UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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)
Not Applicable
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
On November 11, 1997 there were 6,398,255 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.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBERS
-------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND
SEPTEMBER 30, 1997................................................................... 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997..................................... 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997........................................................... 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.............................................................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 9
RESULTS OF OPERATIONS.....................................................................
PART II. OTHER INFORMATION 12
ITEM 1. LEGAL PROCEEDINGS............................................................................... 12
ITEM 2. CHANGES IN SECURITIES........................................................................... 12
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................................................. 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.............................................. 13
ITEM 5. OTHER INFORMATION............................................................................... 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................ 13
SIGNATURES............................................................................... 14
</TABLE>
2
PART I -- FINANCIAL STATEMENTS
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------------- -----------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,718,000 $ 6,395,000
Accounts receivable, net of allowance for doubtful accounts 1,552,000 2,408,000
Current portion of long-term accounts receivable and extended
plan accounts receivable, net of allowance for doubtful accounts 1,667,000 2,695,000
Deferred income taxes 868,000 868,000
Other current assets 434,000 477,000
------------------- -----------------
Total current assets: 16,239,000 12,843,000
------------------- -----------------
Property and equipment, net: 924,000 1,355,000
------------------- -----------------
Other assets: -- --
Long-term accounts receivable, net of current portion 123,000 62,000
Goodwill -- 2,058,000
Other assets 191,000 172,000
------------------- -----------------
Total other assets 314,000 2,292,000
------------------- -----------------
Total assets $ 17,477,000 $ 16,490,000
=================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of capital lease obligations 36,000 30,000
Accounts payable 513,000 583,000
Accrued expenses 1,470,000 3,284,000
------------------- -----------------
Total current liabilities 2,019,000 3,897,000
------------------- -----------------
Capital lease obligations, less current maturities: 79,000 60,000
Other long-term liabilities 20,000 38,000
------------------- -----------------
Total long-term liabilities 99,000 98,000
------------------- -----------------
Stockholders' equity:
Common stock 59,000 65,000
Additional paid-in capital 26,637,000 29,871,000
Accumulated deficit (11,293,000) (17,401,000)
Cumulative translation adjustment (44,000) (40,000)
-------------------- ------------------
Total stockholders' equity 15,359,000 12,495,000
------------------- ------------------
Total liabilities and stockholders' equity $ 17,477,000 $ 16,490,000
================== ==================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
3
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
1996 1997 1996 1997
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
Revenues $ 2,628,000 $ 3,659,000 $ 8,039,000 $ 9,344,000
Cost of revenues 644,000 275,000 1,452,000 1,049,000
-------------- --------------- -------------- --------------
Gross Profit 1,984,000 3,384,000 6,587,000 8,295,000
-------------- --------------- -------------- --------------
OPERATING EXPENSES:
Marketing and selling 1,117,000 2,061,000 3,262,000 4,880,000
Research and development 334,000 841,000 1,014,000 1,998,000
General and administrative 388,000 495,000 1,164,000 1,484,000
In-process research and development -- -- -- 4,930,000
Severance and other non-recurring compensation -- -- -- 1,371,000
-------------- --------------- -------------- --------------
Total operating expenses 1,839,000 3,397,000 5,440,000 14,663,000
-------------- --------------- -------------- --------------
Operating income (loss) 145,000 (13) 1,147,000 (6,368,000)
-------------- --------------- -------------- --------------
Other income (expense), net (18,000) 116,000 (63,000) 458,000
-------------- --------------- -------------- --------------
Income (loss) before provision for (benefit from) 127,000 103,000 1,084,000 (5,910,000)
income taxes -------------- --------------- -------------- --------------
Provision for (benefit from) income taxes (11,000) 57,000 (96,000) 198,000
-------------- --------------- -------------- --------------
Net income (loss) $ 138,000 $ 46,000 $ 1,180,000 $ (6,108,000)
============== =============== ============== ==============
