<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) APRIL 28, 1997
BITSTREAM INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-21541 04-2744890
(State of incorporation or other (Commission (I.R.S. Employer
jurisdiction of incorporation) File Number) Identification No.)
215 FIRST STREET, CAMBRIDGE, MASSACHUSETTS 02142
(Address of principal executive offices, including Zip code)
(617) 497-6222
(Registrant's telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of the Business Acquired.
Financial statements of business acquired are filed as
Exhibit 99(b) hereto.
(b) Proforma Financial Information.
Pro Forma financial information is filed as Exhibit 99(c)
hereto.
(c) Exhibits
Exhibit Number Description of Exhibit
99(a) Agreement and Plan of Merger among Bitstream Inc.,
Archetype, Inc. and Archetype Acquisition
Corporation, dated March 28, 1997. Incorporated by
reference to Exhibit 10.10 of the report of the
Registrant on Form 10-K for the fiscal year ended
December 31, 1996.
99(b) Financial Statements of Business Acquired (filed
herewith).
99(c) Pro Forma Financial Information (filed herewith).
2
<PAGE> 3
SIGNATURE
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.
Date: July 14, 1997 Bitstream Inc.
By: /s/ Charles Ying
--------------------------
President
3
<PAGE> 4
EXHIBIT INDEX
The following designated exhibits are filed herewith:
Exhibit
99(a) Agreement and Plan of Merger among Bitstream Inc., Archetype,
Inc. and Archetype Acquisition Corporation, dated March 28,
1997. Incorporated by reference to Exhibit 10.10 of the report
of the Registrant on Form 10-K for the fiscal year ended
December 31, 1997.
99(b) Financial Statements of Business Acquired (filed herewith).
99(c) Pro Forma Financial Information (filed herewith).
4
<PAGE> 1
EXHIBIT 99(b)
[ARTHUR ANDERSEN LLP LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Archetype, Inc.:
We have audited the accompanying balance sheets of Archetype, Inc. (a Delaware
corporation) as of December 31, 1996 and 1995, and the related statements of
operations and accumulated deficit and cash flows for each of the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Archetype, Inc. as of December
31, 1996 and 1995, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered significant losses from
operations and has negative working capital and a stockholders' deficit that
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
[ARTHUR ANDERSEN LLP LOGO]
Boston, Massachusetts
March 26, 1997
<PAGE> 2
ARCHETYPE, INC.
BALANCE SHEETS -- DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash $114,780 $ 79,918
Accounts receivable, less allowances of $83,000 and
$84,000 as of 1996 and 1995, respectively 474,166 641,346
Prepaid expenses and other current assets 84,681 17,009
-------- --------
Total current assets 673,627 738,273
-------- --------
PROPERTY AND EQUIPMENT, AT COST:
Computer equipment and purchased software 277,627 192,311
Furniture and equipment 132,101 64,239
-------- --------
409,728 256,550
Less -- Accumulated depreciation 179,117 115,727
-------- --------
230,611 140,823
-------- --------
OTHER ASSETS 20,931 6,869
-------- --------
$925,169 $885,965
======== ========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT 1996 1995
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 5,076 $ 4,090
Accounts payable 223,203 253,333
Accrued expenses 452,688 384,454
Deferred revenue 448,953 306,665
Notes payable to stockholders 792,200 493,000
Loans payable to stockholders 107,473 107,473
----------- -----------
Total current liabilities 2,029,593 1,549,015
----------- -----------
LONG-TERM DEBT, LESS CURRENT PORTION 2,168 6,881
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' DEFICIT:
Class B convertible preferred stock, $.0001 par value -
Authorized -- 320,110 shares
Issued and outstanding -- 310,110 shares 31 31
(preference in liquidation of $750,466)
Class C convertible preferred stock, $.0001 par value -
Authorized, issued and outstanding --
255,255 shares (preference in liquidation of $849,999) 26 26
Common stock, $.0001 par value -
Authorized -- 2,350,000 shares
Issued and outstanding -- 774,514 in 1996 and
772,014 shares in 1995 77 77
Capital in excess of par value 1,711,920 1,692,545
Treasury stock (208,302 shares of common stock, at cost) (53,028) (53,028)
Accumulated deficit (2,765,618) (2,309,582)
----------- -----------
Total stockholders' deficit (1,106,592) (669,931)
----------- -----------
$ 925,169 $ 885,965
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 3
ARCHETYPE, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
REVENUES $ 3,041,633 $ 2,772,163
COST OF REVENUES 403,740 431,843
----------- -----------
Gross profit 2,637,893 2,340,320
----------- -----------
OPERATING EXPENSES:
Research and development 1,102,810 688,681
Operating, general and administrative 1,045,811 657,466
