Internet. Increased
competition for customers has resulted in a trend toward more demographically
and customer targeted advertising content.
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
on-demand publishing products provide innovative solutions for designing and
fully automating the production of customized print documents that are
targeted to a narrow market segment or individual reader.
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 and the leading developer of on-demand
publishing products. Key elements of the Company's strategy
include the following:
Maintain Technology Leadership in Type Products. Since its founding
over 15 years ago, Bitstream has played a leading role in the development of
industry-standard type products and enabling technologies (e.g. font
processing software). Recently, Bitstream has been actively developing font
portability and compaction technology. The Company has built substantial
expertise in digital type design and
production, technical font formats, and font portability and compression
software. Bitstream intends to continue to develop or acquire technology to
support its leadership position in these areas.
Obtain Technology Leadership Position in On-Demand Publishing.
Bitstream intends to develop software and technology that will establish and
maintain itself as a leader in on-demand publishing.
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), the Unicode Consortium
and the Print On-Demand Initiative.
Products
Bitstream develops, markets and supports software products and
technologies to enhance the creation, management and transport of electronic
documents. The Company's products and technologies consist of: (i) type
products, such as libraries of type designs (fonts) and custom type products;
(ii) enabling technologies, which deliver typographic capabilities to hardware
output devices and software applications; (iii) TrueDoc, a portable type
technology providing for the efficient distribution of text, with fidelity, in a
highly compact format; (iv) T2K, a font engine software component providing
high-quality text rendering; (v) WebFont Maker, a web publishing tool that
allows web page designers to embed their selected typefaces in web page
designs; (vi) Pageflex, an on-demand publishing server enabling the design and
automatic production of customized print documents that are targeted at a narrow
segment or an individual reader; (vii) NuDoc, an advanced document composition
engine; (viii) Tropix, a workflow application to automate repetitive steps in
electronic publishing production; (ix) Mixxer, a color correction filter for
Adobe Photoshop; and (x) Apertura, an application which enables Adobe Photoshop
to open one or more smaller portions of most popular image formats including
native Scitex CT and LWs.
Each of the Company's major products and technologies is described in
greater detail below.
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. A 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 from which to choose . 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 include
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.
T2K
T2K is a high quality off-the-shelf easy to use font engine software
component providing high-quality text rendering suitable for virtually
anything from the smallest embedded systems to the largest multi-threaded
systems. The T2K font engine is independent of processor and OS and
compatible with all industry standard font formats. It is a full featured
next generation small-footprint multilingual outline font technology. T2K was
designed for both gray-scale and black and white, ROM and non-ROM, based
devices in a potentially networked environment where the fonts may reside
locally or remotely.
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
reliable, compact and efficient recording, transport, viewing and printing of
typographic information regardless of whether the fonts used for the original
creation of the document are resident on the recipient's system. TrueDoc has
been engineered to be small in file and application size, to comply with all
industry font standards, and to be cross-platform compatible.
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.
WebFont Maker
WebFont Maker is a web publishing tool that allows web page designers to
embed their selected typefaces in web page designs. These embedded typefaces
will display properly across version 4.0 and higher of both Netscape
Navigator(TM) and Microsoft Internet Explorer(TM) browsers. WebFont Maker
includes (a) over 200 high-quality TrueType fonts, including the collection of
WGL4 fonts with expanded Pan European characters and the "euro" currency symbol,
(b) Bitstream's award winning Font Navigator for typeface management, and (c)
the newly developed WebFont Wizard(TM). The WebFont Wizard allows users to
create portable, dynamic fonts from the TrueType fonts on the CD, or from any
existing TrueType and PostScript Type 1 fonts installed on the designer's
Windows 95, Windows 98 or Windows NT 4.0 platform. These dynamic fonts can then
be embedded in any web page for display in Netscape Navigator and Microsoft
Internet Explorer browsers.
Pageflex
Pageflex is an on-demand publishing server enabling the design and
fully automated production of customized print documents that are targeted at
a narrow market segment or individual reader. Pageflex can create a variety
of customized documents with highly designed layouts, such as brochures,
sophisticated color reports and direct mail pieces. Pageflex uses customer
profile information about a particular reader or consumer to control the
selection of digital content, such as logos, imagery, illustrations and text
for a document. Pageflex then uses intelligent, flexible templates to
automatically assemble this personalized content into final documents for
output to print, PDF or the Web. Pageflex allows users to capitalize on the
customer information stored in the user's profile database, and to use that
information to tailor a marketing message aimed directly at the user's
customers. It also allows users to repurpose the content, such as text,
images and other digital files used to market their business.
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.
Tropix
Tropix is a workflow application to automate repetitive steps in
electronic publishing production. It is unique in combining a highly visual and
configurable interface with the unparalleled extensibility and power of Smart
Object plug-ins. Also, each new Smart Object readily leverages the capabilities
of all others. With Tropix, what traditionally would have taken a large custom
development effort can now be accomplished by drag and drop.
Mixxer and Apertura
Mixxer is a color correction filter for Adobe Photoshop which brings
important methodologies originating in high-end proprietary prepress
workstations to the Macintosh. Apertura enables Adobe Photoshop to open one or
more smaller portions of most popular image formats including native Scitex CT
and LWs. This dramatically increases the effectiveness of using Adobe Photoshop
for full resolution type corrections on lineworks and localized edits on even
the largest image.
Future Products
The Company has identified other emerging and complementary areas for
which it believes its products will be well suited. Bitstream is currently
developing products to enhance the performance of text-based document creation,
transport, viewing and printing within such markets. Products under development
and future markets being addressed include:
o TrueDoc-based utilities for the graphic arts market that address font
portability issues in the electronic delivery of desktop publishing
documents.
o Type products, enabling technologies and versions of TrueDoc for
integration into new products and applications such as set-top boxes,
personal digital assistants and other information applications based on
new programming languages or operating systems.
Marketing and Sales
The principal objective of the Company's marketing strategy is to
continue to expand the sale of the Company's type products and software to
OEMs and ISVs, who integrate the Company's software into their own products,
and its on-demand publishing software to corporate direct marketing
departments, design firms, advertising agencies, digital service and print
providers, direct mail houses and other corporations and end users. 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 sales organization, as of March 25, 1999, consisted of seven
people focused on OEM and ISV sales and three people focused on corporate direct
sales. The Company's sales efforts are managed from its corporate headquarters
in Cambridge, Massachusetts. In addition, the Company maintains a European sales
headquarters in Cheltenham, England. The Company also 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.
The Company seeks to enhance its relationships with existing customers
through its four 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 four 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 also
licenses its on-demand publishing products to major corporations and end
users. No single Bitstream customer accounted for 10% or more of the
Company's revenues for any of the fiscal years ended September 30, 1994
through December 31, 1998. 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 and corporate channels.
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 on-demand
publishing products and technologies developed by its wholly-owned subsidiary,
Pageflex Inc. 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.
As of March 25, 1999, the Company employed 33 individuals who engage in
research and development activities. Of these, seven focus on type product
development, two on developing enabling technology, four on TrueDoc and T2K,
seven on NuDoc, ten on Pageflex and three on documentation.
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 to 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 with some of its products.
Certain of the Company's competitors, including Adobe and Agfa Division, Miles
Inc. ("Agfa"), have greater name recognition, a larger customer base and
significantly greater financial, technical and marketing resources than the
Company. The Company's products compete with the solutions offered by a variety
of companies, including other suppliers of enabling technologies, software
application developers, and vendors of computer operating systems. Moreover, the
market for the Company's enabling technologies and products may be adversely
impacted to the extent that computer hardware, operating system and application
software vendors incorporate similar functionality or bundle competitive
offerings with their products and thereby reduce the market for the Company's
technology or products. The Company's markets are the subject of intense
industry activity, and it is likely that a number of software developers are
devoting significant resources to developing and marketing technology and
products that may compete with the Company's technology and products.
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 with 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 on-demand publishing products comes from a
couple of smaller companies offering their own on-demand publishing solutions.
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.
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 three patents by 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.
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 on Form 10-K are the property of their respective owners.
Employees
As of March 25, 1999, the Company employed 66 persons, including 14 in
sales and marketing, 33 in research and development and 19 in general
administrative functions. Of the Company's 66 employees, 63 are full time and 3
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.
Executive Officers of the Registrant
The Company's executive officers and their ages as of March 25, 1999 are
as follows:
Name Age Position
- --------------- --- --------------------------------------------------
Charles Ying 52 Chairman of the Board and Chief Executive Officer
Paul Trevithick 39 President
Anna M. Chagnon 32 Executive Vice President, Chief Financial Officer,
Chief Operating Officer and General Counsel
John S. Collins 59 Vice President, Engineering
- ----------
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.
Paul Trevithick has served as President of the Company since August
1998. From April 1997 to August 1998, he served as the Company's Vice
President, Marketing. From 1985 to April 1997, Mr. Trevithick was President,
Chief Executive Officer and founder of Archetype, Inc. which merged with
Bitstream in 1997. Mr. Trevithick holds a B.S.E.E. from the Massachusetts
Institute of Technology.
Anna M. Chagnon has served as Executive Vice President, Chief Operating
Officer, Chief Financial Officer and General Counsel of the Company since August
1998. From July 1997 to August 1998, she served in various positions at the
Company including Vice President, Finance and Administration, Chief Financial
Officer and General Counsel and Vice President and General Counsel. From
November of 1996 to July 1997, Ms. Chagnon was Counsel to Progress Software
Corporation, a developer and worldwide supplier of solutions to build, deploy
and manage applications across Internet, client/server and host/terminal
computing environments. From August 1994 to November 1996 she was an attorney
for the Boston law firm of Peabody & Arnold LLP where she specialized in
corporate, securities, finance and intellectual property law. She holds a
Bachelor of Science degree, summa cum laude, from Northeastern University and a
Juris Doctor degree from Boalt Hall School of Law of the University of
California at Berkeley. She is also currently pursuing a Master of Business
Administration with a concentration in Finance at Babson College.
John S. Collins has been Vice President of Engineering since 1988 and
Chief Technology Officer since August 1998. 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.
ITEM 2. Properties
The Company's corporate headquarters is located in Cambridge,
Massachusetts where it currently leases approximately 27,500 square feet under a
lease expiring in October 2003. The Company currently subleases to a third party
approximately 4,700 square feet of its leased premises under a sublease expiring
in January 2001. 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 on commercially reasonable terms.
ITEM 3. Legal Proceedings
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 approximately $2.2
million. The Company believes that these claims are without merit and is
vigorously contesting their validity.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1998.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
The Class A Common Stock of the Company began trading publicly on the
Nasdaq National Market tier of The Nasdaq Stock Market on October 30, 1996 under
the symbol "BITS." Prior to October 30, 1996, there was no public market for
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 periods commencing January 1, 1997 through
December 31, 1997 and January 1, 1998 through December 31, 1998. Such
information reflects interdealer prices, without retail markup, markdown, or
commission, and may not represent actual transactions.
