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 June 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.
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(Exact name of registrant as specified in its charter)
DELAWARE 04-2744890
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
215 FIRST STREET
CAMBRIDGE, MASSACHUSETTS 02142
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(Address of principal executive offices) (Zip Code)
(617) 497-6222
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
At August 12, 1997 there were 5,981,206 shares of Class A Common Stock, par
value $0.01 per share, and 130,869 shares of Class B Common Stock, par value
$0.01 per share, outstanding.
INDEX
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PAGE
NUMBERS
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND
JUNE 30, 1997...................................................................... 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
AND SIX MONTHS ENDED JUNE 30, 1996 AND 1997........................................ 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997............................................................. 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................................ 7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................................... 11
ITEM 2. CHANGES IN SECURITIES................................................................ 11
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................................................... 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS................................... 11
ITEM 5. OTHER INFORMATION.................................................................... 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................................... 12
SIGNATURES........................................................................... 13
</TABLE>
PART I -- FINANCIAL STATEMENTS
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
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(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,718,000 $ 8,238,000
Accounts receivable, net of allowance for doubtful accounts 1,552,000 1,891,000
Current portion of long-term accounts receivable and extended
plan accounts receivable, net of allowance for doubtful accounts 1,667,000 1,827,000
Deferred income taxes 868,000 868,000
Other current assets 434,000 368,000
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Total current assets: 16,239,000 13,192,000
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Property and equipment, net: 924,000 1,074,000
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Other assets:
Long-term accounts receivable, net of current portion 123,000 18,000
Intangible assets -- 2,183,000
Other assets 191,000 170,000
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Total other assets 314,000 2,371,000
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Total assets: $ 17,477,000 $ 16,637,000
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of capital lease obligations $ 36,000 $ 31,000
Accounts payable 513,000 456,000
Accrued expenses 1,470,000 3,719,000
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Total current liabilities: 2,019,000 4,206,000
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Capital lease obligations, less current maturities: 79,000 66,000
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Other long-term liabilities: 20,000 33,000
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Stockholders' equity:
Common stock 59,000 65,000
Additional paid-in capital 26,637,000 29,755,000
Accumulated deficit (11,293,000) (17,447,000)
Cumulative translation adjustment (44,000) (41,000)
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Total stockholders' equity: 15,359,000 12,332,000
------------------ ------------------
Total liabilities and stockholders' equity: $ 17,477,000 $ 16,637,000
================== ==================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30,
---------------------------------------- -------------------------------------------
1996 1997 1996 1997
--------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
REVENUES:
Revenues $2,705,000 $3,163,000 $5,411,000 $5,685,000
Cost of revenues 452,000 485,000 808,000 774,000
--------- --------- --------- ---------
Gross Profit 2,253,000 2,678,000 4,603,000 4,911,000
--------- --------- --------- ---------
OPERATING EXPENSES:
Marketing and selling 1,039,000 1,603,000 2,145,000 2,819,000
Research and development 347,000 649,000 680,000 1,157,000
General and administrative 377,000 564,000 776,000 989,000
In-process research and development -- 4,930,000 -- 4,930,000
Severance and other non-recurring compensation -- 1,371,000 -- 1,371,000
--------- --------- --------- ---------
Total operating expenses 1,763,000 9,117,000 3,601,000 11,266,000
--------- --------- --------- ---------
Operating income (loss) 490,000 (6,439,000) 1,002,000 (6,355,000)
--------- --------- --------- ---------
Other income (expense), net (35,000) 171,000 (44,000) 342,000
--------- --------- --------- ---------
Income (loss) before provision for (benefit from)