Selling and marketing 867,245 926,412
----------- -----------
Total operating expenses 3,015,866 2,272,559
----------- -----------
Operating income (loss) (377,973) 67,761
OTHER INCOME 14,914 --
INTEREST EXPENSE (92,977) (62,395)
----------- -----------
Net income (loss) (456,036) 5,366
ACCUMULATED DEFICIT, BEGINNING OF YEAR (2,309,582) (2,314,948)
----------- -----------
ACCUMULATED DEFICIT, END OF YEAR $(2,765,618) $(2,309,582)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
ARCHETYPE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(456,036) $ 5,366
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities -
Depreciation 78,727 53,005
Gain on disposal of property and equipment (10,614) --
Changes in current assets and liabilities -
Accounts receivable 167,180 (311,643)
Prepaid expenses and other current assets (67,672) 8,639
Accounts payable (30,130) 134,441
Accrued expenses 68,234 (59,708)
Deferred revenue 142,288 302,219
--------- ---------
Net cash provided by (used in) operating activities (108,023) 132,319
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (186,874) (104,770)
Decrease in other assets (14,062) 242
Proceeds from disposal of property and equipment 28,973 --
--------- ---------
Net cash used in investing activities (171,963) (104,528)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on note payable (3,727) (3,550)
Proceeds from issuance of stock 19,375 --
Proceeds from issuance of stockholder debt 299,200 --
--------- ---------
Net cash provided by (used in) financing activities 314,848 (3,550)
--------- ---------
NET INCREASE IN CASH 34,862 24,241
CASH, BEGINNING OF YEAR 79,918 55,677
--------- ---------
CASH, END OF YEAR $ 114,780 $ 79,918
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,339 $ 5,764
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
ARCHETYPE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) OPERATIONS AND MERGER
Archetype, Inc. (Archetype or the Company) is a developer of publishing
automation software for use on a variety of microcomputer hardware
platforms. The Company's customers are located primarily in the United
States, Europe and Asia.
The Company is subject to a number of risks associated with emerging
technology-oriented companies. Principal among these are the risks
associated with the development and marketing of the Company's products,
competition (including the development of substitute products) and the
need to obtain additional financing to fund future operations. The
Company has incurred a significant accumulated deficit to date and is
devoting substantially all of its efforts toward marketing its products.
Management's plan is to proceed with a merger with Bitstream, Inc., as
discussed below. In the event that the Company is unable to execute the
merger, there is substantial doubt concerning its ability to continue as
a going concern. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
On March 27, 1997, the Company entered into a Plan and Agreement of
Merger (the Merger Agreement) with Bitstream, Inc. (Bitstream), a
Delaware corporation primarily engaged in the business of developing and
marketing software products and technologies to enhance the creation,
transport, viewing and printing of electronic documents. The Merger
Agreement provides for the merger (the Merger) of Archetype into
Archetype Acquisition Corporation, a newly organized wholly owned
subsidiary of Bitstream. The Merger is intended to qualify as a tax-free
reorganization under the Internal Revenue Code.
The Merger Agreement provides that, upon consummation of the Merger, each
Archetype stockholder will receive, in exchange for their shares of
Archetype capital stock, a certain amount of cash and Class A Common
Stock (the Merger Consideration) depending on the class of Archetype
capital stock exchanged therefor. It is expected that the Merger
Consideration will consist of approximately $1.64 million in cash, in
aggregate, and approximately 531,427 shares of Class A Common Stock, in
aggregate, subject to certain adjustments. On the closing of the Merger,
it is expected that Bitstream will repay up to $800,000, in aggregate, of
indebtedness owed by Archetype to certain of its stockholders.
Additionally, following the Merger, the Company expects to issue options
or warrants (the Options) to purchase up to approximately 650,000 shares
of Class A Common Stock, in order to induce the former Archetype
employees and other persons receiving such options to become employees
of, or perform certain services for, Bitstream and/or to replace certain
outstanding options and warrants issued by Archetype. Of these Options,
450,000 will be issued at an exercise price of $.90 per share, and the
remaining 200,000 will be issued at an exercise price per share equal to
the fair market value of the Class A Common Stock on the date of the
consummation of the Merger.