1997 1998
---- ----
High Low High Low
---- --- ---- ---
First Quarter $6.250 $3.875 $3.375 $1.750
Second Quarter $4.375 $2.375 $2.500 $1.750
Third Quarter $3.000 $1.500 $2.000 $1.313
Fourth Quarter $2.750 $1.594 $1.625 $1.313
As of March 25, 1999, the Company's Class A Common Stock was held by
approximately 104 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 25, 1999, 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 137,895 shares of Class A Common Stock in connection with the
exercise of 137,895 vested options and warrants issued under the Company's 1994
Stock Plan and 1996 Stock Plan and 510,322 shares of Class A Common Stock were
issued in connection with the acquisition of Archetype, Inc. During the fiscal
year ended December 31, 1998, the Company issued an aggregate of 498,603 shares
of Class A Common Stock in connection with the exercise of 498,603 vested
options and warrants issued under the Company's 1994 Stock Plan, 1996 Stock Plan
and 1997 Stock Plan. There were no unregistered securities sold by the Company
during the fiscal year ended December 31, 1998.
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, par value $.01 per
share, 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, 1998, the approximately $12,200,000 net proceeds
from 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 a result of the acquisition of Archetype, Inc.;
(ii) approximately $6,041,000 for the acquisitions of Mainstream Software
Solutions, Ltd., Archetype, Inc., Type Solutions, Inc., and certain assets of
Alaras Corporation; (iii) approximately $1,500,000 for the repayment of
indebtedness, of which 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 $850,000 for royalty payments to
others; (v) $500,000 for the investment in DiamondSoft, Inc.; and
(vi) approximately $746,000 for the purchase and installation of equipment.
The remaining net proceeds from the IPO are invested in short-term,
interest-bearing, investment-grade securities.
ITEM 6. Selected Consolidated Financial Data
The selected consolidated financial data presented below as of December
31, 1996, 1997 and 1998 and for the three years in the period ended December 31,
1996, 1997 and 1998 have been derived from, and are qualified by reference to,
the Company's consolidated financial statements which have been audited by
Arthur Andersen LLP, independent public accountants, whose report thereon is
included elsewhere in this Report. The selected consolidated financial data
presented below for the two years in the period ended September 30, 1995 and the
three months ended December 31, 1995 have been derived from, and are qualified
by reference to, the Company's audited financial statements, which are not
included in this Report. The selected consolidated statement of operations data
for the three months ended December 31, 1994 have been derived from the
unaudited consolidated financial statements of the Company, which are not
included in this Report. In the opinion of management, the unaudited financial
statements of the Company have been prepared on the same basis as the audited
consolidated financial statements and include all adjustments, consisting only
of normal recurring adjustments, necessary for the fair presentation of
financial position and results of operations for these periods. The selected
consolidated financial data set forth below should be read in conjunction with,
and are qualified by reference to, the Consolidated Financial Statements of the
Company and Notes thereto, with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Report, and other financial data appearing elsewhere herein.
SELECTED CONSOLIDATED FINANCIAL DATA
-------------------------------------------------------------------------------
Years Ended Three Months Ended Years Ended
(In thousands, except per share data) December 31, December 31, September 30,
-------------------------------------------------------------------------------
1998 1997 1996(1) 1995(1) 1994(1) 1995(1) 1994
---- ---- ------- ------- ------- ------- ----
(Unaudited)
Consolidated Statements of Operations Data:
Revenues ..................................... $ 8,870 $ 13,102 $ 10,551 $ 2,355 $ 2,276 $ 8,970 $ 9,832
Cost of revenues ............................. 1,522 1,518 1,858 411 273 1,579 2,299
-------- -------- -------- -------- -------- -------- --------
Gross profit ............................... 7,348 11,584 8,693 1,944 2,003 7,391 7,533
-------- -------- -------- -------- -------- -------- --------
Operating expenses:
Marketing and selling ...................... 5,696 6,621 4,386 978 740 3,264 3,334
Research and development ................... 4,404 2,826 1,512 331 255 1,071 1,534
General and administrative ................. 1,742 2,104 1,533 385 266 1,261 1,281
In-process research and development ........ -- 4,930 -- -- -- -- --
Severance and other nonrecurring
compensation ............................. 2,647 1,371 -- -- -- -- --
Restructuring charge ....................... -- -- -- -- -- -- 365
-------- -------- -------- -------- -------- -------- --------
Total operating expenses ................ 14,489 17,852 7,431 1,694 1,261 5,596 6,514
Gain on sale of assets ..................... 10,317 -- -- -- -- -- --
Operating income (loss) ...................... 3,176 (6,268) 1,262 250 742 1,795 1,019
Loss on investment in
DiamondSoft, Inc. .......................... (56) -- -- -- -- -- --
Other income (expense), net .................. 489 510 (19) 17 (2) 11 (40)
-------- -------- -------- -------- -------- --------
Provision for (benefit from) income taxes .... 775 232 (94) (471) 17 118 133
-------- -------- -------- -------- -------- -------- --------
Net income (loss) ............................ $ 2,834 $ (5,990) $ 1,337 $ 738 $ 723 $ 1,688 $ 846
======== ======== ======== ======== ======== ======== ========
Basic net income (loss) per share (2) ........ $ 0.42 $ (0.95) $ 1.07 $ 0.21 $ 0.45
======== ======== ======== ======== ========
Basic weighted average shares
outstanding (2) ............................ 6,751 6,303 1,248 3,486 3,765
======== ======== ======== ======== ========
Diluted net income (loss) per share (2) ...... $ 0.38 $ (0.95) $ 0.25 $ 0.16 $ 0.34
======== ======== ======== ======== ========
Weighted average common shares outstanding
and dilutive potential common shares (2) .. 7,443 6.303 5,404 4,730 5,009
======== ======== ======== ======== ========
---------------------------------------------------------------
As of December 31, As of September 30,
---------------------------------------------------------------
(In thousands) 1998 1997 1996 1995(1) 1995 1994
---------------------------------------------------------------
Consolidated Balance Sheet Data:
Cash and cash equivalents ........................... $14,252 $ 6,364 $11,718 $ 390 $ 523 $ 654
Working capital (deficit) ........................... 12,640 9,213 14,220 1,245 881 (920)
Total assets ........................................ 20,711 17,009 17,477 4,328 3,194 2,640
Long-term obligations ............................... 54 73 99 210 124 125
Mandatorily redeemable convertible preferred stock .. -- -- -- -- -- 2,311
Stockholders' equity (deficit) ...................... 16,277 12,683 15,359 1,806 1,066 (3,041)
- ----------
(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. Because of this
change in fiscal year, the Company is presenting certain consolidated
statement of operations data for the three months ended December 31, 1994
and December 31, 1995, as well as consolidated balance sheet data as of
December 31, 1995.
(2) Calculated on the basis described in Note 3 of Notes to the Consolidated
Financial Statements.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Bitstream Inc. develops, markets, and supports software technologies and
applications for the graphics communications industry. The Company primarily
licenses its products, including text imaging and page layout technologies, to
OEMs and ISVs, for inclusion in their output devices, embedded systems,
applications, Internet authoring tools, World Wide Web browsers and other
products, and to end users.
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. 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. The Company recognizes
revenue under software development contracts as services are provided for per
diem contracts or by using the percentage-of-completion method of accounting for
long-term fixed price contracts.
In January 1997, the Company purchased substantially all of the assets of
Mainstream Software Solutions ("Mainstream"), a corporation organized under the
laws of England primarily engaged in the business of marketing, selling,
distributing and supporting Bitstream type products in the United Kingdom, for
approximately $505,000. As a result, Bitstream directly distributes its own
products in the United Kingdom.
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. Pursuant to an Asset
Purchase Agreement dated August 28, 1998, the Company sold substantially all of
the assets relating to its MediaBank and InterSep OPI product lines to Inso
Providence Corporation of Boston, Massachusetts for net cash proceeds of
$11,400,000.
In November 1998, the Company purchased certain assets of Alaras
Corporation ("Alaras"), a North Carolina corporation primarily engaged in the
business of developing, marketing and distributing its software products to the
electronic publishing market. Alaras' product lines acquired by the Company
include: Tropix, a workflow application to automate repetitive steps in
electronic publishing production; Mixxer, a color correction filter for Adobe
Photoshop; and Apertura, an application which enables Adobe Photoshop to open
one or more smaller portions of most popular image formats.
In December 1998, the Company acquired all of the outstanding stock of
Type Solutions, Inc., a New Hampshire corporation primarily engaged in the
business of developing and licensing font rendering technologies, for $600,000
in cash.
Cost of revenues is composed 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.
IMPACT OF YEAR 2000 ISSUE
YEAR 2000 READINESS DISCLOSURE - made pursuant to the Year 2000 Information and
Readiness Disclosure Act, Pub. L. No. 105-271 (1998)
The Year 2000 presents potential concerns and issues for the Company as
well as other companies in the software industry. In general, Year 2000
readiness issues typically arise in computer software and hardware systems that
use two digit date formats, instead of four digit dates, to represent a
particular year. Users must test their unique combination of hardware, system
software (including databases, transaction processors, and operating systems)
and application software in order to achieve Year 2000 readiness. This issue
creates risk for the Company from unforeseen problems in its own computer and
embedded systems and from third parties with whom the Company deals on financial
and other transactions worldwide. Failure of the Company's and/or third parties'
computer systems could have a material impact on the Company's ability to
conduct its business.
YEAR 2000 COMMITTEE
The Company has established a Year 2000 steering committee to evaluate,
plan and implement policies and practices, including contingency planning,
and to address the impact of the Year 2000 on the Company and its products.
The Company's Year 2000 readiness preparations fall into three categories:
(1) product readiness, addressing product functionality; (2) internal
readiness, addressing the Year 2000 operability of internal information
technology ("IT") systems and mission critical non-IT systems; and (3) third
party readiness, addressing the preparedness of relevant third parties and
the Year 2000 operability of products furnished for internal use and resale.
After reviewing these areas, the committee will report to the Board of
Directors specific areas of concern and a plan for resolving and further
testing of any remaining Year 2000 issues. The committee will also formulate
a contingency plan in the event that the committee reasonably determines that
certain Year 2000 issues may not be resolved by the end of 1999 or if
unforeseen problems arise.
STATUS OF INVESTIGATION - PRODUCT READINESS
The Company has established Year 2000 date operability standards against
which the most current versions of its software products are being tested.
During 1997, the Company initiated a program to update its accounting and
information systems, where applicable, to ensure that its computer systems are
Year 2000 compliant. Bitstream currently expects to be substantially complete
analyzing its current internal systems, as well as developing contingency plans
for certain internal systems, by mid-1999. In addition, the Company maintains a
Year 2000 expert on its staff to continue to assess, plan and implement
solutions that will prepare its internal systems for January 1, 2000. Bitstream
believes that these solutions will not pose significant operational problems for
the Company, and that the costs of such preparations will not be material.