Net income (loss) per common and
common equivalent share $ 0.03 $ 0.01 $ 0.26 $ (0.98)
-------------- --------------- -------------- --------------
Weighted average common and
common equivalent shares outstanding 4,734,455 7,773,690 4,731,721 6,254,063
============== =============== ============== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
4
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1997
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ 1,180,000 $ (6,108,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-
In-process research and development --- 4,930,000
Depreciation and amortization 199,000 452,000
Deferred income tax benefit (238,000) ---
Net loss (gain) on disposal of property and equipment (5,000) ---
Changes in assets and liabilities-
Accounts receivable (927,000) (1,566,000)
Long-term and extended plan accounts receivable (109,000) 61,000
Other current assets (387,000) 169,000
Accounts payable 21,000 (170,000)
Accrued expenses 485,000 1,527,000
-------------- --------------
Net cash provided by (used in) operating activities $ 219,000 $ (705,000)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (592,000) (538,000)
Acquisition of business --- (4,141,000)
Change in other assets --- 81,000
Change in other long term liabilities --- 18,000
-------------- --------------
Net cash provided by (used in) investing activities $ (592,000) $ (4,580,000)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from capital lease obligations 324,000 ---
Proceeds from debt to stockholders 600,000 ---
Payments on capital lease obligations (109,000) (31,000)
Payments on line of credit (150,000) ---
Payments on IPO offering expenses --- (68,000)
Change in other long term liabilities (11,000) ---
Proceeds from line of credit 100,000 ---
Proceeds from the exercise of stock options and warrants 6,000 61,000
-------------- --------------
Net cash used in financing activities $ 760,000 $ (38,000)
-------------- --------------
Net Increase (Decrease) in Cash and Cash Equivalents 387,000 (5,323,000)
Cash and Cash Equivalents, beginning of period 390,000 11,718,000
-------------- --------------
Cash and Cash Equivalents, end of period $ 777,000 $ 6,395,000
-------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 90,000 $ 7,000
Cash paid for income taxes $ 142,000 $ 30,000
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
5
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
(1) BASIS OF PRESENTATION
The consolidated financial statements of Bitstream Inc. (the "Company")
presented herein, without audit, have been prepared pursuant to the rules of the
Securities and Exchange Commission (the "SEC") for quarterly reports on Form
10-Q and do not include all of the information and footnote disclosures required
by generally accepted accounting principles. The balance sheet information at
December 31, 1996 has been derived from the Company's audited consolidated
financial statements. These statements should be read in conjunction with the
financial statements and notes thereto for the period ended December 31, 1996
included in the Company's Report on Form 10-K which was filed by the Company
with the SEC on March 31, 1997.
The balance sheet as of September 30, 1997, the statements of operations for
the nine months ended September 30, 1996 and 1997, the statements of cash flows
for the nine months ended September 30, 1996 and 1997 and the notes to each
thereof are unaudited but, in the opinion of management, include all adjustments
necessary for a fair presentation of the consolidated financial position,
results of operations, and cash flows of the Company and its subsidiaries for
these interim periods.
The results of operations for the nine months ended September 30, 1997 are
not necessarily indicative of the results to be expected for any future interim
period or for the year ending December 31, 1997.
(2) NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share for the three months ended
September 30, 1997 have been determined in accordance with the modified treasury
stock method by dividing (i) net income increased by the effect of reduced
interest expense associated with the assumed repayment of certain indebtedness
as of the beginning of the period and by the effect of increased interest income
associated with the assumed investment in U.S. Government securities as of the
beginning of the period with the assumed proceeds from the exercise of
outstanding options and warrants by (ii) the weighted average number of common
and common equivalent shares outstanding, including the dilutive effect of
options and warrants.
(3) CONCENTRATION OF CREDIT RISK
The Company has no significant off-balance-sheet concentration of credit
risk such as foreign exchange contracts, option contracts or other foreign
hedging arrangements.
For the three months ended September 30, 1997, one customer represented
13.7% of revenues, respectively. For the three months ended September 30, 1996,
three customers represented 12.9%, 15.7% and 16.7% of revenues, respectively.
(4) RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share. SFAS No. 128
establishes standards for computing and presenting earnings per share and
applies to entities with publicly held common stock or potential common stock.