<PAGE> 6
ARCHETYPE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(1) OPERATIONS AND MERGER (Continued)
Consummation of the Merger is subject to various conditions, and there
can be no assurance that the Merger will be consummated on the terms
referenced above, if at all.
(2) SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements reflect the application of certain
accounting policies as described below and elsewhere in the accompanying
financial statements and notes.
(a) Management Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(b) Revenue Recognition
License fees from software products marketed by the Company are
recognized when the software is shipped to customers. Maintenance
revenue is recognized ratably over the period of service.
Development revenue is recognized as the related work is
performed.
(c) Property and Equipment
Property and equipment are stated at cost. Depreciation is charged
to operations using the straight-line and declining-balance
methods over the estimated useful lives of the assets, ranging
from three to seven years.
(d) Software Development Costs
Costs incurred in the development of computer software to be sold
have been expensed as research and development costs in the
accompanying statements of operations and accumulated deficit, in
accordance with Statement of Financial Accounting Standards (SFAS)
No. 86, Accounting for the Costs of Computer Software To Be Sold,
Leased or Otherwise Marketed. SFAS No. 86 requires that costs
incurred in creating a computer software product be charged to
research and development expense until technological feasibility
has been established for the product. The costs incurred
subsequent to the attainment of technological feasibility are
insignificant.
<PAGE> 7
ARCHETYPE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(2) SIGNIFICANT ACCOUNTING POLICIES (Continued)
(e) Income Taxes
The Company accounts for income taxes using the liability method
in accordance with SFAS No. 109, Accounting for Income Taxes.
At December 31, 1996, the Company has net operating loss
carryforwards available for federal income tax purposes of
approximately $2,146,000. The net operating loss carryforwards
expire through the year 2011 and are subject to review and
possible adjustment by the Internal Revenue Service. The Internal
Revenue Code contains provisions that may limit the net operating
loss carryforwards available to be used in any given year in the
event of significant changes in ownership interest.
The components of the net deferred tax amount recognized in the
accompanying balance sheets are as follows:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Net operating loss carryforwards $ 715,000 $ 864,000
Nondeductible reserves and accruals 221,000 253,000
Valuation allowance (936,000) (1,117,000)
--------- -----------
$ - $ -
========= ===========
</TABLE>
Due to the uncertainty relating to the timing of the realization
of the benefits of certain of its favorable tax attributes in
future returns, the Company has placed valuation allowances
against its otherwise recognizable net deferred tax assets.
(f) Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and
cash equivalents, accounts receivable, current maturities of debt
and accounts payable. The carrying amount of these financial
instruments as of December 31, 1996, approximates fair value due
to the short-term nature of these instruments.
(g) 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.
<PAGE> 8
ARCHETYPE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(2) SIGNIFICANT ACCOUNTING POLICIES (Continued)
(g) Concentration of Credit Risk (Continued)
In 1995, one customer accounted for 15% of revenues; in 1996, no
one customer accounted for more than 10% of revenues.
(3) BORROWINGS
(a) Loans Payable, Notes Payable to Stockholders
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Note payable to officer/stockholder due on demand. The per annum interest rate
is 9% with interest due quarterly. The note payable, along with accrued
interest, is convertible into shares of common stock at a price per share of
$1.42 at the option of the stockholder $ 43,000 $ 43,000
Note payable to stockholder due on demand. The per annum interest rate under the
note is 12% with interest due quarterly. The note payable, along with accrued
interest, is convertible into shares of Class C convertible preferred stock at a
price per share of $3.33 at the option of the stockholder 450,000 450,000
Note payable to stockholder due on demand. The per annum interest rate under the
note is 12%. The note payable, along with accrued interest, is convertible into
shares of common stock at a price per share of $3.45 at the option of
the stockholder 250,000 -
Convertible debt due on demand. The debt is convertible to
stock based on a subsequent acquisition, merger or public offering 49,200 -
-------------- --------------
Notes payable to stockholders $ 792,200 $ 493,000
============== ==============
Loan payable to stockholder due on demand. The per annum
interest rate is 9% with interest due quarterly $ 102,460 $ 102,460
Loan payable to stockholder due on demand. The per annum
interest rate is 12% with interest due quarterly 5,013 5,013
-------------- --------------
Loans payable to stockholders $ 107,473 $ 107,473
============== ==============
</TABLE>
<PAGE> 9
ARCHETYPE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(3) BORROWINGS (Continued)
(b) Long-Term Debt
Long-term debt consists of a promissory note payable to a leasing
company. The note is payable in monthly principal and interest
installments of $449, through May 1998, with interest at 14.25%.