However, if contingency plans were to fail or new non-compliance issues are
identified, the Company's results of operations or financial condition could be
materially adversely affected.
The Company has completed testing of its current software products and believes
the most current versions conform to these standards and are Year 2000 ready.
Despite the Company's testing, there can be no assurance that the Company's
products do not contain undetected errors or defects related to Year 2000
operability that may result in material costs to the Company or that the
Company's products contain all features and functionality considered necessary
by customers, end users and distributors to be Year 2000 ready.
While the Company believes that most of its current releases of products
are Year 2000 ready, other factors may result in an application created using
the Company's products not being Year 2000 ready. Some of these factors include
improper programming techniques used by third parties in creating the
application, customization, or non-compliance of hardware, software or firmware
not provided by the Company with which the products operate. The Company does
not believe that it would be liable in such an event. However, due to the
unprecedented nature of the potential litigation related to Year 2000 readiness
as discussed in the industry and popular press, the most likely worst case
scenario is that the Company would be subject to litigation. It is uncertain
whether or to what extent the Company may be affected by such litigation.
The Company has tested only the current versions of its products, and does
not plan to test earlier versions of products. The Company believes a
substantial number of the Company's customers are running product versions which
have not been tested and may experience Year 2000 date related operability
issues. The Company is in the process of identifying these customers and
encouraging them to upgrade to current versions of the products. Further, the
Company cautions users of such products to conduct their own Year 2000
operability testing to determine if continued use of the products allows them to
meet their own Year 2000 readiness objectives. While many customers will be
upgraded to Year 2000 ready versions of products under maintenance coverage, if
eligible, in the normal course the Company expects to incur some increased
expenses associated with the furnishing of upgrades and modifications. In
addition, the ability of the Company to implement upgrades in time to meet
customer's Year 2000 readiness requirements requires the continued availability
of qualified technical personnel and the Company may incur additional costs to
attract and retain such personnel as the Year 2000 draws closer. At this time
the Company does not believe that the cost of potential upgrades or
modifications will have a material effect on the Company's business, financial
condition and operating results.
STATUS OF INVESTIGATION - INTERNAL READINESS
The Company is engaged in conducting a Year 2000 readiness audit of its
internal IT and non-IT systems (including telecommunication, facilities
management, safety and security systems). Although the Company is not
presently aware of any material operational issues or costs associated with
preparing its internal IT and non-IT systems for the Year 2000, the Company
is continuing its investigation and there can be no assurance that the
Company will not experience unanticipated negative consequences or material
costs caused by undetected errors or defects in the technology used in its
internal systems, which include third party hardware, firmware, and software.
The Company anticipates finalizing its testing of internal IT and non-IT
systems on or about September 30, 1999.
STATUS OF INVESTIGATION - THIRD PARTY READINESS
The Company is continuing to assess the Year 2000 readiness of material
third parties, such as public utilities and key clients or suppliers, who
provide external services to the Company. The Company expects to
substantially complete these assessments and testing by the middle of 1999.
The Company has certain key relationships with suppliers which furnish
components and software used by the Company in its products. If these
suppliers fail to adequately address the Year 2000 issue for the products
they supply to the Company, such failure could have a material adverse effect
on the Company's operations, reputation, and financial results. Certain of
the Company's products contain third party components and software that are
integral to their operation for which the cost and time to integrate
alternative components or software into these products would be material.
CONTINGENCY PLANS AND WORST CASE SCENARIO
At the present time, the Company is in the process of outlining
contingency plans to operate in the event that its products, systems, or
business partners are not Year 2000 ready. If the Company's investigations
suggest that there is a significant risk that certain products, systems, or
business partners might not be Year 2000 ready, the Company will modify its
contingency plans accordingly.
COSTS, SOURCE OF FUNDS AND ACCOUNTING TREATMENT
The Company's policy is to expense all costs related to its Year 2000
compliance program unless the useful life of the technological asset is
extended or increased. The expenses incurred to date have not had a material
impact on the Company's results of operations or financial condition. At this
time, the Company intends to fund Year 2000 expenses through cash flows from
operations.
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, this Annual Report
on Form 10-K may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Investors are cautioned that
forward-looking statements are inherently uncertain. Actual performance and
results of operations may differ materially from those projected or suggested in
the forward-looking statements due to certain risks and uncertainties,
including, without limitation, market acceptance of the Company's products,
including its TrueDoc enabling technology, competition 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 (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:
Years Ended
December 31,
------------------------
1998 1997 1996
----- ----- -----
Revenues .......................................... 100.0% 100.0% 100.0%
Cost of revenues .................................. 17.2 11.6 17.6
----- ----- -----
Gross profit .................................... 82.8 88.4 82.4
----- ----- -----
Operating expenses:
Marketing and selling ........................... 64.2 50.5 41.6
Research and development ........................ 49.7 21.6 14.3
General and administrative ...................... 19.6 16.1 14.5
In-process research and development ............. -- 37.6 --
Severance and other nonrecurring compensation ... 29.8 10.5 --
----- ----- -----
Total operating expenses ..................... 163.3 136.3 70.4
----- ----- -----
Gain on sale of assets ............................ 116.3 -- --
Operating income (loss) ....................... 35.8 (47.9) 12.0
----- ----- -----
Other income (expense), net ....................... 4.9 3.9 (0.2)
----- ----- -----
Provision for (benefit from) income taxes ......... 8.7 1.8 (0.9)
----- ----- -----
Net income (loss) ............................. 32.0% (45.7)% 12.7%
===== ===== =====
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Revenues for the year ended December 31, 1998 decreased by
approximately $4.2 million, or 32%, to approximately $8.9 million compared to
approximately $13.1 million for the year ended December 31, 1997. The decrease
in revenues for the year ended December 31, 1998 as compared to the year ended
December 31, 1997 is primarily a result of (a) the sale of substantially all of
the assets relating to the Company's MediaBank(TM) and InterSep(TM) OPI product
lines to Inso Providence Corporation in August, 1998, (b) weaker than expected
demand in OEM channels for the Company's traditional type products; and (c)
slower than anticipated growth in emerging markets for the Company's type and
technology products. Revenues relating to the product lines sold to Inso
Providence Corporation in the year ended December 31, 1998 totaled approximately
$2.6 million.
Revenues from product sales to OEM and ISV customers for the year ended
December 31, 1998 decreased by approximately $4.6 million, or 51.1%, to
approximately $4.4 million, from approximately $9.0 million for the year ended
December 31, 1997, as a result of weaker than expected demand in OEM channels
for the Company's traditional type products and slower than anticipated growth
in emerging markets for the Company's type and technology products. Revenues
from product sales to end users and distributors for the year ended December 31,
1998 increased by $500,000, or 12.5%, to $4.5 million, from $4.0 million for the
year ended December 31, 1997, as a result of increased demand for the Company's
retail type and technology products.
Gross Profit. Gross profit for the year ended December 31, 1998 decreased
by approximately $4.3 million, or 37.1%, to approximately $7.3 million, compared
to approximately $11.6 million for the year ended December 31, 1997. Gross
profit as a percentage of revenues for the year ended December 31, 1998
decreased to 82.8% compared to 88.4% for the year ended December 31, 1997. The
decreases in gross profit and gross profit as a percentage of revenues are a
result of the sale of substantially all of the assets relating to the Company's
MediaBank and InterSep OPI product lines to Inso Providence Corporation in
August, 1998.
Selling and Marketing. Selling and marketing expenses for the year ended
December 31, 1998 decreased by $925,000, or 14.0%, to approximately $5.7 million
compared to approximately $6.6 million for the year ended December 31, 1997.
Selling and marketing expenses as a percentage of revenues for the year ended
December 31, 1998 increased to 64.2% from 50.5% for the year ended December 31,
1997. The decrease in selling and marketing expenses reflects a reduction in
salary expense of sales and marketing personnel from the headcount reductions
that occurred in March and June of 1998 offset by the addition of travel, trade
show and other marketing program expenses from Archetype operations for the year
ended December 31, 1998.
Research and Development. Research and development expenses for the year
ended December 31, 1998 increased by $1.6 million, or 55.8%, to $4.4 million
compared to $2.8 million for the year ended December 31, 1997. Research and
development expenses as a percentage of revenues for the year ended December 31,
1998 increased to 49.7% compared to 21.6% for the year ended December 31, 1997.
The increase in research and development expenses in dollars, and as a
percentage of revenues, reflects the ongoing investment in additional personnel
to support expanded development of the Company's enabling technologies such as
NuDoc and Pageflex.
General and Administrative. General and administrative expenses for the
year ended December 31, 1998 decreased by $362,000, or 17.2%, to $1.7 million
compared to $2.1 million for the year ended December 31, 1997. General and
administrative expenses represented 19.6% of revenues for the year ended
December 31, 1998 compared to 16.1% for the year ended December 31, 1997. The
decreases in general and administrative expenses, is primarily due to the
elimination of duplicative general and administrative functions and
administrative costs, including rent, utilities and other costs associated with
Archetype's Burlington, Massachusetts office and a reduction in salary expense
of general and administrative personnel as a result of the headcount reductions
that occurred in March and June of 1998.
Severance and Other Non-Recurring Compensation. Operating expenses for the
year ended December 31, 1998 include $2.65 million for severance and other
non-recurring compensation expenses related to certain former executives and
employees as a result of the headcount reductions that occurred in March and
June of 1998. Operating expenses for the year 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
arrangements between the Company and certain former high-level executives.
Gain on Sale of Assets. Reflected in income from operations for the
year ended December 31, 1998 is a gain of approximately $10.3 million on the
sale of substantially all assets of the Company's MediaBank and InterSep OPI
product lines to Inso Providence Corporation in August 1998.
The Company recorded a tax provision for the year ended December 31,
1998 of $775,000. This provision consisted of foreign tax liabilities of
$104,000 relating mainly to sales to customers in Asia and approximately
$671,000 to record federal and state income taxes payable in connection with
a pre-tax gain of approximately $10.3 million on the sale of substantially
all assets of its MediaBank and InterSep OPI products lines to Inso
Providence Corporation in August 1998. The Company recorded a tax provision
for the year ended December 31, 1997 of $232,000. This provisions consists of
foreign tax liabilities of $190,000 relating to sales to customers in Japan
and federal and state income tax provision totaling $42,000.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues. Revenues for the 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 year ended December 31, 1996. Revenues from
product sales to OEM
and ISV customers for the 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 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 year ended December 31, 1997
increased by $2.2 million, or 122.2%, to $4.0 million, from $1.8 million for the
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 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 year ended December
31, 1996. The increase in gross profit was a result of a decrease in third
party royalties paid by the Company on type technologies as well as the
addition of revenues of the Company's Acquired Subsidiaries.
Marketing and Selling. Marketing and selling expenses for the 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 year
ended December 31, 1996 due to the addition of the sales, marketing and support
programs of the Acquired Subsidiaries.