This statement is effective for the fiscal years ending after December 15, 1997
and early adoption is not permitted. When adopted, the statement will require
restatement of prior years' earnings per share. The Company will adopt this
statement for its fiscal year ended December 31, 1997. The adoption of this
statement will not have a material impact on earnings per share for the three
and nine months ended
6
September 30, 1997. Pro forma calculations of basic and diluted earnings per
share for the nine months ended September 30, 1997 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
------------------ ------------------
<S> <C> <C>
Basic EPS Net Income $ 46,000 $ (6,108,000)
Weighted average common shares outstanding 6,478,075 6,254,063
Basic EPS $0.01 $ (0.98)
Diluted EPS Net Income $ 46,000 $ (6,108,000)
Weighted average common and common equivalent
shares outstanding 7,662,307 6,254,063
Diluted EPS $0.01 $ (0.98)
</TABLE>
(5) ACQUISITIONS
MAINSTREAM ACQUISITION
In January 1997, Bitstream purchased substantially all of the assets of
Mainstream Software Solutions, a corporation organized under the laws of England
primarily engaged in the business of marketing, selling, distributing and
supporting Bitstream type products in the United Kingdom, for approximately
$505,000. As a result, Bitstream directly distributes its own products in the
United Kingdom. The acquisition was accounted for as a purchase and resulted in
approximately $500,000 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, pursuant to an Agreement and Plan of Merger, dated March 27, 1997
among the Company, Archetype, and Archetype Acquisition Corporation, a newly
organized wholly owned subsidiary of the Company. 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.
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 $1.6 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,
in order to induce the former Archetype employees and other persons receiving
such Options to become employees of, or perform certain services for, the
Company and/or to replace certain outstanding options and warrants issued by
Archetype. Of these options, 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.
7
The aggregate purchase price of $7,454,000 consisted of the following:
DESCRIPTION AMOUNT
- ----------- ------
Common stock $ 2,904,000
Cash paid 2,544,000
Assumed liabilities 1,606,000
Acquisition costs 400,000
---------------
Total purchase price $ 7,454,000
The purchase price allocations represent the fair values 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:
DESCRIPTION AMOUNT
Current assets $ 431,000
Property, plant and equipment 207,000
Other assets 54,000
In-process research and development 4,930,000
Other acquired intangible assets 1,832,000
---------
Total assets acquired: $ 7,454,000
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.
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 1997.
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- ----------------
REVENUES $ 13,552 $ 10,406
Net Income (loss) 915 (6,751)
Net Income (loss) per share $ 0.16 $ (1.00)
The pro forma results are not necessarily indicative of future operations
or the actual results that would have occurred had the acquisition been made
during 1996.
(6) SEVERANCE AND OTHER NON-RECURRING EXPENSES
Operating expenses for the nine months ended September 30, 1997 reflect
$1.4 million for severance and other non-recurring compensation expenses
incurred in connection with the acquisition of Archetype and certain severance
arrangements between the Company and certain former high-level executives.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company develops, markets and supports software products and
technologies to enhance the creation, management and transport of electronic
information. The Company primarily licenses its products, including text imaging
and page layout technologies, to original equipment manufacturers ("OEMs") and
independent software vendors ("ISVs") for inclusion in their output devices,
embedded systems, applications, Internet authoring tools, World Wide Web
browsers and other products and develops publishing applications that are sold
to publishers, advertising agencies, and other major corporations.
The Company derives revenues principally from the following sources: (i)
licensing fees and royalty payments paid by OEM and ISV customers; (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 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, pursuant
to an Agreement and Plan of Merger, dated March 27, 1997 among the Company,
Archetype, and Archetype Acquisition Corporation , a newly organized wholly
owned subsidiary of the Company. 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.
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 sales compensation and commissions), research and development
expense and general and administrative expenses.
Except for the historical information contained herein, this quarterly
Report on Form 10-Q 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,
9
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
REVENUES. Revenues for the three months ended September 30, 1997 increased
by $1,031,000, or 39%, to approximately $3.7 million, as compared to
approximately $2.6 million for the three months ended September 30, 1996.
Revenues from OEM and ISV customers for the three months ended September 30,
1997 increased by $213,000, or 9%, to approximately $2,492,000 from
approximately $2,279,000 for the three months ended September 30, 1996. Revenues
from end users and distributors for the three months ended September 30, 1997
increased by $805,000, or 230%, to approximately $1,154,000 from approximately
$349,000 for the three months ended September 30, 1996 reflecting the inclusion
of Archetype revenues for the period.
Revenues for the nine months ended September 30, 1997 increased by
$1,305,000, or 16.2% to approximately $9.3 million, as compared to approximately
$8.0 million for the nine months ended September 30, 1996. Revenues from OEM and
ISV customers for the nine months ended September 30, 1997 were relatively
unchanged at approximately $6.6 million as compared to approximately $6.7
million for the nine months ended September 30, 1996. Revenues from end users
and distributors for the nine months ended September 30, 1997 increased
$1,359,000, or 99%, to approximately $2,731,000 from approximately $1,372,000
for the nine months ended September 30, 1996 reflecting inclusion of Archetype
revenues since April 28, 1997.