The promissory note payable is secured by the equipment financed.
(4) STOCKHOLDERS' DEFICIT
(a) Class B Convertible Preferred Stock
The Class B convertible preferred stock is currently convertible
at the option of the holder into 310,110 shares of the Company's
common stock, subject to adjustment based on certain conditions.
Conversion is automatic upon a public offering of the Company's
common stock generating at least $5,000,000 gross proceeds with a
per share price to the public of at least $5.00 per share. The
Class B convertible preferred stockholders have equal dividend
rights with the holders of the common stock and a liquidation
preference that is the greater of $2.42 per share plus declared
and unpaid dividends or such amount per share as would be payable
had such shares been converted into common stock.
(b) Class C Convertible Preferred Stock
The Class C convertible preferred stock is currently convertible
at the option of the holder into 255,255 shares of the Company's
common stock, subject to adjustment based on certain conditions.
Conversion is automatic upon a public offering of the Company's
common stock generating at least $10,000,000 gross proceeds with a
per share price to the public of at least $9.00 per share. The
Class C convertible preferred stockholders have dividend and
voting rights equal to that of holders of common stock and have a
preference in liquidation to both the Class B convertible
preferred stockholders and the common stockholders that is the
greater of $3.33 per share plus declared and unpaid dividends or
such amount per share as would be payable had such shares been
converted into common stock.
(c) Stock Option Plans
The Company has two stock option plans that provide for the
issuance of incentive and nonqualified stock options for the
purchase of up to 330,000 shares of the Company's common stock.
Employees, consultants and directors can be granted options to
purchase the Company's common stock at fair value on the date of
the grant as determined by the Board of Directors. Shares issuable
vest generally over four to five years, at the discretion of the
Board of Directors. Options for the purchase of 31,616 shares were
available for grant at December 31, 1996.
<PAGE> 10
ARCHETYPE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(4) STOCKHOLDERS' DEFICIT (Continued)
(c) Stock Option Plans (Continued)
Stock option activity is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES OPTION PRICE PRICE
<S> <C> <C> <C>
Balance, December 31, 1994 283,000 $ .97 - $ 2.00
Granted 20,500 1.75
Terminated (25,000) 1.50 - 2.00
----------- -----------------
Balance, December 31, 1995 278,500 .97 - 1.75
Granted 27,500 2.25
Terminated (8,000) 1.75
Exercised (2,500) 1.75
----------- -----------------
Balance, December 31, 1996 295,500 $ .97 - $ 2.25 $ 1.75
=========== ================= ======
Exercisable, December 31, 1996 221,750 $ .97 - $ 1.75 $ 1.66
=========== ================= ======
</TABLE>
The weighted average remaining life of the options outstanding as
of December 31, 1996 is approximately 7.1 years.
The Company accounts for its stock-based compensation plans under
APB Opinion No. 25, Accounting for Stock Issued to Employees. In
October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, Accounting for Stock-Based Compensation, which is
effective for fiscal years beginning after December 15, 1995. SFAS
No. 123 establishes a fair-value-based method of accounting for
stock-based compensation plans. The Company has adopted the
disclosure-only alternative for grants to employees, which
requires disclosure of the pro forma effects on earnings as if
SFAS No. 123 had been adopted, as well as certain other
information.
The Company has computed the pro forma disclosures required under
SFAS No. 123 for all 1996 and 1995 stock options granted to
employees as of December 31, 1996 using the Black-Scholes option
pricing model prescribed by SFAS No. 123.
<PAGE> 11
ARCHETYPE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(4) STOCKHOLDERS' DEFICIT (Continued)
(c) Stock Option Plans (Continued)
Assumptions used and the weighted average information are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
<S> <C> <C>
Risk-free interest rates 6.48% 6.50% - 7.79%
Expected dividend yield - -
Expected lives 7 years 7 years
Expected volatility - -
</TABLE>
The total fair value of the options granted to employees during
1996 and 1995 was computed as $22,550, and $14,370, respectively.
Of these amounts $7,351 and $3,166 would be charged to operations
for 1996 and 1995, respectively. The remaining amount of $26,403
would be amortized over the remaining vesting periods.