Research and Development. Research and development expenses for the year
ended December 31, 1997 increased by approximately $1.3 million, 86.7%, to
approximately $2.8 million, compared to approximately $1.5 million for the 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 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
year ended December 31, 1997 increased by $571,000, or 38.1%, to approximately
$2.1 million, compared to $1.5 million for the year ended December 31, 1996.
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.
In-Process Research and Development. The $4,930,000 expensed to in-process
research and development during the year ended December 31, 1997 is related to
projects that had not yet reached technological feasibility and that, until
completion of the development, had 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.
When excluding one time charges of the in-process research and development
of $4.9 million and severance and other nonrecurring compensation of $1.4
million, the Company would have shown net income of approximately $311,000 for
the year ended December 31, 1997.
The Company recorded a tax provision for the year ended December 31,
1997 of $232,000. This provision consists of foreign tax liabilities of
$190,000 relating to sales to customers in Japan and federal and state income
tax provisions totalling $42,000. For the year ended December 31, 1996, the
Company recorded a tax benefit of $94,000.
Liquidity and Capital Resources
The Company has funded its operations primarily through the public sale of
equity securities and cash flow from operations.
The Company's operating activities used cash of approximately $1.2
million for the year ended December 31, 1998 as compared to $477,000 for the
year ended December 31, 1997. The cash used during 1998 is primarily due to
decreases in accounts payable and accrued expenses. The cash used during 1997
is primarily due to operating losses.
The Company's investing activities provided cash of approximately $8.7
million for the year ended December 31, 1998 as compared to using $4.9 million
for the year ended December 31, 1997. The cash provided during the year ended
December 31, 1998 is primarily due to the net cash receipt of $11.4 million from
the sale of substantially all of the assets relating to the Company's MediaBank
and InterSep OPI product lines to Inso Providence Corporation in August, 1998,
offset by an equity investment of $500,000 in DiamondSoft, Inc., a California
corporation primarily engaged in the business of developing, marketing and
distributing software tools to a variety of professional markets; the purchase
of all of the outstanding stock of Type Solutions, Inc. for $600,000;
the purchase of certain assets of Alaras Corporation for $1.3 million; and the
purchase of property and equipment of $335,000. For the year ended December 31,
1997, investing activities consisted primarily of the purchase of Archetype,
Inc. as well as the purchase of substantially all of the assets of Mainstream
Software Solutions, Ltd.
The Company's financing activities provided cash of $432,000 for the year
ended December 31, 1998 and provided cash of $16,000 for the year ended December
31, 1997. The cash provided in the year ended December 31, 1998 was primarily
due to proceeds from the exercise of stock options.
The Company believes its current cash balances will be sufficient to meet
the Company's operating and capital requirements for at least the next 12
months. There can be no assurance, however, that the Company will not require
additional financing in the future. If the Company were required to obtain
additional financing in the future, there can be no assurance that sources of
capital will be available on terms favorable to the Company, if at all.
From time to time, the Company evaluates potential acquisitions of
products, businesses and technologies that may complement or expand the
Company's business. Any such transactions consummated may use a portion of the
Company's working capital or require the issuance of equity or debt.
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.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments.
As of December 31, 1998, the Company did not participate in any derivative
financial instruments or other financial and commodity instruments for which
fair value disclosure would be required under SFAS No. 107. All of the Company's
investments are short-term, investment-grade commercial paper, and money market
accounts that are carried on the Company's books at amortized cost, which
approximates fair market value. Accordingly, the Company has no quantitative
information concerning the market risk of participating in such investments.
Primary Market Risk Exposures.
The Company's primary market risk exposures are in the areas of interest
rate risk and foreign currency exchange rate risk. The Company's investment
portfolio of cash equivalent and short-term investments is subject to interest
rate fluctuations, but the Company believes this risk is immaterial due to the
short-term nature of these investments.
The Company's exposure to currency exchange rate fluctuations has been and
is expected to continue to be modest due to the fact that the operations of its
international subsidiaries are almost exclusively conducted in their respective
local currencies. International subsidiary operating results are translated into
U.S. dollars and consolidated for reporting purposes. The impact of currency
exchange
rate movements on intercompany transactions was immaterial for the year ended
December 31, 1998. Currently the Company does not engage in foreign currency
hedging activities.
ITEM 8. Financial Statements and Supplementary Data
The index to Financial Statements appears on page F-1, the Report of
Independent Public Accountants appears on page F-2, and the Consolidated
Financial Statements and Notes to Consolidated Financial Statements appear on
pages F-1 to F-20.
ITEM 9. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information required by this Item 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 3, 1999 and filed with the
Securities and Exchange Commission by April 30, 1999. The information concerning
the executive officers of the Company required by this Item is contained in the
"Executive Officers of the Registrant" section of Item 1 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 3, 1999 the information with
respect to any delinquent filings of reports pursuant to Section 16(a) of the
Securities Exchange Act of 1934.
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 3, 1999 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 3, 1999 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 3, 1999 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
Report of Independent Public Accountants on Financial Statements
Schedule II - Valuation and Qualifying Accounts
(3) Exhibits.
Certain of the exhibits listed hereunder have been previously filed with
the Commission as exhibits to certain registration statements and periodic
reports as indicated in the footnotes below 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).
3.2.1 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).
3.2.2 Bylaw Amendments adopted by the Board of Directors of the
Company on November 6, 1998 (incorporated by reference to
Exhibit 2 to the Company's Current Report on Form 8-K filed on
November 16, 1998).
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).
4.2 Rights Agreement dated as of November 12, 1998 between the
Company and BankBoston N.A., as Rights Agent, which includes:
as Exhibit A thereto, the Form of Certificate of Designation
of Series A Junior Participating Preferred Stock of the
Company; as Exhibit B thereto, the Form of Right Certificate;
and as Exhibit C thereto, the summary of Rights to Purchase
Preferred Shares.
10 Material Contracts
10.1 1996 Stock Plan (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 (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 Amendment to Lease 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 Amendment to Lease 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 Amendment to Lease 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 Amendment to Lease 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).
*10.4.7 Seventh Amendment to Lease between Athenaeum Property LLC and
the Company dated October 1, 1998.
10.5 First Amendment to Credit Agreement dated August 29, 1997
between BankBoston, N.A. and Company (incorporated by
reference to Exhibit 10.4.8 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).
10.5.2 Fourth Amendment to Amended and Restated Credit Agreement
dated as of July 15, 1998 between BankBoston, N.A. and the
Company (incorporated by reference to Exhibit 10.4.9 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998).
10.5.3 Commercial Demand Note dated August 10, 1998 between
BankBoston, N.A. and the Company (incorporated by reference to
Exhibit 10.4.10 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998).
10.5.4 Pledge Agreement dated August 10, 1998 between BankBoston N.A
and the Company (incorporated by reference to Exhibit 10.4.11
to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998).
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 (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 Pre-effective Amendment No. 1 to
the Company's Registration Statement on Form S-1, Registration
No. 333-11519, filed on October 15, 1996).
#10.8 Agreement between Tumbleweed Software Corporation and the
Company dated as of June 10, 1996 (incorporated by reference
to Exhibit 10.7 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).
10.9 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).
10.13 Asset Purchase Agreement among the Company, Archetype, Inc.,
Inso Corporation and Inso Providence Corporation dated August
28, 1998 (incorporated by reference to Exhibit 99(a) to the
Company's Current Report on Form 8-K filed on September 14,
1998).
21 Subsidiaries of Registrant
*21.1 Subsidiaries of the Company
23 Consents
*23.1 Consent of Independent Public Accountants
27 Financial Data Schedule
*27.1 Financial Data Schedule
# Pursuant to Rule 406 under the Securities Act, confidential treatment
requested as to certain provisions.
* Filed herewith.
(b) REPORTS ON FORM 8-K
The Company filed a current report on Form 8-K dated November 16, 1998
reporting the adoption of a Stockholder Rights Plan intended to deter coercive
and unfair takeover tactics and to impede any change of control that would not
be fair to all stockholders.
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, 1999.