income taxes 455,000 (6,268,000) 958,000 (6,013,000)
--------- --------- --------- ---------
Provision for (benefit from) income taxes (49,000) 118,000 (86,000) 141,000
--------- --------- --------- ---------
Net income (loss) $504,000 $(6,386,000) $1,044,000 $ (6,154,000)
======== ============ ========== =============
Net income (loss) per common and
common equivalent share $0.12 $(1.01) $0.24 $(1.01)
======== ============ ========== =============
Weighted average common and
common equivalent shares outstanding 4,745,292 6,303,487 4,745,292 6,112,453
======== ============ ========== =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
SIX MONTHS ENDED
JUNE 30,
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1996 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ 1,044,000 $ (6,154,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
In-process research and development 0 4,930,000
Depreciation and amortization 108,000 201,000
Deferred income tax benefit (158,000) 0
Changes in assets and liabilities-
Accounts receivable (299,000) (180,000)
Long-term and extended plan accounts receivable (416,000) 104,000
Other current assets (139,000) 278,000
Accounts payable (63,000) (297,000)
Accrued expenses 82,000 1,852,000
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Net cash provided by operating activities $ 159,000 $ 734,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (453,000) (130,000)
Proceeds from sale of property and equipment 23,000 0
Acquisition of businesses 0 (4,141,000)
Change in other assets 0 81,000
Change in other long term liabilities (5,000) (18,000)
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Net cash provided by (used in) investing activities $ (435,000) $ (4,172,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from capital lease obligations 191,000 0
Proceeds from debt to stockholders 600,000 0
Payments on capital lease obligations (74,000) (23,000)
Payments on line of credit (150,000) 0
Payments on IPO offering expenses 0 (68,000)
Proceeds from the exercise of stock options and warrants 5,000 49,000
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Net cash provided by (used in) financing activities $ 572,000 $ (42,000)
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Net Increase (Decrease) in Cash and Cash Equivalents 296,000 (3,480,000)
Cash and Cash Equivalents, beginning of period 390,000 11,718,000
------------ ------------
Cash and Cash Equivalents, end of period $ 686,000 $ 8,238,000
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 29,000 $ 2,000
Cash paid for income taxes $ 91,000 $ 118,000
In connection with the acquisition of businesses (see Note 5), the following
non-cash transactions occurred:
Fair value of assets acquired -- $ 7,959,000
Liabilities assumed -- (914,000)
Issuance of common stock -- (1,608,000)
Issuance of options to purchase common stock -- (1,296,000)
------------
Cash paid for acquisition and acquisition costs -- 4,141,000
============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 June 30, 1997, the statements of income for the six
months ended June 30, 1996 and 1997, the statements of cash flows for the six
months ended June 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 six months ended June 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 and six
months ended June 30, 1996 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.
Net loss per common and common equivalent share for the three and six months
ended June 30, 1997 have been calculated using weighted average number of common
and common equivilent shares outstanding.
(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 June 30, 1997, two customers represented 11.8%
and 13.5% of revenues, respectively. For the three months ended June 30, 1996,
three customers represented 12.9%, 15.7% and 16.7% of revenues, respectively.
For the six months ended June 30, 1997 and June 30, 1996, the Company had no
customers which represented 10% or more of revenues.
(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 six months ended June 30, 1997.
Pro forma calculations of basic and diluted earnings per share for the six
months ended June 30, 1996 as required by SFAS No. 128 are as follows:
<TABLE>
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1996
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<S> <C> <C>
Basic EPS Net Income $ 504,000 $ 1,044,000
Weighted average common shares outstanding 3,487,683 3,487,663
Basic EPS 0.14 0.30
Diluted EPS Net Income $ 504,000 $ 1,044,000
Weighted average common and common equivalent
shares outstanding 4,745,292 4,745,292
Diluted EPS 0.12 0.24
</TABLE>
(5) RECENT 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.
The aggregate purchase price of $6,762,000 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 assets. 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.
(6) SEVERANCE AND OTHER NON-RECURRING EXPENSES
Operating expenses for the three and six months ended June 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company develops and markets software products and technologies to
enhance the creation, transport, viewing and printing of electronic documents.