The effect of applying SFAS No. 123 would be as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
<S> <C> <C>
Pro forma net income (loss) $ (463,387) $ 2,200
</TABLE>
(5) COMMITMENTS AND CONTINGENCIES
(a) Commitments
The Company leases office space and equipment under agreements
that expire through 2001. The future minimum rental payments under
these leases are approximately as follows:
<TABLE>
<S> <C>
1997 $ 147,000
1998 131,000
1999 125,000
2000 115,000
2001 67,000
</TABLE>
<PAGE> 12
ARCHETYPE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(5) COMMITMENTS AND CONTINGENCIES (Continued)
(a) Commitments (Continued)
Total rent expense associated with these leases and included in
the accompanying statements of operations and accumulated deficit
was approximately $161,000 and $177,000 for 1996 and 1995,
respectively.
(b) Contingencies
The Company was involved in a lawsuit with a company that claimed
the Company owed commission payments to it on certain software
licenses sold. On March 9, 1995, the Company reached a settlement
related to this suit. The terms of the settlement required the
Company to make total payments, as defined, in 11 equal
installments, as well as the delivery of a specified amount of the
Company's product. Included in accrued expenses in the
accompanying balance sheets as of December 31, 1996 and 1995 is an
accrual of $6,350 related to litigation settlement costs.
(6) RELATED-PARTY TRANSACTIONS
In 1991, the Company recorded revenues of approximately $222,000 related
to development work performed for a company of which a principal
stockholder is also a significant stockholder of Archetype. Subsequent to
the completion of this development work, Archetype entered into a
technology license agreement with this company pursuant to which
Archetype will pay royalties on sales incorporating the licensed
technology at varying rates, as defined in the agreement, and had the
right to purchase the product rights for an amount equal to $3,600,000
less royalties paid through December 31, 1993.
On June 2, 1995, the Company restated the software license agreement with
the related party. The new agreement stipulates that the Company must
make aggregate payments of $1,200,000 to reach the buyout threshold. The
Company will have to pay a fixed royalty of 15% of the royalty base, as
defined, until the buyout threshold is achieved. Once the buyout
threshold has been achieved, the Company will have to pay a fixed royalty
of 7.5% of the royalty base for a minimum of 36 months thereafter. The
related party also has a loan payable of $102,460 due on demand from the
Company, which is included in loans payable to stockholders in the
accompanying balance sheets. The Company incurred royalty expense of
approximately $277,000 and $294,000 for the years ended December 31, 1996
and 1995, respectively. Included in accrued expenses in the accompanying
balance sheets are approximately $79,479 and $105,000 of royalties due to
the related party as of December 31, 1996 and 1995, respectively.
<PAGE> 1
EXHIBIT 99(c)
BITSTREAM INC.
PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
BITSTREAM INC. ARCHETYPE, INC. PRO FORMA
12/31/96 12/31/96 ADJUSTMENTS
------------- ---------- -----------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 11,718,000 $ 115,000 $(3,058,000)A
Accounts receivable, net of allowance for doubtful accounts 1,557,000 474,000 -
Current portion of long-term accounts receivable and extended
plan accounts receivable, net of Allowance for doubtful accounts 1,667,000 - -
Deferred income taxes 868,000 - -
Other current assets 434,000 85,000 -
------------- ---------- -----------
Total current assets: 16,239,000 674,000 (3,058,000)
------------- ---------- -----------
Property and equipment, net: 924,000 231,000 -
------------- ---------- -----------
Other assets:
Long-term accounts receivable, net of current portion 123,000 - -
Goodwill - - 1,712,000B
Other assets 191,000 20,000 -
------------- ---------- -----------
314,000 20,000 1,712,000
------------- ---------- -----------
Total assets: $ 17,477,000 $ 925,000 $(1,346,000)
============= ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of capital lease obligations $ 36,000 $ 5,000 $ -
Accounts payable 513,000 223,000 -
Accrued expenses 1,470,000 453,000 155,000C
Deferred revenue - 450,000 -
Loans payable to stockholders - - -
Notes payable to stockholders - 899,000 (899,000)D
------------- ---------- -----------
Total current liabilities: 2,019,000 2,030,000 (744,000)
------------- ---------- -----------
Capital lease obligations, less current maturities: 79,000 2,000 (2,000)
------------- ---------- -----------
Other long-term liabilities: 20,000 - -
------------- ---------- -----------
Stockholders' equity (deficit):
Common stock 59,000 - 5,000E