GROSS PROFIT. Gross profit for the three months ended September 30, 1997
increased by $1.4 million, or 70.6%, to approximately $3.4 million compared to
approximately $2.0 million for the three months ended September 30, 1996. Gross
profit as a percentage of revenues for the three months ended September 30, 1997
increased to 92.5% compared to 75.5% for the three months ended September 30,
1996. The increase in gross profit as a percentage of revenues reflects the
decrease in the cost of third party royalties to Bitstream's asian font
partners.
Gross profit for the nine months ended September 30, 1997 increased by
$1,708,000, or 25.9%, to approximately $8.3 million compared to approximately
$6.6 million for the nine months ended September 30, 1996. Gross profit as a
percentage of revenues for the nine months ended September 30, 1997 increased to
88.8% compared to 81.9% for the nine months ended September 30, 1996. The
increase in gross profit as a percentage of revenues reflects a decrease in
costs of custom products, licensing fees and royalties. Gross profit and gross
profit as a percentage of revenues in the future may be affected by a variety of
factors including third party licensing fees and royalties, pricing of the
Company's products and changes in the product mix of the Company's revenues.
MARKETING AND SELLING. Marketing and selling expenses for the three months
ended September 30, 1997 increased by $944,000, or 84.5%, to approximately $2.1
million compared to approximately $1.1 million for the three months ended
September 30, 1996. This increase primarily reflects the inclusion of Archetype
operations since April 28, 1997.
Marketing and selling expenses for the nine months ended September 30,
1997 increased by $1,618,000, or 49.6%, to approximately $4.9 million compared
to approximately $3.3 million for the nine months ended September 30, 1996. This
increase primarily reflects the inclusion of Archetype operations for the
period.
10
RESEARCH AND DEVELOPMENT. Research and development expenses for the three
months ended September 30, 1997 increased by $507,000, or 151.8%, to $841,000
compared to $334,000 for the three months ended September 30, 1996, reflecting
the addition of personnel to support expanded development of the Company's
enabling technologies, as well as the addition of Archetype development.
Research and development expenses consist primarily of personnel costs and fees
paid for outside software development and consulting fees.
Research and development expenses for the nine months ended September 30,
1997 increased by $984,000, or 97.0%, to approximately $2.0 million compared to
approximately $1.0 million for the nine months ended September 30, 1996,
reflecting the addition of personnel to support expanded development of the
Company's enabling technologies, as well as Archetype expenses since April 28,
1997. Research and development expenses consist primarily of personnel costs and
fees paid for outside software development and consulting fees. The Company
expects to continue to invest in research and development expenditures in future
periods to support development of current and future products and technologies.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three months ended September 30, 1997 increased by $107,000, or 27.5%, to $
495,000 compared to $388,000 for the three months ended September 30, 1996. As a
percentage of revenues, general and administrative expenses represented 13.5%
for the three months ended September 30, 1997 compared to 14.8% for the three
months ended September 30, 1996.
General and administrative expenses for the nine months ended September
30, 1997 increased by $320,000, or 27.5%, to approximately $1.5 million compared
to approximately $1.2 million for the nine months ended September 30, 1996. As a
percentage of revenues, general and administrative expenses represented 16.0%
for the nine months ended September 30, 1997 compared to 14.5% for the nine
months ended September 30, 1996.
Operating expenses for the nine months ended September 30, 1997 reflect
non-recurring expenses of $6.3 million, including $4.9 million for in process
research and development expenses incurred in conjunction with the merger of the
Company and Archetype and $1.4 million for severance and other non-recurring
compensation expenses.
The Company recorded a tax provision for the three months and nine months
ended September 30, 1997 of $57,000 and $198,000, respectively. These provisions
consisted of foreign withholding taxes of $47,000 and $136,000, respectively,
and an income tax provision of $10,000 and $62,000, respectively, in the three
months and nine months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily through the public sale of
equity securities and cash flow from operations.