The Company primarily licenses its products and technologies to original
equipment manufacturers ("OEMs") and independent software vendors ("ISVs") for
inclusion in their output devices, embedded systems, applications, Internet
authoring tools, World Wide Web browsers and other products.
The Company derives revenues principally from the following sources: (i)
licensing fees and royalty payments paid by OEM and ISV customers; (ii) direct
sales of software solutions for the creation, enhancement, management,
transport, viewing and printing of electronic information; (iii) direct sales of
custom and other type products to end users such as graphic artists, desktop
publishers and corporations; and (iv) sales of type products to foreign
customers primarily through distributors. Royalty payments due from OEM and ISV
customers, who generally pay specified minimums or fixed fees for the right to
include the Company's products as a component of a larger product for a
specified time period or volume limit, are generally recognized as revenue at
the time the software is delivered to the OEM or ISV customer. If the royalty
payments are to be received over a period of time greater than one year, the
amount recognized is discounted to the present value of the future minimum
payments. Certain OEM and ISV customers pay royalties only upon the sublicensing
of the Company's products to end users. Royalties due from these OEM and ISV
customers are recognized when such sublicenses are reported to the Company by
the OEM or ISV customer. Revenues from sales to end users and foreign
distributors are generally recognized at the time the software products are
delivered to the customer.
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 (the "Merger
Agreement") among the Company, Archetype, and Archetype Acquisition Corporation
("A-Sub"), 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 comprised of direct costs of licenses and royalties, as
well as direct costs of product sales to end users. Included in cost of licenses
and royalties are fees paid to third parties for the development or license of
rights to technology and/or unique typeface designs and the costs incurred in
the fulfillment of custom orders from OEM and ISV customers. Included in cost of
product sales to end users and distributors are the direct costs associated with
the duplication, packaging and shipping of products, and any royalty fees paid
to third parties for rights to license typefaces.
Operating expenses consist primarily of sales and marketing expenses
(principally sales compensation and commissions), research and development
expense and general and administrative expenses.
Except for the historical information contained herein, this 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, 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 June 30, 1997 increased by
$458,000, or 16.9%, to approximately $3.2 million, as compared to approximately
$2.7 million for the three months ended June 30, 1996. Revenues from OEM and ISV
customers for the three months ended June 30, 1997 as compared to June 30, 1996
were relatively unchanged. Revenues from end users and distributors for the
three months ended June 30, 1997 increased by $453,000, or 84.5%, to
approximately $989,000 from approximately $536,000 for the three months ended
June 30, 1996 reflecting inclusion of Archetype revenues since April 28, 1997.
Revenues for the six months ended June 30, 1997 increased by $274,000, or
5.1%, to approximately $5.7 million, as compared to approximately $5.4 million
for the six months ended June 30, 1996. Revenues from OEM and ISV customers for
the six months ended June 30, 1997 declined by $267,000, or 6.1%, to
approximately $4.1 million from approximately $4.3 million for the six months
ended June 30, 1996. Revenues from end users and distributors for the six months
ended June 30, 1997 increased $540,000, or 52.7%, to approximately $1,564,000
from approximately $1,024,000 for the six months ended June 30, 1996 reflecting
inclusion of Archetype revenues since April 28, 1997.
GROSS PROFIT. Gross profit for the three months ended June 30, 1997
increased by $425,000, or 18.9%, to approximately $2.7 million compared to
approximately $2.3 million for the three months ended June 30, 1996. Gross
profit as a percentage of revenues for the three months ended June 30, 1997
increased to 84.67% compared to 83.29% for the three months ended June 30, 1996.
The increase in gross profit as a percentage of revenues reflects higher margins
earned on Archetype sales and a decrease in costs of licensing fees and
royalties.