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, 1999
- ------------------------ Chief Executive Officer (Principal
Charles Ying Executive Officer)
/s/ Anna M. Chagnon Executive Vice President, Chief March 31, 1999
- ------------------------ Financial Officer, Chief Operating
Anna M. Chagnon Officer, Treasurer and Secretary
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Amos Kaminski Director March 31, 1999
- ------------------------
Amos Kaminski
/s/ David G. Lubrano Director March 31, 1999
- ------------------------
David G. Lubrano
/s/ George B. Beitzel Director March 31, 1999
- ------------------------
George B. Beitzel
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
CONSOLIDATED FINANCIAL STATEMENTS OF BITSTREAM INC. AND SUBSIDIARIES
Report of Independent Public Accountants................................... F-2
Consolidated Balance Sheets as of December 31,1998 and December 31, 1997... F-3
Consolidated Statements of Operations for the Years Ended December 31,
1998, 1997 and 1996..................................................... F-4
Consolidated Statements of Stockholders' Equity for the
Years ended December 31, 1998, 1997 and 1996............................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996..................................................... F-6
Notes to Consolidated Financial Statements................................. F-7
F-1
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, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. 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 consolidated financial position of
Bitstream Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Boston, Massachusetts
March 3, 1999
F-2
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
December 31,
------------
1998 1997
-------- --------
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 14,252 $ 6,364
Accounts receivable, net of allowance for doubtful accounts
of $1,025 and $232 in 1998 and 1997, respectively ..................... 1,206 3,694
Current portion of long-term accounts receivable and extended
plan accounts receivable, net of allowance for doubtful accounts
of $135,000 and $220,000 in 1998 and 1997, respectively ............... 304 1,855
Deferred tax assets ..................................................... 868 868
Prepaid expenses and other current assets ............................... 390 684
-------- --------
Total current assets ............................................... 17,020 13,465
-------- --------
Property and equipment, net ............................................... 853 1,399
-------- --------
Other assets:
Long-term accounts receivable, net of current portion and allowance
for doubtful accounts of $73 and $9 in 1998 and 1997,
respectively .......................................................... $ 93 $ 39
Goodwill, net of amortization of $212 and $334 in
1998 and 1997, respectively ........................................... 2,133 1,948
Investment in DiamondSoft, Inc. ......................................... 444 --
Other ................................................................... 168 158
-------- --------
Total other assets .................................................... 2,838 2,145
-------- --------
Total assets ........................................................ $ 20,711 $ 17,009
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of capital lease obligations ......................... $ 27 $ 28
Accounts payable ........................................................ 171 753
Accrued expenses ........................................................ 2,344 3,159
Deferred revenue ........................................................ 1,148 313
Accrued income taxes .................................................... 692 --
-------- --------
Total current liabilities ........................................... 4,382 4,253
-------- --------
Capital lease obligations, net of current portion ......................... 27 54
Other long-term liabilities ............................................... 27 19
-------- --------
Total long-term liabilities ......................................... 54 73
Commitments and Contingencies (Notes 10 and 11):
Stockholders' equity:
Common stock, $.01 par value, 30,500,000 shares authorized,
7,055,000 and 6,556,000 shares issued as of
December 31, 1998 and 1997, respectively .............................. 70 65
Additional paid-in capital .............................................. 30,714 29,940
Accumulated deficit ..................................................... (14,449) (17,283)
Cumulative translation adjustment ....................................... -- (39)
Treasury Stock, at cost; 38,549 shares in 1998 .......................... (60) --
Total stockholders' equity ............................................ 16,276 12,683
-------- --------
Total liabilities and stockholders' equity .......................... $ 20,711 $ 17,009
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For the Years Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Revenues ........................................... $ 8,870 $ 13,102 $ 10,551
Cost of revenues ................................... 1,522 1,518 1,858
-------- -------- --------
Gross profit .................................... 7,348 11,584 8,693
Operating expenses:
Selling and marketing ........................... 5,696 6,621 4,386
Research and development ........................ 4,404 2,826 1,512
General and administrative ...................... 1,742 2,104 1,533
Acquired in-process research and development .... -- 4,930 --
Severance and other non-recurring compensation .. 2,647 1,371 --
-------- -------- --------
Total operating expenses .................... 14,489 17,852 7,431
Gain on sale of assets .......................... 10,317 -- --
-------- -------- --------
Operating income (loss) ............................ 3,176 (6,268) 1,262
Loss on investment in DiamondSoft, Inc. ......... (56) -- --
-------- -------- --------
Interest income (expense), net ..................... 489 510 (19)
-------- -------- --------
Income (loss) before provision for
(benefit from) income taxes ..................... 3,609 (5,758) 1,243
Provision for (benefit from) income taxes .......... 775 232 (94)
-------- -------- --------
Net income (loss) ........................... $ 2,834 $ (5,990) $ 1,337
======== ======== ========
Earnings per share:
Basic ........................................... $ 0.42 $ (0.95) $ 1.07
======== ======== ========
Diluted ......................................... $ 0.38 $ (0.95) $ 0.25
======== ======== ========
Weighted average shares outstanding:
Basic ........................................... 6,751 6,303 1,248
======== ======== ========
Diluted ......................................... 7,443 6,303 5,404
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Convertible Preferred Stock Common Stock
--------------------------- --------------------- Additional
Number $.01 Number $.01 Paid-in
of Shares Par Value of Shares Par Value Capital
-------- -------- -------- -------- --------
BALANCE,
DECEMBER 31, 1995 ............ 3,174 $ 32 312 $ 3 $ 14,449
Exercise of stock options
and warrants ............... -- -- 7 -- 5
Cumulative translation
adjustment ................. -- -- -- -- --
Conversion of convertible
preferred stock into
common stock ............... (3,174) (32) 3,174 32 --
Sale of 2,415 shares of
common stock in initial
public offering, net of
issuance costs of $1,269 -- -- 2,415 24 12,183
Net income .................. -- -- -- -- --
Comprehensive net income
for the year ended
December 31, 1996 ........ -- -- -- -- --
-------- -------- -------- -------- --------
BALANCE,
DECEMBER 31, 1996 ............ -- -- 5,908 59 26,637
Exercise of stock options
and warrants ............... -- -- 138 1 124
Issuance of Class A common
stock upon merger .......... -- -- 510 5 1,602
IPO related expenses ........ -- -- -- -- (68)
Issuance of options upon
merger ..................... -- -- -- -- 1,400
Options issued for
severance .................. -- -- -- -- 245
Cumulative translation
adjustment ................. -- -- -- -- --
Net loss .................... -- -- -- -- --
Comprehensive net loss for
the year ended
December 31, 1997 .......... -- -- -- -- --
-------- -------- -------- -------- --------
BALANCE,
DECEMBER 31, 1997 ............ -- $ -- 6,556 $ 65 $ 29,940
Exercise of stock options
and warrants ............... -- -- 499 5 444
Deferred compensation
expense related to
options .................... -- -- -- -- 330
Treasury stock received
from acquisition
escrow (see Note 4) ........ -- -- -- -- --
Cumulative translation
adjustment ................. -- -- -- -- --
Net income .................. -- -- -- -- --
Comprehensive net income
for the year ended
December 31, 1998 .......... -- -- -- -- --
BALANCE,
DECEMBER 31, 1998 ............ -- $ -- 7,055 $ 70 $ 30,714
======== ======== ======== ======== ========
Cumulative Treasury Stock Total
Accumulated Translation ----------------- Shareholders Comprehensive
Deficit Adjustment Shares Cost Equity Net Income
-------- -------- -------- -------- -------- --------
BALANCE,
DECEMBER 31, 1995 ............ ($12,630) ($ 48) -- $ -- $ 1,806 $ --
Exercise of stock options
and warrants ............... -- -- -- -- 5 --
Cumulative translation
adjustment ................. -- 4 -- -- 4 4
Conversion of convertible
preferred stock into
common stock ............... -- -- -- -- -- --
Sale of 2,415 shares of
common stock in initial
public offering, net of
issuance costs of $1,269 -- -- -- -- 12,207 --
Net income .................. 1,337 -- -- -- 1,337 1,337
Comprehensive net income
for the year ended
December 31, 1996 ........ -- -- -- -- -- $ 1,341
-------- -------- -------- -------- -------- --------
BALANCE,
DECEMBER 31, 1996 ............ (11,293) (44) -- -- 15,359 --
Exercise of stock options
and warrants ............... -- -- -- -- 125 --
Issuance of Class A common
stock upon merger .......... -- -- -- -- 1,607 --
IPO related expenses ........ -- -- -- -- (68) --
Issuance of options upon
merger ..................... -- -- -- -- 1,400 --
Options issued for
severance .................. -- -- -- -- 245 --
Cumulative translation
adjustment ................. -- 5 -- -- 5 5
Net loss .................... (5,990) -- -- (5,990) (5,990)
Comprehensive net loss for
the year ended
December 31, 1997 .......... -- -- -- -- -- $ (5,985)
-------- -------- -------- -------- -------- --------
BALANCE,
DECEMBER 31, 1997 ............ $(17,283) $ (39) $ -- $ -- $ 12,683 $ --
Exercise of stock options
and warrants ............... -- -- -- -- 449 --
Deferred compensation
expense related to
options .................... -- -- -- -- 330 --
Treasury stock received
from acquisition
escrow (see Note 4) ........ -- -- 39 ($ 60) ($ 60) --
Cumulative translation
adjustment ................. -- 39 -- -- 39 39
Net income .................. 2,834 -- -- -- 2,834 2,834
Comprehensive net income
for the year ended
December 31, 1998 .......... -- -- -- -- -- $ 2,873
BALANCE,
DECEMBER 31, 1998 ............ $(14,449) $ -- 39 ($ 60) $ 16,275 --
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For the Years Ended December 31,
1998 1997 1996
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ..................................... $ 2,834 $ (5,990) $ 1,337
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities,
net of acquisitions---
Gain on sale of certain assets sold to Inso Providence
Corporation ......................................... (10,317) -- --
Acquired in-process research and development ......... -- 4,930 --
Change in cumulative translation adjustment .......... 39 -- --
Release of treasury stock from escrow ................ (60) -- --
Depreciation and amortization ........................ 1,093 831 292
Compensation on grant of stock options ............... 330 --
Deferred income taxes ................................ -- -- (268)
Loss on investment in DiamondSoft, Inc. .............. 56 -- --
Net loss (gain) on disposal of property and
equipment ........................................... 19 1 (7)
Options issued for severance ......................... -- 245 --
Changes in assets and liabilities--
Accounts receivable ................................. 4,039 (1,676) 294
Long-term and extended plan accounts receivable ..... (54) (253) (1,026)
Prepaid expenses and other current assets ........... 294 (37) (240)
Accounts payable .................................... (582) -- 47
Accrued expenses .................................... (758) 230 58
Deferred revenue .................................... 1,148 1,242 --
Accrued income taxes ................................ 692 -- --
-------- -------- --------
Net cash provided by (used in) operating
activities ...................................... (1,227) (477) 487
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash received .................... (1,900) (4,141) --
Purchases of property and equipment ................... (335) (747) (679)
Cash proceeds from sale of certain assets to Inso
Providence Corporation .............................. 11,430 -- --
Investment in DiamondSoft, Inc. ....................... (500) -- --
Increase in other assets .............................. (10) (5) (187)
-------- -------- --------
Net cash provided by (used in) investing
activities ...................................... 8,685 (4,893) (866)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt and capital lease
obligations ......................................... -- -- 324
Payments on line of credit ............................ -- -- (300)
Principal payments on long-term debt and capital
lease obligations ................................... (27) (39) (527)
Change in other long-term liabilities ................. 8 (1) (2)
Payment of IPO offering expenses ...................... -- (68) --
Proceeds from sale of common stock .................... -- -- 12,207
Proceeds from the exercise of stock options and
warrants ............................................ 449 124 5
-------- -------- --------
Net cash provided by financing activities ......... 432 16 11,707
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .... 7,888 (5,354) 11,328
Cash and cash equivalents, beginning of year ............ 6,364 11,718 390
-------- -------- --------
Cash and cash equivalents, end of year .................. $ 14,252 $ 6,364 $ 11,718
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ................................ $ 6 $ 8 $ 29
======== ======== ========
Cash paid for income taxes ............................ $ 125 $ 190 $ 150
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
RELATED TO ACQUSITIONS (NOTE 4):
Fair value of assets acquired excluding cash........... $ 1,900 $ 7,454 --
Payments in connection with the acquisitions,
net of cash acquired................................. (1,900) (1,094)
Liabilities assumed.................................... $ -- $ 6,360
-------- --------- -----
-------- --------- -----
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Operations and Significant Accounting Policies
Bitstream Inc. and subsidiaries (the "Company") develop and market
software products and technologies to enhance the creation, transport, viewing
and printing of electronic documents.
The Company primarily licenses its products and technologies to
original equipment manufacturers ("OEMs") and independent software vendors
("ISVs"), for inclusion in their output devices, embedded systems,
applications, Internet authoring tools, World Wide Web browsers and other
products, and to end users. The Company generally enters into a license with
such customers and charges a combination of licensing fees and royalty
payments. In addition, Bitstream sells custom and other type products and
application products directly and indirectly to end users such as graphic
artists, publishers, advertising agencies and corporations.
The Company is subject to risks common to technology-based companies,
including dependence on key personnel, rapid technological change, competition
from alternative product offerings and larger companies, and challenges to the
development and marketing of commercial products and services.