At September 30, 1997, the Company had cash and cash equivalents of $6.4
million, a decrease of $5.3 million from approximately $11.7 million at December
31, 1996. Working capital was approximately $8.9 million at September 30, 1997
as compared to $14.2 million at December 31, 1996. The Company's operating
activities used cash of $705,000 for the nine months ended September 30, 1997
and provided cash of $219,000 for the nine months ended September 30, 1996. The
Company's investing activities used cash of approximately $4.6 million for the
nine months ended September 30, 1997 as compared to $592,000 for the nine months
ended September 30, 1996. Investing activities consisted primarily of the
purchase of Archetype as well as the purchase of substantially all assets of
Mainstream Software Solutions. The Company's financing activities used cash of
$38,000 for the nine months ended September 30, 1997 and provided cash of
$760,000 for the nine months ended September 30, 1996.
11
The Company has received a $2 million unsecured working capital line of
credit from a commercial lender. This line of credit bears interest at the
bank's base lending rate, and will expire in August 1998.
The Company believes that the cash generated from the proceeds of its
initial public offering of its Class A Common Stock, cash from operations,
current cash balances and the availability of its working capital line of credit
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.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
During the quarter ended September 30, 1997, the Company issued an
aggregate of 143,869 shares of Class A Common Stock including (i) 13,000 shares
of Class A Common Stock issued in connection with the exercise of 13,000 vested
options issued under the Company's 1994 Stock Plan, and (ii) 130,869 shares of
Class A Common Stock issued in connection with the conversion of 130,869 shares
of the Company's Class B Common Stock at the request of the holder thereof
pursuant to the terms of the Company's Certificate of Incorporation.
The sales and issuances of securities under the 1994 Stock Plan are deemed
to be exempt from registration under the Securities Act of 1933, as amended (the
"Securities Act"), under Rule 701 promulgated thereunder, in that they were
issued pursuant to a written compensatory benefit plan or pursuant to a written
contract relating to compensation as provided by Rule 701. The issuances of
securities upon conversion of the Class B Common Stock is deemed to be exempt
from registration under the Securities Act under Section 4(2) thereof.
On September 30, 1997, the Company filed a Registration Statement on Form
S-8 under the Securities Act of 1933, as amended, relating to the issuance of up
to an aggregate of 3,500,000 shares of the Company's Class A Common Stock, par
value $.01 per share, pursuant to stock options and warrants granted or which
may be granted under the Company's 1997 Stock Plan, 1996 Stock Plan and 1994
Stock Plan.
12
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.4.7 First Amendment to Credit Agreement dated August 29, 1997
between BankBoston, N.A. and Company.
10.4.8 Amended and Restated Revolving Credit Note dated August 29,
1997 between BankBoston, N.A. and the Company.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Not applicable.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BITSTREAM INC.
--------------
(Registrant)
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Wendy Darland Vice President, Finance and November 13, 1997
- -------------------------- Administration, Chief Financial
Wendy Darland Officer, Treasurer and Assistant
Secretary (Principal Financial
Officer and Principal Accounting
Officer)
</TABLE>
14
EXHIBIT 10.4.7
FIRST AMENDMENT TO CREDIT AGREEMENT
This First Amendment to Credit Agreement (this "Agreement") is made as
of August 29, 1997 by and between BITSTREAM INC., a Delaware corporation with a
place of business at 215 First Street, Cambridge, Massachusetts 02142 (the
"Borrower") and BANKBOSTON, N.A., successor by merger with BayBank, N.A.,
formerly known as BayBank, with an address at 100 Federal Street, Boston,
Massachusetts 02110 (the "Bank").
WHEREAS, the Bank and the Borrower have entered into a loan arrangement
as of July 14, 1995, evidenced by, among other documents (the "Loan Documents"),
a certain Credit Agreement dated as of July 14, 1995 by and between the Borrower
and the Bank (as may be amended, the "Credit Agreement"). Terms used but not
defined herein are used with the meanings ascribed to them in the Credit
Agreement.
WHEREAS, the Borrower has requested, and the Bank has agreed, to amend
certain terms of the Loan Documents, as more particularly set forth herein.
NOW THEREFORE, for good and valuable consideration, the receipt,
adequacy and sufficiency of which is hereby acknowledged, the parties hereto
agree, effective as of the date hereof, as follows:
1. The Credit Agreement shall be amended by deleting the
definition of "Borrowing Base" in Section 1.1 on Page 2 and inserting
in lieu thereof the following text:
""Borrowing Base" shall mean at any time an amount
equal to (as shown on the Bank's records at any time) eighty
percent (80%) of all Eligible Accounts."
2. The Credit Agreement shall be amended by deleting in its
entirety the definition of "Eligible International Account" in Section
1.1 on Page 4.