Gross profit for the six months ended June 30, 1997 increased by $308,000,
or 6.7%, to approximately $4.9 million compared to approximately $4.6 million
for the three months ended June 30, 1996. Gross profit as a percentage of
revenues for the six months ended June 30, 1997 increased to 86.39% compared to
85.07% for the six months ended June 30, 1996. The increase in gross profit as a
percentage of revenues reflects higher margins earned on Archetype sales and a
decrease in costs of 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 June 30, 1997 increased by $564,000, or 54.3%, to approximately $1.6
million compared to approximately $1.0 million for the three months ended June
30, 1996. This increase primarily reflects the inclusion of Archetype operations
since April 28, 1997.
Marketing and selling expenses for the six months ended June 30, 1997
increased by $674,000, or 31.4%, to approximately $2.8 million compared to
approximately $2.1 million for the six months ended June 30, 1996. This increase
primarily reflects the inclusion of Archetype operations since April 28, 1997.
In future periods, the Company believes marketing and selling expenses may
increase in absolute dollars due to higher levels of sales commissions and
higher levels of promotional activities in support of new product introductions.
RESEARCH AND DEVELOPMENT. Research and development expenses for the
three months ended June 30, 1997 increased by $302,000, or 87.0%, to $649,000
compared to $347,000 for the three months ended June 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.
Research and development expenses for the six months ended June 30, 1997
increased by $477,000, or 70.1%, to approximately $1.2 million compared to
$680,000 for the six months ended June 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
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 three months ended June 30, 1997 increased by $187,000, or 49.6%, to
$564,000 compared to $377,000 for the three months ended June 30, 1996. As a
percentage of revenues, general and administrative expenses represented 17.83%
for the three months ended June 30, 1997 compared to 13.94% for the three months
ended June 30, 1996 reflecting an increase in professional fees in the three
months ended June 30, 1997.
General and administrative expenses for the six months ended June 30,
1997 increased by $213,000, or 27.4%, to $989,000 compared to $776,000 for the
six months ended June 30, 1996. As a percentage of revenues, general and
administrative expenses represented 17.83% for the six months ended June 30,
1997 compared to 14.34% for the six months ended June 30, 1996 reflecting an
increase in professional fees in the six months ended June 30, 1997. The Company
expects to increase general and administrative expenses in absolute dollars in
the future to support the Company's growth and infrastructure.
Operating expenses for the three months ended June 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. See Note 6 to the financial statements.
The Company recorded a tax provision for the three months and six
months ended June 30, 1997 of $118,000 and $141,000, respectively. These
provisions consisted of foreign withholding taxes of $85,000 and $90,000,
respectively, and current tax provision of $33,000 and $52,000, respectively, in
the three months and six months ended June 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 June 30, 1997, the Company had cash and cash equivalents of $8.2 million,
a decrease of $3.4 million from $11.7 million at December 31, 1996. Working
capital was $8.9 million at June 30, 1997 as compared to $14.2 million at
December 31, 1996. The Company's operating activities provided cash of $734,000
for the six months ended June 30, 1997 as compared to $159,000 for the six
months ended June 30, 1996. The Company's investing activities used cash of $4.2
million for the six months ended June 30, 1997 as compared to $435,000 for the
six months ended June 30, 1996. Investing activities consisted primarily of the
purchase of Archetype, as well as the purchase of substantially all of the
assets of Mainstream Software Solutions. The Company's financing activities used
cash of $42,000 for the six months ended June 30, 1997 and provided cash of
$562,000 for the six months ended June 30, 1996.
The Company has received a commitment from a commercial lender for a $2
million unsecured working capital line of credit. 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 June 30, 1997, the Company issued an aggregate of
318,007 shares of Class A Common Stock including (i) 26,850 shares of Class A
Common Stock issued in connection with the exercise of 26,850 vested options
issued under the Company's 1994 Stock Plan, and (ii) 291,157 shares of Class A
Common Stock issued in connection with the conversion of 291,157 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) On June 3, 1997, the Annual Meeting of Stockholders of the Company was
held at the Royal Sonesta Hotel, 5 Cambridge Parkway, Cambridge, Massachusetts
02142.
b) George B. Beitzel, Amos Kaminski, David G. Lubrano and Charles Ying were
elected at the Annual Meeting to serve as directors of the Company.
c) At the Annual Meeting, the Stockholders also voted to approve and ratify
the adoption of the Company's 1997 Stock Plan.