The accompanying consolidated financial statements reflect the application
of certain accounting policies as described in this note and elsewhere in the
accompanying consolidated financial statements and notes. The preparation of the
accompanying consolidated financial statements required the use of certain
estimates by management in determining the Company's assets, liabilities,
revenues and expenses. Actual results may differ from these estimates.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries: Bitstream World Trade, Inc. (a
Delaware corporation), a holding company for Bitstream, B.V. (a Dutch
corporation); Bitstream S.A.R.L. (a French corporation); Bitstream B.V. France
(a French corporation), which was closed in 1998; Mainstream Software Solutions
Ltd. (an English corporation); Type Solutions, Inc. (a New Hampshire
corporation); and Archetype, Inc. (a Delaware corporation). All material
intercompany transactions and balances have been eliminated in consolidation.
(b) Revenue Recognition
The Company adopted Statement of Position 97-2 (SOP 97-2), Software
Revenue Recognition in 1998. The adoption of SOP 97-2 did not have a material
effect on the Company's results of operations or financial position. The Company
generates revenue from licensing the rights to include its software products in
the products and software of OEMs and ISVs as well as the licensing of its
software products to end users through direct and indirect sales channels.
Certain OEM and ISV customers irrevocably contract to pay a minimum royalty
amount over a defined period in exchange for the right to sublicense a certain
number of the Company's software products over a specified period. Other OEMs
and ISVs elect to pay royalties on a pay-as-you-go basis based on the
sublicensing of the Company's software products to end users.
Revenue from guaranteed minimum royalty licenses is recognized upon
delivery of the software, while revenue on pay-as-you-go licenses is recognized
in the period when sublicenses to end users are reported to the Company by the
OEM or ISV customer. In certain guaranteed minimum royalty licenses, the Company
will enter into extended payment programs with creditworthy customers.
Revenue from end user product sales is recognized upon delivery of the
software, net of estimated returns and allowances, if there are no significant
post delivery obligations and if collection is probable. Revenue from
maintenance contracts is recognized pro rata over the term of the contract.
Revenue on certain long-term development contracts is recognized using the
percent-of-completion method, as the services are performed. Provisions for any
estimated losses on uncompleted contracts are made in the period in which such
losses become probable.
Deferred revenue includes unearned software maintenance revenue, certain
prepaid royalties and advance billings under software development contracts.
F-7
Cost of revenues consists of costs to distribute the product, including
the cost of the media on which it is delivered and internal production costs
incurred in the fulfillment of custom orders. Additional costs include fees paid
to third parties for the development of unique typeface designs and costs
associated with fulfilling.
(c) Research and Development Expenses
The Company has evaluated the establishment of technological feasibility
of its products in accordance with Statement of Financial Accounting Standards
(SFAS) No. 86, Accounting for the Costs of Computer Software To Be Sold, Leased
or Otherwise Marketed. The Company sells products in a market that is subject to
rapid technological change, new product development and changing customer needs.
The time period during which costs could be capitalized from the point of
reaching technological feasibility until the time of general product release is
very short, and consequently, the amounts that could be capitalized are not
material to the Company's financial position or results of operations.
Therefore, the Company has charged all of such costs to research and development
in the period incurred.
(d) Cash and Cash Equivalents
As of December 31, 1998, cash and cash equivalents included bank deposits
and approximately $13,442,000 of money market instruments. The Company considers
all highly liquid investments with original maturities of three months or less
at the time of acquisition to be cash equivalents and records such investments
at cost, which approximates market value.
(e) Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Property and equipment consists of the following (in
thousands):
December 31,
-----------------
1998 1997
------ ------
Equipment and computer software .......................... $2,677 $2,738
Equipment and computer software under capital lease ...... 426 423
Furniture and fixtures ................................... 334 255
Leasehold improvements ................................... 787 755
------ ------
4,224 4,171
Less -- Accumulated depreciation and amortization ........ 3,371 2,772
------ ------
$ 853 $1,399
====== ======
Depreciation is provided on a straight-line basis over the estimated
useful lives of the related assets as follows:
Asset Classification Estimated Useful Life
- ------------------------------------------------------- ---------------------
Equipment and computer software........................ 3 Years
Equipment and computer software under capital lease.... Life of lease
Furniture and fixtures................................. 5 Years
Leasehold improvements................................. Life of lease
(f) Derivative Financial Instruments and Fair Value of Financial Instruments
The Company does not have any derivatives or other financial instruments
as defined by SFAS No. 119, Disclosures About Derivative Financial Instruments
and Fair Value of Financial Instruments.
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of an estimate of the fair value of certain financial
instruments. The Company's financial instruments consist of cash equivalents,
accounts receivable, accounts payable and capital leases. The estimated fair
value of these financial instruments approximates their carrying value at
December 31, 1998 and 1997 due to the short-term nature of these instruments.
F-8
(g) Foreign Currency Translation
The Company considers the functional currency of its foreign subsidiaries
to be the local currency, and accordingly, their financial information is
translated into U.S. dollars using exchange rates in effect at period end for
assets and liabilities and average exchange rates during each reporting period
for the results of operations. Adjustments resulting from translation of foreign
subsidiary financial statements are included as a separate component of
stockholders' equity.
(h) Postretirement Benefits
The Company had no obligations under SFAS No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions, as it does not currently offer
such benefits.
(i) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit
Risk, requires disclosure of any significant off-balance sheet and credit risk
concentrations. Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash equivalents and
trade accounts receivable. The Company places its temporary cash investments in
several financial institutions. The Company has not experienced significant
losses related to receivables from any individual customers or groups of
customers in any specific industry or by geographic area. Due to these factors,
no additional credit risk beyond amounts provided for collection losses is
believed by management to be inherent in the Company's accounts receivable. For
the years ended December 31, 1998 and 1997, no single customer accounted for 10%
or greater of the Company's revenues or accounts receivable, respectively.
(j) Goodwill
Goodwill is stated at cost, less accumulated amortization, and consists of
the following (in thousands):
December 31,
---------------------
1998 1997
------ ------
Acquisition of Mainstream Software
Solutions Ltd. ................................ $ 450 $ 450
Acquisition of Type Solutions, Inc. .............. 595 --
Acquisition of Alaras Corporation ................ 1,300 --
Acquisition of Archetype, Inc. ................... -- 1,832
------ ------
2,345 2,282
Less -- Accumulated amortization ................. 212 334
------ ------
$2,133 $1,948
====== ======
Goodwill is amortized on a straight-line basis over the estimated useful
lives of 5 years.
(k) Impairment of Long-Lived Assets
In accordance with SFAS No. 121, Accounting for Impairment of Long-Lived
Assets and For Long-Lived Assets to be Disposed of, the Company reviews its
long-lived assets (which include intangible assets and property and equipment)
for impairment as events and circumstances indicate the carrying amount of an
asset may not be recoverable. The Company evaluates the realizability of its
long-lived assets based on profitability and cash flow expectations for the
related asset or subsidiary. Management believes that, as of each of the balance
sheet dates presented, none of the Company's long-lived assets was impaired.
(2) Recently Issued Accounting Standards
In July 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements, in order to measure all changes in equity of an enterprise
that result from transactions and other economic events of the period other than
transactions with owners. Comprehensive income, as defined by SFAS No. 130, is
the total of net income and all other non-owner
F-9
changes in equity. The Company adopted SFAS No. 130 effective January 1, 1998,
and has disclosed comprehensive income for all periods presented in the
accompanying consolidated statements of stockholders' equity.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company believes that the adoption of SFAS No. 133 will
not have a material impact on its financial results or financial position.
(3) Earnings Per Share
The Company adopted SFAS No. 128, Earnings Per Share, in 1997. SFAS No.
128 established standards for computing and presenting earnings per share and
applies to entities with publicly held common stock or potential common stock.
The Company has applied the provisions of SFAS No. 128 and S.E.C. Staff
Accounting Bulletin (SAB) No. 98 retroactively to all periods presented. Basic
earnings per share was determined by dividing net income by weighted average
shares of common stock outstanding during the year. Diluted earnings per share
reflects dilution of potentially derivative securities, primarily stock options
based on the treasury stock method. Diluted net loss per share for the year
ended December 31, 1997 is the same as basic net loss per share as the inclusion
of the potential common stock equivalents would be antidilutive.
A reconciliation of basic and diluted weighted average shares outstanding
for basic and diluted earnings per share is as follows (in thousands):
1998 1997 1996
---------------------
Shares outstanding for basic earnings (loss) per share:
Weighted average shares outstanding ................ 6,751 6,303 1,248
----- ----- -----
Shares outstanding for diluted earnings per share:
Weighted average shares outstanding ................ 6,751 6,303 1,248
Dilutive effect of options ......................... 473 -- 1,197
Dilutive effect of warrants ........................ 220 -- 328
Shares issuable upon conversion of preferred stock ..... -- -- 2,631
----- ----- -----
7,443 6,303 5,404
----- ----- -----
Options and warrants excluded as they are antidilutive . 1,279 2,847 96
----- ----- -----
F-10
(4) Acquisitions
Mainstream Acquisition
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 the Company's type products in the United Kingdom, for
approximately $505,000 in cash. As a result, the Company directly distributes
its own products in the United Kingdom. The acquisition was accounted for as a
purchase and resulted in approximately $450,000 of goodwill.
Archetype Acquisition
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's products included: 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.
In connection with the merger, Archetype stockholders received an
aggregate of approximately $1.3 million in cash and 510,000 shares of the
Company's Class A Common Stock in exchange for their shares of Archetype capital
stock. In addition, the Company satisfied approximately $1.8 million of
obligations and indebtedness owed by Archetype, and issued options and warrants
(the "Options") to purchase approximately 605,000 shares of the Company's Class
A Common Stock. Of these options, 405,000 have an exercise price of $.90 per
share and were issued under the Company's 1996 Stock Plan and the remaining
200,000 have an exercise price of $3.94 per share and were issued under the
Company's 1997 Stock Plan.
The merger was accounted for as a purchase, and accordingly, the initial
purchase price and acquisition costs aggregating approximately $7.5 million has
been allocated to the assets acquired as described below. The aggregate purchase
price of $7,454,000 consisted of the following (in thousands):
Description Amount
----------- ------
Common stock and stock options......... $ 2,904
Cash paid to shareholders and for the
retirement of certain obligations.. 3,056
Assumed liabilities.................... 1,094
Acquisition costs...................... 400
--------
Total purchase price................... $ 7,454
=======
The purchase price allocations represent the fair values of assets
acquired determined by an independent appraisal. The appraisal incorporated
established valuation procedures and techniques in determining the fair value of
each asset. The purchase price has been allocated as follows (in thousands):
Description Amount
------------ ------
Current assets....................... $ 431
Property, plant and equipment........ 207
Other assets......................... 54
In-process research and development.. 4,930
Other acquired intangible assets..... 1,832
-------
Total assets acquired................ $ 7,454
=======
The amount allocated to in-process research and development related to
projects that had not yet reached technological feasibility and that, until
completion of the development, had no alternative future use. These projects
will require substantial high risk development and testing by the Company prior
to reaching technological feasibility. Accordingly, the Company charged fair
value to operations in the year ended December 31, 1997.