3. The Credit Agreement shall be amended by deleting the
definition of "Maximum Credit Amount" in Section 1.1 on Page 7 and
inserting in lieu thereof the following text:
""Maximum Credit Amount" shall mean Two Million and
00/100 Dollars ($2,000,000.00)."
4. The Credit Agreement shall be amended by deleting in its
entirety the definition of "Prime Rate" in Section 1.1 on Page 8 and
inserting in lieu thereof in Section 1.1 on Page 2 after the definition
of "Banking Day" the following text:
""Base Rate" shall mean the higher of (a) the annual
rate of interest announced from time to time by the Bank at
15
its head office in Boston, Massachusetts as its "Base Rate" or
(b) one half of one percent (1/2%) above the overnight federal
funds effective rate as published by the Board of Governors of
the Federal Reserve System, as in effect from time to time.
All references herein to the Prime Rate are deemed to refer to
the Base Rate."
5. The Credit Agreement shall be amended by deleting the
definition of "Revolving Credit Facility Termination Date" in Section
1.1 on Page 9 and inserting in lieu thereof the following text:
""Revolving Credit Facility Termination Date" shall
mean the earlier of (a) written demand of the Bank to the
Borrower and (b) July 15, 1998."
6. The Credit Agreement shall be amended by deleting in
Section 2.2 on Page 11 the following text:
"The interest rate for any portion of the outstanding
principal balance of the Revolving Credit Note shall be
computed at a per annum rate equal to the lesser of (a) the
Prime Rate plus two percent (2%) and (b) the Prime Rate plus
two percent (2%) minus the product of 0.25% and the number of
Rate Reduction Events that have occurred; provided, however,
that in no event shall the interest rate be less than Prime
plus one percent (1%)."
and substituting in lieu thereof the following text:
"The interest rate for any portion of the outstanding
principal balance of the Revolving Credit Note shall be
computed at a per annum rate equal to the Base Rate."
7. The Credit Agreement shall be amended by deleting Section
2.9 on Page 14 and inserting in lieu thereof the following text:
"2.9 Revolving Credit Facility Fee. In addition to
the interest described above, the Borrower shall pay to the
Bank a non-refundable facility fee, payable on the date
hereof, of $7,500.00, representing 0.375% of the Maximum
Credit Amount at the closing of this Agreement."
8. The Credit Agreement shall be amended by deleting in its
entirety Section 9.1 on Page 30 and inserting in lieu thereof the
following text:
"9.1 Profitability. The Borrower shall not incur an
operating loss of greater than: (i) $1,000,000.00 for fiscal
year 1997, exclusive of acquisition and non-recurring charges
incurred during the second quarter of 1997, and (ii)
$500,000.00 for the first two quarters of fiscal 1998."
16
9. The Credit Agreement shall be amended by deleting in its
entirety Section 9.2 on Page 30-31 and inserting in lieu thereof the
following text:
"9.2 Ratio of Total Liabilities to Tangible Net
Worth. The Borrower shall not permit the ratio of its Total
Liabilities to Tangible Net Worth as at the end of each month
to exceed the ratio of 0.75:1."
10. The Credit Agreement shall be amended by deleting in its
entirety Section 9.3 on Page 31 and inserting in lieu thereof the
following text:
"9.3 Quick Ratio. The Borrower shall maintain at the
end of each quarter a Quick Ratio of no less than 2.00:1."
11. The Credit Agreement shall be amended by deleting in its
entirety Section 9.6 on Page 31.
12. The Credit Agreement shall be amended by deleting in its
entirety Section 10.8 on Page 34 and inserting in lieu thereof the
following text:
"10.8 Maintenance of Accounts. The Borrower shall
maintain the Bank as its depository for its principal
depository account, which account shall contain a minimum
balance at all times of $4,000,000.00."
13. The Credit Agreement shall be amended by deleting the
notice provision in Section 15.2 on Page 42 as it pertains to the
addresses of the parties and inserting in lieu thereof the following
text:
"If to the Borrower: Bitstream Inc.
215 First Street
Cambridge, Massachusetts 02142
Attn: Wendy Darland
Vice President, Finance and
Administration
With a copy to: Anna M. Chagnon, General Counsel
Bitstream Inc.
215 First Street
Cambridge, Massachusetts 02142
If to the Bank: BankBoston, N.A.