The following votes were tabulated on the aforementioned proposals:
1. To elect a board of four (4) directors to serve until the next Annual
Meeting of Stockholders or until their respective successors are elected and
qualified.
Nominee For Withheld Authority
------- --- ------------------
George B. Beitzel 3,829,894 31,850
Amos Kaminski 3,829,894 31,850
David G. Lubrano 3,830,194 31,550
Charles Ying 3,829,894 31,850
2. To approve and ratify the adoption of the Company's 1997 Stock Plan.
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
2,924,388 474,597 4,700 458,059
d) Not applicable
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.4.5 Fifth Amendment to Lease between Athenaeum Property LLC and
the Company dated April 15, 1997
10.4.6 Sixth Amendment to Lease between Athenaeum Property LLC and
the Company dated June 6, 1997
27.1 Financial Data Schedule
(b) Reports on form 8-K
The Company filed a Current Report on Form 8-K on May 9, 1997 and filed
an amendment to such Current Report on July 14, 1997 to announce the
Company's acquisition of Archetype, Inc, 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. The Form 8-K/A filed on
July 14, 1997 included financial statements for Archetype, Inc. for the
fiscal year ended December 31, 1996 and pro forma combined financial
statements for the Company and Archetype, Inc. giving effect to the merger
of the two companies.
SIGNATURES
In accordance with 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/ Charles Ying Chairman of the Board of Directors and August 14, 1997
- ----------------------------- Chief Executive Officer (Principal
Executive Officer, Principal Financial
Charles Ying Officer and Principal Accounting
Officer)
</TABLE>
EXHIBIT 10.4.5
--------------
FIFTH AMENDMENT TO LEASE
LESSOR: ATHENAEUM PROPERTY LLC
LESSEE: BITSTREAM INC.
DATE OF LEASE: MARCH 17, 1992;
(First Amendment September 7, 1993;
Second Amendment July 14, 1994;
Third Amendment July 15, 1996;
Fourth Amendment March 3, 1997)
PREMISES: ATHENAEUM HOUSE, 215 FIRST STREET,
CAMBRIDGE, MASSACHUSETTS
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which
are hereby acknowledged, the lease between Athenaeum Property LLC as Lessor and
Bitstream Inc., a Delaware corporation, as Lessee dated March 17, 1992, and
amended on September 7, 1993 and by letter agreement on July 14, 1994 and
amended on July 15, 1996, and on March 3, 1997, is hereby amended for the fifth
time effective April 1, 1997, as follows:
1. "EXPANDED LEASED PREMISES." Effective June 1, 1997 (the
"Effective Date") and pursuant to Paragraph 5 of the Fourth
Amendment to Lease, the Leased Premises shall be reduced by
2800 rentable square feet ("Reduced Leased Premises"), more or
less, on the ground floor of the Building as shown on Exhibit
A hereto. Lessee agrees it is giving up the Reduced Leased
Premises in its "as is" condition, except that the Reduced
Leased Premises shall be delivered to Lessor in vacuumed clean
condition, free of debris and personal effects.
2. ADJUSTED RENT. The Base Rent for the Leased Premises shall be
decreased as of the Effective Date by $28,000.00 per year,
calculated as 2,800 square feet at $10.00 per rentable square
feet, representing the Base Rent on the Reduced Leased
Premises.
3. DECREASED RENT ADJUSTMENT. As of the Effective Date, the Rent
Adjustment percentage in Paragraph 5 shall be decreased from
8.66 percent to 7.68 percent.
4. CONSTRUCTION; INTERPRETATION. To the extent that this lease
amendment conflicts with the existing lease, this amendment
shall control. Both parties acknowledge the lease remains in
full force and effect. Other than as stated in this amendment,
all other terms and conditions remain the same.