F-11
Based on the unaudited data, the following table presents selected
financial information for Bitstream and Archetype on a pro forma basis, assuming
the companies had been combined since the beginning of 1996 (in thousands):
For the Years Ended
------------------------------
December 31, December 31,
1997 1996
------------ ------------
Revenues ...................................... $ 14,164 $ 13,552
Net income (loss) ............................. $ (1,703) $ 915
Basic net income (loss) per share ............. $ (0.26) $ 0.52
The pro forma results are not necessarily indicative of future operations
or the actual results that would have occurred had the acquisition been made on
January 1, 1996. The pro forma amounts exclude the $4,930,000 write-off of
in-process research and development.
In November 1998, the Company received 39,000 shares of treasury stock
upon the release of the escrow for the Archetype acquisition.
Alaras Acquisition
In November 1998, the Company purchased certain assets of Alaras
Corporation ("Alaras"), a North Carolina corporation primarily engaged in the
business of developing, marketing and distributing its software products to a
variety of markets, for $1,300,000 in cash. Alaras' products included: Tropix, a
workflow application to automate repetitive steps in electronic publishing
production; Mixxer, a color correction filter for Adobe Photoshop; and Apertura,
an application which enables Adobe Photoshop to open one or more smaller
portions of most popular image formats including native Scitex CT and LWs. The
acquisition was accounted for as a purchase and resulted in $1,300,000 of
goodwill.
Selected financial information for Bitstream and Alaras on a pro forma
basis has not been provided as it is immaterial to the consolidated financial
statements taken as a whole.
Type Solutions Acquisition
In December 1998, the Company acquired all of the outstanding stock of
Type Solutions, Inc. ("Type Solutions"), a New Hampshire corporation primarily
engaged in the business of developing and licensing font rendering technologies,
for $600,000 in cash. The acquisition was accounted for as a purchase and
resulted in $595,000 of goodwill.
Selected financial information for Bitstream and Type Solutions on a pro
forma basis has not been provided as it is immaterial to the consolidated
financial statements taken as a whole.
(5) Sale of Assets
Pursuant to an Asset Purchase Agreement dated August 28, 1998, the Company
sold substantially all of the assets relating to its MediaBank and InterSep OPI
product lines to Inso Providence Corporation for net cash proceeds of
approximately $11,430,000.
Included in income from operations for the year ended December 31, 1998 is
a pre-tax gain of approximately $10,317,000 from this sale. The components of
the gain are as follows (in thousands):
Description Amount
- ------------ ------
Net cash proceeds from buyer .............................. $ 11,430
Net book value of assets sold ............................. (1,485)
Liabilities assumed by buyer .............................. 472
Transaction costs ......................................... (100)
--------
Total gain on sale ................................... $ 10,317
========
(6) Investments
In March 1998, the Company made a $500,000 equity investment in
DiamondSoft, Inc. ("DiamondSoft"), a California corporation primarily engaged in
the business of developing, marketing and distributing software tools to a
variety of professional
F-12
markets. This equity investment represents a 25% ownership interest. Losses for
the year ended December 31, 1998 related to the Company's investment in
DiamondSoft totaled approximately $56,000 and are included in the accompanying
1998 statement of operations.
(7) Severance And Other Non-Recurring Expenses
Included in operating expenses for the year ended December 31, 1998 are
approximately $2,647,000 of severance and other non-recurring compensation
expenses incurred in connection with certain arrangements between the Company
and certain former employees and executives. Operating expenses for the year
ended December 31, 1997 reflect $1,371,000 for severance and other non-recurring
compensation expenses incurred in connection with the acquisition of Archetype
and certain arrangements between the Company and certain former executives.
(8) Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under the liability method in accordance with SFAS
No. 109, a deferred tax asset or liability is determined based on the difference
between the financial statement and the tax bases of assets and liabilities, as
measured by enacted tax rates assumed to be in effect when these differences are
expected to reverse.
A reconciliation between the provision for income taxes computed at
statutory tax rates and the amount reflected in the accompanying consolidated
statements of operations as a percentage of pre-tax income is as follows :
Year Ended December 31,
1998 1997 1996
---- ---- ----
Computed expected federal tax
provision (benefit) .............................. 34.0% (34.0%) 34.0%
State income taxes, net of federal benefit .......... 6.3 (6.0) 5.6
State and foreign net operating loss and credit
carryforwards ....................................... (2.2) -- (1.0)
Foreign income/losses ............................... (2.9) 3.4 --
Foreign withholding taxes ........................... 2.9 3.3 8.5
Nondeductible write-off of in-process R & D and
other ............................................ 2.4 35.6 --
Nondeductible goodwill amortization ................. 18.8 1.7 --
Domestic net operating loss carryforwards and
change in valuation allowance..................... (37.8) -- 14.1
---- ---- ----
21.5% 4.0% 7.0%
The following is a summary of the components of the provision for (benefit
from) income taxes (in thousands):
Years Ended December 31,
------------------------
1998 1997 1996
----- ----- -----
Current:
Federal .................... $ 127 $ 36 $ 40
State ...................... 544 6 25
Foreign .................... 104 190 109
----- ----- -----
$ 775 $ 232 $ 174
===== ===== =====
Deferred:
Federal .................... $ -- $ -- $(228)
State ...................... -- -- (40)
Foreign .................... -- -- --
----- ----- -----
$ -- $ -- $(268)
===== ===== =====
F-13
The significant items composing the deferred tax asset are as follows (in
thousands):
December 31,
------------
1998 1997 1996
------- ------- -------
Net operating loss carryforwards ........ $ 1,111 $ 3,869 $ 3,374
Tax credit carryforwards ................ 2,786 2,340 2,244
Other temporary differences ............. 1,344 1,065 471
------- ------- -------
Gross deferred tax asset ........ 5,241 7,274 6,089
Valuation allowance ..................... (4,373) (6,406) (5,221)
------- ------- -------
Net deferred tax asset .......... $ 868 $ 868 $ 868
======= ======= =======
At December 31, 1998, the Company has available federal and state net
operating loss carryforwards for income tax purposes and federal and state
tax credit carryforwards to reduce future income taxes, if any. Utilization
of these NOLs is subject to certain annual limitations in accordance with
certain tax laws and regulations. These net operating loss and tax credit
carryforwards are subject to review and possible adjustment by the Internal
Revenue Service and expire as follows:
Credit ($000) NOLs ($000)
------------- -----------
1999 4 --
2000 40 --
2001 96 --
2002 192 --
2003 250 --
2004 265 --
2005 101 --
2006 366 --
2007 113 --
2008 311 2,139
2009 164 1,129
2010 124 --
2011 111 --
2012 109 745
2018 540 --
------ ------
$2,786 $4,013
====== ======
The Tax Reform Act of 1986 (the Reform Act) limits the amount of net
operating loss and credit carryforwards which companies may utilize in any one
year in the event of cumulative changes in ownership over a three-year period in
excess of 50%. The Company has assessed its status with respect to these
ownership changes which have occurred over the last three years, as well as the
change of ownership interests with the initial public offering and the
acquisition of Archetype, Inc., and believes that its ability to utilize its
existing net operating loss and credit carryforwards will not be materially
affected as a result of these changes in ownership interests.
The Company has established a valuation allowance against its deferred tax
asset to the extent that it believes it is more likely than not these assets
will not be realized. In determining the amount of valuation allowance required,
the Company considers numerous factors, including historical profitability,
estimated future taxable income and the volatility of the industry in which it
operates.
F-14
(9) Accrued Expenses
Accrued expenses consist of the following (in thousands):
December 31,
------------
1998 1997
------ ------
Accrued royalties ................................ $ 350 $ 737
Payroll and other compensation ................... 414 790
Other ............................................ 1,580 1,632
------ ------
Total ......................................... $2,344 $3,159
====== ======
(10) Debt
(a) Line of Credit
The Company had a working capital line-of-credit agreement with a bank,
which matured on July 15, 1998 that provided for borrowings up to $2,000,000
based on a percentage of qualified accounts receivable, as defined. This line
bore interest at various per annum rates between the prime rate plus 1% to 2%,
as defined. No balance was outstanding under this line as of December 31, 1997.
(b) Capital Leases
The Company leases certain equipment under capital leases expiring through
fiscal 2000. These capital lease payments are due in equal monthly installments
and bear interest at rates ranging from 8.7% to 9.0%. Future minimum lease
payments under the capital lease obligations as of December 31, 1998 are as
follows (in thousands):
Year Amount
------
1999 .................................................................. 32
2000 .................................................................. 29
---
Total minimum lease payments ........................................ 61
Less -- Amount representing interest ................................ 7
---
Total capital lease obligations .................................. 54
Less -- Current portion ............................................. 27
---
$27
===
(11) Operating Leases
The Company conducts its operations in leased facilities and is obligated
to pay monthly rent plus real estate taxes and certain operating expenses
through October, 2003. Rent expense charged to operations for the years ended
December 31, 1996, 1997 and 1998 was approximately $270,000, $545,000 and
$493,000, respectively. The Company subleased approximately 4,700 square feet of
its leased facilities to a third party for a two year period commencing on
January 15, 1999 for $79,900 per annum.
The future minimum annual lease payments as of December 31, 1998 under the
Company's leased facilities, net of sublease commitments, is as follows (in
thousands):
Year Amount
------------------------------
1999 $145
2000 145
2001 225
2002 225
2003 169
----
$909
====
(12) Contingent Liabilities
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
F-15
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 is
vigorously contesting their validity.
(13) Stockholders' Equity
(a) General
The Company has the following authorized capital: 30,500,000 shares of
Common Stock, $0.01 par value, (30,000,000 of which are shares of Class A Common
Stock and 500,000 of which are shares of Class B Common Stock), and 6,000,000
shares of preferred stock, $0.01 par value.
On October 30, 1996, upon the effective date of an underwritten public
offering of common stock all shares of Class A and B Preferred Stock were
automatically converted into an equal number of shares of Class A Common Stock
and Class B Common Stock, respectively. The number of common shares issued upon
conversion was as follows:
Outstanding As Converted
----------- ------------
Class A Preferred ...................... 2,782,575 --
Class B Preferred ...................... 391,162 --
Class A Common ......................... 288,646 3,071,221
Class B Common ......................... 30,864 422,026
(b) Common Stock
Class A Common stockholders have voting rights. Class A Common
Stockholders have the option, at any time, to convert any or all shares of Class
A Common Stock held into an equal number of shares of Class B Common Stock. The
Class B Common Stock has rights similar to Class A Common Stock, except it is
nonvoting. The Class B Common stockholders have the option to convert any or all
shares of Class B Common Stock held into an equal number of shares of Class A
Common Stock, to the extent such stockholder and its affiliates shall be
permitted to own, control or have the power to vote such Class A Common Stock
under any law, rule or regulation at the time applicable to such stockholder or
its affiliates.