100 Federal Street, 8th Floor
Boston, Massachusetts 02110
Attn: Stephen C. Buzzell
Vice President
With a copy to: Riemer & Braunstein
Three Center Plaza
17
Boston, Massachusetts 02108
Attn: David A. Ephraim, Esquire"
14. The Security Agreement dated as of July 14, 1995 by and
between the Borrower and the Bank, as may have been amended, is hereby
terminated, and the Bank hereby releases the security interest secured
thereunder.
15. The Patent and License Security Agreement dated as of July
14, 1995 by and between the Borrower and the Bank, as may have been
amended, is hereby terminated, and the Bank hereby releases the
security interest secured thereunder.
16. The Trademark and License Security Agreement dated as of
July 14, 1995 by and between the Borrower and the Bank, as may have
been amended, is hereby terminated, and the Bank hereby releases the
security interest secured thereunder.
17. The Bank hereby releases any and all other security
interests created pursuant to the Loan Documents, including, without
limitation, any filings made by the Borrower in favor of the Bank with
the U.S. Copyright Office.
18. Conditions. The effectiveness of this Agreement shall be
subject to the compliance by the Borrower with its representations,
warranties, covenants and agreements contained herein and in the Loan
Documents after giving effect to the amendments thereto contemplated
hereby, and to the prior satisfaction of the following further
conditions:
18.1 Corporate Due Diligence. The Borrower shall
deliver to the Bank evidence that all necessary corporate actions in
connection with the making of this Agreement and the transactions
contemplated hereby and thereby have been taken by the Borrower.
18.2 Bank's Expenses. The Borrower shall pay all of
the Bank's reasonable out-of-pocket expenses, including the attorneys'
fees and disbursements of the Bank's counsel, Riemer & Braunstein, in
connection with this Agreement, the transactions contemplated hereby
and the matters referred to herein and the Loan Documents.
18.3 General. All instruments and legal and corporate
proceedings in connection with this Agreement and the transactions
contemplated hereby shall be satisfactory in form and substance to the
Bank and its counsel, and the Bank and its counsel shall have received
copies of all documents, including records of corporate authority,
which the Bank and its counsel may have requested in connection
therewith.
19. Representations and Warranties. The Borrower hereby
represent and warrants that:
18
19.1 Authority. The Borrower has taken all action
necessary to enter into this Agreement and all agreements and
instruments executed by the Borrower in connection herewith.
19.2 Incorporation of Representations and Warranties.
The representations and warranties set forth in each of the Loan
Documents, after giving effect to the within amendments, are true and
correct on and as of the date hereof.
19.3 No Default, Etc. No breach of any of the Loan
Documents exists on the date hereof.
20. Covenants and Agreements. The Borrower hereby reaffirms
each of the covenants and agreements of the Borrower set forth in each
of the Loan Documents. As hereby amended, the Loan Documents are hereby
ratified and confirmed in all respects.
21. Miscellaneous. The invalidity or unenforceability of any
term or provision hereof shall not affect the validity or
enforceability of any other term or provision hereof. The headings in
this Agreement are for convenience of reference only and shall not
alter or otherwise affect the meaning hereof.
This Agreement may be executed in any number of counterparts which
together shall constitute one instrument and shall be governed by and construed
in accordance with the laws (other than the conflict of law rules) of The
Commonwealth of Massachusetts and shall bind and inure to the benefit of the
parties hereto and their respective successors and assigns.
Executed as a sealed instrument as of the day and year first written
above.
WITNESS: BITSTREAM INC.
/s/ Anna M. Chagnon By: /s/ John Collins
- ------------------- -----------------
Name: John Collins
-------------
Title: V.P. Engineering
-----------------
WITNESS: BANKBOSTON, N.A.
/s/ Cecelia C. Duggan By: /s/ Stephen C. Buzzell
- --------------------- -----------------------
Name: Stephen C. Buzzell
-------------------
Title: Vice President
---------------
19
EXHIBIT 10.4.8
AMENDED AND RESTATED REVOLVING CREDIT NOTE
------------------------------------------
$2,000,000.00 Boston, Massachusetts
August 29, 1997
FOR VALUE RECEIVED, the undersigned, BITSTREAM INC., a Delaware
corporation (the "Borrower") promises to pay to BANKBOSTON, N.A., a national
banking association (the "Bank") the principal amount of Two Million Dollars
($2,000,000.00) or such lesser principal amount as shall represent the unpaid
principal balance of all revolving credit loans made by the Bank to the Borrower
pursuant to the Credit Agreement (hereinafter defined) and noted on the records
of the Bank, such payment to be made as hereinafter provided, together with
interest (computed on the basis of the actual number of days elapsed over a
360-day year) on the unpaid principal amount hereof until paid in full.