EXECUTED as a sealed instrument this 15th day of April, 1997.
ATHENAEUM PROPERTY LLC
By /s/ Allan R. Jones /s/ Barbara J. Soper
----------------------------- -----------------------------
President Witness
Athenaeum F.A. Inc.
Managing Member
BITSTREAM INC.
By: /s/ James D. Hart /s/ John F. Dervishian
---------------------------------- -----------------------------
Vice President, Treasurer and Witness
Chief Financial Officer
Duly Authorized
EXHIBIT A
"REDUCED LEASED PREMESIS"
A floor plan of consisting of 2,800 rentable square feet on the lower
level of the property located at 215 First Street, Cambridge, Massachusetts is
set forth on this Exhibit.
THE ATHENAEUM HOUSE Rev.
215 First Street, Cambridge Lower Level May 1, 1997
EXHIBIT 10.4.6
--------------
SIXTH AMENDMENT TO LEASE
LESSOR: Athenaeum Property LLC
LESSEE: Bitstream Inc.
DATE OF LEASE: March 17, 1992;
(First Amendment September 7, 1993,
Second Amendment July 14, 1994,
Third Amendment July 15, 1994,
Fourth Amendment March 3, 1997, and
Fifth Amendment April 15, 1997)
PREMISES: Athenaeum House, 215 First Street,
Cambridge, Massachusetts (the "Building")
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of
which are hereby acknowledged, the lease originally entered into between
Athenaeum Realty Nominee Trust as Lessor and Bitstream Inc., a Massachusetts
corporation, as Lessee dated March 17, 1992, and amended as listed above
(collectively, the "Lease"), is hereby further amended as follows as of July 1,
1997 (the "Effective Date"):
1. PARTIES. The parties acknowledge and agree that Athenaeum
Property LLC has assumed all obligations as Lessor and that
Bitstream Inc., a Delaware corporation, has assumed all
obligations as Lessee Under the Lease.
2. "ADDITIONAL LEASED PREMISES." As of the Effective Date, 5,624
rentable square feet ("RSF"), more or less, shall be added to
the Leased Premises on the second floor of the Building as
shown on Exhibit A hereto ("Additional Leased Premises").
3. TERM. The initial term of the Lease shall be extended through
October 1, 2003 with respect to the Additional Leased Premises
added hereby, and also the Expanded Leased Premises that the
parties added by the Fourth Amendment. The initial Lease term
shall remain unchanged with respect to all other space under
the Lease, and continue to extend through October 1, 1998 in
accordance with the Second Amendment, ss.6.
4. INCREASED RENT. The Base Rent for the Leased Premises shall be
increased as of the Effective Date by $18.00 per rentable
square foot of the Additional Leased Premises, or $101,232 per
year through
Sixth Amendment to Lease dated March 17, 1992 Effective Date: July 1, 1997
Athenaeum Property LLC and Bitstream Inc. Page 2
the end of the said term. All other rental amounts in the
Lease shall remain unchanged.
5. INCREASED RENT ADJUSTMENT. The Rent Adjustment percentage for
Real Estate Taxes and Common Area Operating expenses in ss.5
of the Lease shall be increased from 7.68% percent to 9.65% as
of the Effective Date.
6. UTILITIES. All Lessee's utilities will continue to be
separately metered, or billed on a pro rata basis.
7. OPTIONS TO EXTEND. The parties confirm and agree as follows
with respect to the option to extend the term of the Leased
Premises in ss.23 of the original lease:
7.1. Original Leased Premises. The option to extend with
respect to the Leased Premises other than the
Expanded Leased Premises and Additional Leased
Premises (i.e. 17,174 RSF) shall remain unchanged
hereby, and is hereby confirmed to consist of two,
consecutive five (5) year extensions, the first to
begin on October 1, 1998 in accordance with the
Second Amendment,ss.6, and the second to begin on the
fifth anniversary thereof, or October 1,2003, each
option to be exercised within the appropriate time
period as provided in the saidss.23 of the original
lease, and the rent to be determined in accordance
with the formula stated in the saidss.23 on pp. 15-17
of the original lease.