(c) Stock Option Plans
On December 7, 1992, the Company adopted the 1993 Nonqualified Stock
Option Plan (the 1993 Plan). Options outstanding under the 1993 Plan as of
December 31, 1998 are exercisable immediately, expire no later than 10 years
from the date of grant and were granted at no less than the fair market value on
the date of grant, as determined by the Board of Directors. In 1998, 1997 and
1996, the Company had not granted, and does not intend to grant, any additional
options under the 1993 Plan.
On November 21, 1994 , the Board of Directors approved the 1994 Stock Plan
(the 1994 Plan) under which the Company is authorized to grant incentive stock
options and nonqualified stock options (including warrants) to purchase up to
1,833,333 shares of Class A Common Stock. Incentive stock options granted under
the 1994 Plan must be granted at no less than fair market value of the shares at
the date of grant, expire no later than 10 years from the date of grant and vest
over periods of up to three years. As of December 31, 1998, the Company had
available for issuance stock options to purchase 312,121 shares of Class A
Common Stock pursuant to the 1994 Stock Plan.
On May 1, 1996, the Board of Directors adopted the 1996 Stock Plan
under which the Company is authorized to grant incentive stock options and
nonqualified stock options to purchase shares of Class A Common Stock.
Options granted under this plan are exercisable at such price as shall be
determined by the Board of Directors at the time of grant which, in the case
of incentive stock options, shall be no less than 100% of the fair market
value of the shares on the date of grant and expire no later than 10 years
from the date of grant. In addition, the 1996 Stock Plan provides that
options granted thereunder, subject to future vesting, shall immediately vest
upon the occurrence of certain events, such as the sale of all or
substantially all of the assets of the Company or a change in control of the
Company. As of December 31, 1998, 458,264 options had been granted under the
1996 Stock Plan. A total of 666,667 shares of Class A Common Stock has been
reserved for issuance under the 1996 Stock Plan. As of December 31, 1998, the
Company had available for issuance, stock options to purchase 149,647 shares
of Class A Common Stock pursuant to the 1996 Stock Plan.
On March 10, 1997, the Board of Directors adopted the 1997 Stock Plan
under which the Company is authorized to grant warrants, incentive stock
options and nonqualified stock options to purchase shares of Class A Common
Stock. Options granted under this plan are exercisable at such price as shall
be determined by the Board of Directors at the time of grant which, in the
case of incentive stock options, shall be no less than 100% of the fair
market value of the shares on the date of grant and expire no later than 10
years from the date of grant. In addition, the 1997 Stock Plan provides that
options granted thereunder, subject to future vesting, shall immediately vest
upon the occurrence of certain events, such as the sale of all or
substantially all of the assets of the Company or a change in control of the
Company. As of December 31, 1998, 1,393,833 options had been granted under
the 1997 Stock Plan. A total of 1,500,000 shares of Class A Common Stock has
been reserved for issuance under the 1997 Stock Plan. As of December 31,
1998, the Company had available for issuance, stock options to purchase
385,958 shares of Class A Common Stock pursuant to the 1997 Stock Plan.
F-16
Stock option activity under all of these plans for the years ended
December 31, 1998, 1997 and 1996 is as follows (in thousands, except exercise
prices):
Number Exercise Weighted Average
of Options Price Range Exercise Price
---------- ----------- --------------
Outstanding, December 31, 1995............................ 1,459 $.90 - $84.38 $1.79
Exercised............................................... (1) .90 .90
Canceled................................................ (5) 1.50 - 84.38 4.27
Granted................................................. 21 3.00 3.00
----- -------------- -----
Outstanding, December 31, 1996............................ 1,474 .90 - $84.38 1.81
Exercised............................................... (138) .90 - 1.50 1.43
Canceled................................................ (248) .90 - 4.94 1.50
Granted................................................. 1,163 .90 - 4.94 1.89
----- -------------- -----
Outstanding, December 31, 1997............................ 2,251 .90 - 84.38 2.23
Exercised............................................... (499) .90 - 1.50 0.91
Canceled................................................ (426) .90 - 84.38 2.84
Granted................................................. 1,120 1.375 - 2.00 1.75
----- -------------- -----
Outstanding, December 31, 1998............................ 2,446 $.90 - $84.38 $1.98
===== ============== =====
Exercisable, December 31, 1998............................ 1,204 $.90 - $84.38 $6.43
===== ============== =====
F-17
Options Outstanding Options Exercisable
------------------- -------------------
Range of Exercise Weighted Average Remaining Weighted Average Weighted Average
Prices Contractual Life in Years Number Exercise Price Number Exercise Price
------ ------------------------- ------ -------------- ------ --------------
$0.90 6.06 863 $0.90 857 $0.90
$1.50-$3.00 8.55 1,297 $1.81 205 $1.94
$3.94-$4.94 8.29 310 $4.58 138 $4.63
$11.25 4.00 4 $11.25 4 $11.25
$41.63-$84.38 1.27 5 $80.33 5 $80.33
(d) Warrants
In 1997, the Company issued warrants under the 1994 Plan for the purchase
of 150,000 shares of Class A Common Stock at $ .90 - $4.94 per share, which vest
in annual increments over a three-year period, to several members of the
Company's management team and Board of Directors and an affiliate to the Board
of Directors. The Company is recognizing compensation expense associated with
the warrants over the three year vesting period. As of December 31, 1998,
warrants to purchase the following classes of stock remained outstanding:
Number of Number of
Shares Warrants
Stock Class Purchasable Exercisable Exercise Price Range
----------- ----------- ----------- --------------------
Class A Common Stock 512,109 472,107 $.90 - $111.15
(e) Stock-Based Compensation
The Company accounts for its stock-based compensation plans for employees under
APB Opinion No. 25, Accounting for Stock Issued to Employees. In October 1995,
The Financial Accounting Standards Board issued SFAS No. 123, Accounting for
Stock-Based Compensation, which is effective for fiscal years beginning after
December 15, 1995. SFAS No. 123 establishes a fair-value based method of
accounting for stock-based compensation plans. The Company has adopted the
disclosure-only alternative for grants to employees, which requires disclosure
of the pro forma effects on earnings and earnings per share as if SFAS No. 123
had been adopted for employee grants, as well as certain other information.
The Company has computed the pro forma disclosures required under SFAS No. 123
for all 1996, 1997 and 1998 stock options granted to employees as of December
31, 1998 using the Black Scholes option pricing model prescribed by SFAS No.
123.
Assumptions used and the weighted average information are as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
----------------- ------------------ -----------------
Risk-free interest rates......... 4.83%-5.64% 6.21%-6.71% 5.72%-5.82%
Expected dividend yield.......... -- -- --
Expected lives................... 10 years 10 years 10 years
Expected volatility.............. 100% 95% 61%
Weighted average exercise
price......................... $1.75 $2.23 $1.81
Weighted average remaining
contractual life of options
outstanding................... 4.83 4.91 3.77
The total value of the options granted to employees during the years ended
December 31, 1998, 1997 and 1996 was computed as $1,548,000, $1,826,000 and
$59,000, respectively. Of these amounts, $1,297,000, $587,000 and $84,000 would
be charged to operations for the years ended December 31, 1998, 1997 and 1996,
respectively. The remaining amount of $1,465,000 would be amortized over the
remaining option vesting periods.
F-18
The effect of applying SFAS No 123 would be as follows (in thousands, except per
share data):
Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
Net income (loss) as reported $2,834 ($5,990) $1,337
Pro forma net income (loss) .......... $1,537 ($6,576) $1,251
Pro forma basic net income (loss)
per share.......................... $0.23 ($1.04) $1.74
Pro forma diluted net income (loss)
per share......................... $0.21 ($1.04) $0.25
F-19
(14) Employee Benefit Plan
The Company has an employee benefit plan under Section 401(k) of the
Internal Revenue Code. The plan allows employees to make contributions up to a
specified percentage of their compensation. Under the plan, the Company may, but
is not obligated to, match a portion of the employee's contribution up to a
defined maximum. The Company contributed $126,000, $121,000 and $32,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
(15) Related Party Transactions
An employee of a company which is an affiliate of a member of the
Company's Board of Directors (the "Affiliate") rendered financial advisory
services to the Company on an as-needed basis. As compensation for the services
rendered, the Company paid the Affiliate a monthly fee and reimbursed the
affiliate for reasonable expenses incurred by the Affiliate and/or the employee
in connection with the performance of services to the Company. From January 1,
1996 through April 30, 1996, the Company paid the affiliate $10,000 per month
for such services. From May 1, 1996 to August 30, 1997, the affiliate was an
employee of the Company. Effective August 30, 1997, the employee terminated his
employment with the Company.
(16) Geographical Information
The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, in the fiscal year ended December 31, 1998.
SFAS No. 131 establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS No. 131 also establishes standards for related disclosures
about products and services and geographic areas. Operating segments are
identified as components of an enterprise about which separate discrete
financial information is available for evaluation by the chief operating
decision maker, or decision making group, in making decisions now to allocate
resources and assess performance. The Company's chief decision-maker, as defined
under SFAS No. 131, is the Chief Executive Officer. To date, the Company has
viewed its operations and manages its business as principally one segment,
software sales and associated services.
Product revenues from international sources was approximately $4.1
million. $5.8 million and $4.9 million in 1998, 1997 and 1996, respectively. The
Company's revenues from international resources were primarily generated from
customers located in Europe, Asia and Canada. All of the Company's product sales
for the years ended December 31, 1998, 1997 and 1996 were shipped from its
headquarters located in the United States or its office located in Cheltenham,
England.
The following table represents the Company's export sales from the United
States to customers in foreign countries (in thousands):
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
------------------------------------------------
Europe ......... $ 2,225 $ 1,942 $ 2,599
Japan........... 1,307 2,336 911
Canada......... 569 1,184 1,188
Other.......... 9 317 192
-------- -------- --------
$ 4,110 $ 5,779 $ 4,890
======== ======== ========
(17) Subsequent Events
In January 1999, the Company formed a wholly-owned subsidiary, Pageflex, Inc.,
for the purpose of operating its on-demand publishing software business. The
products and technologies of Pageflex Inc. consist of: (i) Pageflex, an
on-demand publishing server enabling the design and automatic production of
customized print documents that are targeted at a narrow segment or an
individual reader; and (ii) NuDoc, an advanced document composition engine.
F-20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To Bitstream Inc.:
We have audited, in accordance with generally accepted auditing
standards, the consolidated financial statements of Bitstream Inc. and
subsidiaries included in this Form 10-K and have issued our report thereon
dated March 3, 1999. Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The financial
statement schedule is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and regulations and is not part of the basic financial
statements. The financial statement schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements
and in our opinion, fairly states, in all material respects, the financial
data required to be set forth therein in relation to the basic financial
statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 3, 1999
F-21
BITSTREAM INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Accounts receivable Balance at Beginning Charged to Costs and Deductions from Balance at
reserves: of Year Expenses Reserves End of Year
- --------- ------- -------- -------- -----------
December 31, 1998 $461 $928 $156 $1,233
December 31, 1997 318 141 271 461
December 31, 1996 250 164 96 318
F-22