The entire unpaid principal (not at the time overdue) of this Note
shall bear interest at the rate or rates from time to time in effect under the
Credit Agreement. Accrued interest on the unpaid principal under this Note shall
be payable on the dates specified in the Credit Agreement.
In no event shall the aggregate outstanding principal amount of the
revolving credit loans at any time exceed the Maximum Available Revolving Credit
Funds (as defined in the Credit Agreement), as the amount of Maximum Available
Revolving Credit Funds is reduced from time to time pursuant to the terms hereof
or pursuant to the terms of the Credit Agreement. Accordingly, upon any such
reduction in the Maximum Available Revolving Credit Funds, the Borrower agrees
to repay so much of the revolving credit loans as may be necessary so that the
aggregate outstanding principal amount of the revolving credit loans will not
exceed the Maximum Available Revolving Credit Funds, as so reduced. On the
earlier of (a) July 15, 1998, the date of the final maturity of this Note, or
(b) upon demand of the Bank, there shall become absolutely due and payable by
the Borrower hereunder, and the Borrower hereby promises to pay to the holder
hereof, the outstanding principal balance of this Note plus all accrued but
unpaid interest hereon and all (if any) other amounts payable on or in respect
of this Note or the indebtedness evidenced hereby.
All payments under this Note shall be made to the Bank at 100 Federal
Street, Boston, Massachusetts 02110 (or at such other place as the Bank may
designate from time to time
20
in writing) in lawful money of the United States of America in immediately
available funds. The Borrower may prepay this Note in whole or in part at any
time without premium or penalty. Amounts so paid and other amounts may be
borrowed and reborrowed by the Borrower hereunder from time to time as provided
in the Credit Agreement.
This Note is issued pursuant to, is entitled to the benefits of, and is
subject to the provisions of a certain Credit Agreement dated as of July 14,
1995, as amended by a certain First Amendment to Credit Agreement dated August
29, 1997 by and between the Borrower and the Bank (herein, as the same may from
time to time be further amended or extended, referred to as the "Credit
Agreement"). Neither this reference to the Credit Agreement nor any provision
thereof shall affect or impair the absolute and unconditional obligation of the
Borrower to pay the principal of and interest on this Note as herein provided.
Upon an Event of Default, as defined in the Credit Agreement, the
aggregate unpaid balance of principal plus accrued interest may become or may be
declared due and payable in the manner and with the effect provided in the
Credit Agreement.
The Borrower hereby waives presentment, demand, notice of dishonor,
protest and all demands and notices in connection with the delivery, acceptance,
performance and enforcement of this Note and assents to any extension or
postponement of the time of payment or any other indulgence without notice.
This Note is governed by and construed in accordance with the laws of
the Commonwealth of Massachusetts and is executed as a sealed instrument as of
the date first above written.
WITNESS: BITSTREAM INC.
By: /s/ John Collins
------------------
Name: John Collins
--------------
Title: V.P. Engineering
------------------
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE NINE
MONTHS ENDED 9-30-97 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
FINANCIAL STATEMENTS AND NOTES THERETO CONTAINED IN THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 6,395,000
<SECURITIES> 0
<RECEIVABLES> 5,621,000
<ALLOWANCES> 518,000
<INVENTORY> 39,000
<CURRENT-ASSETS> 12,843,000
<PP&E> 3,986,000
<DEPRECIATION> 2,631,000
<TOTAL-ASSETS> 16,490,000
<CURRENT-LIABILITIES> 3,897,000
<BONDS> 0
65,000
0
<COMMON> 0
<OTHER-SE> 12,430,000
<TOTAL-LIABILITY-AND-EQUITY> 16,490,000
<SALES> 9,344,000
<TOTAL-REVENUES> 9,344,000
<CGS> 1,049,000
<TOTAL-COSTS> 14,663,000
<OTHER-EXPENSES> 459,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,909,000)
<INCOME-TAX> 198,000
<INCOME-CONTINUING> (6,108,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,108,000)
<EPS-PRIMARY> (0.98)
<EPS-DILUTED> 0
</TABLE>