7.2 Expanded and Additional Leased Premises. There shall
be only one, five year option to extend the term of
the "Expanded" and "Additional" Leased Premises
(4,700 RSF and 5,624 RSF, respectively), beginning on
October 1,2003, and upon written notice from LESEE to
LESSOR at least six (6) months prior to the
expiration of the initial lease term (September 30,
2003). The rental amount as of the commencement of
the extended term shall be fair market value as
determined in accordance with the procedure set forth
in the eighth full paragraph of ss.23 of the original
lease, beginning at the bottom of page 15, and
continuing through the top of page 17 thereof.
8. CONDITION OF ADDITIONAL LEASED PREMISES. Lessee agrees it is
leasing the Additional Leased Premises "as is," except that
the Additional Leased Premises shall be delivered vacant and
free of rights of possession or occupancy, vacuumed clean,
free of debris and personal effects, and all systems to be
maintained by Landlord under the Lease shall be in good
working order.
9. BROKER. The Lessor and Lessee each represent and warrant to
the other hat each has had no dealings with any Brokers
concerning this lease other than Robert A. Jones & Co., and
each party agrees
Sixth Amendment to Lease dated March 17, 1992 Effective Date: July 1, 1997
Athenaeum Property LLC and Bitstream Inc. Page 3
to indemnify and hold the other harmless for any damages
occasioned to the other by reason of a breach f this
representation and warranty.
10. CONSTRUCTION; INTERPRETATION. To the extent that this
amendment conflicts with the original lease, this amendment
shall control. Both parties acknowledge the lease remains in
full force and effect. Other than as stated in this amendment,
all other terms and conditions remain the same.
EXECUTED as a sealed instrument this 6th day of June 1997.
ATHENAEUM PROPERTY LLC
By: /s/ Allan R. Jones /s/ Geraldine McCarthy
--------------------------------- -------------------------
Allan R. Jones, President Witness
Athenaeum F.A. Inc.
Managing Member
BITSTREAM INC.
By: /s/ James D. Hart /s/ John F. Dervishian
--------------------------------- -------------------------
James D. Hart, Witness
Vice President, Treasurer and
Chief Financial Officer
EXHIBIT A
"ADDITIONAL LEASED PREMESIS"
A floor plan of consisting of 5,624 rentable square feet on the second
floor of the property located at 215 First Street, Cambridge, Massachusetts is
set forth on this Exhibit.
THE ATHENAEUM HOUSE Rev.
215 First Street, Cambridge Second Floor May 8, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SIX
MONTHS ENDED 6-30-97 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>
<CIK> 0000818813
<NAME> BITSTREAM INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 8,238,000
<SECURITIES> 0
<RECEIVABLES> 4,216,000
<ALLOWANCES> 499,000
<INVENTORY> 51,000
<CURRENT-ASSETS> 13,192,000
<PP&E> 3,578,000
<DEPRECIATION> 2,505,000
<TOTAL-ASSETS> 16,637,000
<CURRENT-LIABILITIES> 4,206,000
<BONDS> 0
0
0
<COMMON> 65,000
<OTHER-SE> 12,267,000
<TOTAL-LIABILITY-AND-EQUITY> 16,637,000
<SALES> 5,685,000
<TOTAL-REVENUES> 5,685,000
<CGS> 774,000
<TOTAL-COSTS> 11,266,000
<OTHER-EXPENSES> 342,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,013,000)
<INCOME-TAX> 141,000
<INCOME-CONTINUING> (6,154,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,154,000)
<EPS-PRIMARY> (1.01)
<EPS-DILUTED> 0
</TABLE>