Additional paid-in capital 26,637,000 1,712,000 1,187,000E
Accumulated deficit (11,293,000) (2,766,000) (1,845,000)F
Treasury Stock - (53,000) 53,000E
Cumulative translation adjustment (44,000) - -
------------- ---------- -----------
Total stockholders' equity (deficit): 15,359,000 (1,107,000) (600,000)
------------- ---------- -----------
Total liabilities and stockholder's equity (deficit): $ 17,477,000 $ 925,000 $(1,346,000)
============= ========== ===========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
------------
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 8,775,000
Accounts receivable, net of allowance for doubtful accounts 2,026,000
Current portion of long-term accounts receivable and extended
plan accounts receivable, net of allowance for doubtful accounts 1,667,000
Deferred income taxes 868,000
Other current assets 519,000
------------
Total current assets: 13,855,000
------------
Property and equipment, net: 1,155,000
------------
Other assets:
Long-term accounts receivable, net of current portion 123,000
Goodwill 1,712,000
Other assets 211,000
------------
2,046,000
------------
Total assets: $ 17,056,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of capital lease obligations $ 41,000
Accounts payable 736,000
Accrued expenses 2,078,000
Deferred revenue 450,000
Loans payable to stockholders -
Notes payable to stockholders -
------------
Total current liabilities: 3,305,000
------------
Capital lease obligations, less current maturities: 79,002
------------
Other long-term liabilities: 20,000
------------
Stockholders' equity (deficit):
Common stock 64,000
Additional paid-in capital 29,536,000
Accumulated deficit (15,904,000)
Treasury Stock -
Cumulative translation adjustment (44,000)
------------
Total stockholders' equity (deficit): 13,652,000
------------
Total liabilities and stockholder's equity (deficit): $ 17,056,000
============
</TABLE>
<PAGE> 2
BITSTREAM INC.
PRO FORMA COMBINED STATEMENT OF OPERATION
(UNAUDITED)
<TABLE>
<CAPTION>
BITSTREAM INC. ARCHETYPE, INC. PRO FORMA PRO FORMA
12/31/96 12/31/96 ADJUSTMENTS G COMBINED
-------- -------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Revenues $ 10,551,000 $ 3,042,000 $ -- $ 13,593,000
Cost of revenues 1,858,000 404,000 (277,000) H 1,985,000
------------ ----------- --------- ------------
Gross Profit 8,693,000 2,638,000 277,000 11,608,000
------------ ----------- --------- ------------
OPERATING EXPENSES:
Marketing and selling 4,386,000 867,000 -- 5,255,000
Research and development 1,512,000 1,103,000 -- 2,615,000
General and administrative 1,533,000 1,046,000 342,000 I 2,921,000
------------ ----------- --------- ------------
Total operating expenses 7,431,000 3,016,000 342,000 10,789,000
------------ ----------- --------- ------------
Operating income (loss) 1,262,000 (378,000) (65,000) 819,000
------------ ----------- --------- ------------
Other income (expense), net (19,000) (78,000) 74,000 J (23,000)
------------ ----------- --------- ------------
Income (loss) before provision for (benefit
from) income taxes 1,243,000 (456,000) 9,000 796,000
Provision for (benefit from) income taxes (94,000) -- -- (94,000)
------------ ----------- --------- ------------
Net income (loss) $ 1,337,000 $ (456,000) $ 9,000 $ 890,000
============ =========== ========= ============
Pro forma net income per common and
common equivalent share $ 0.27 $ 0.15 K
============ =========== ========= ============
Pro forma weighted average common and
common equivalent shares outstanding 5,041,054 1,025,000 6,066,054 K
============ =========== ========= ============
</TABLE>
<PAGE> 3
BITSTREAM INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
(Unaudited)
Overview
On April 28, 1997, Bitstream Inc. (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. Pursuant to the Merger Agreement, the acquisition was
accomplished by merging (the "Merger") Archetype into A-Sub.
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, $0.01 par value per share ("Common Stock"), in
exchange for their shares of Archetype capital stock. The value of the shares of
the Common Stock issued in connection with the Merger was approximately $2
million based on a weighted average market price, as determined pursuant to the
terms of the Merger Agreement, of the Company's freely tradable shares. As the
shares issued for the Merger are subject to selling restrictions the shares are
not freely tradable. Therefore, for purposes of calculating aggregate
consideration paid, the value of the shares issued was recorded at a discounted
value. 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 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 200,000
have an exercise price of $3.94 per share.
Out of the above described cash payments made and securities issued by
the Company on the consummation of the Merger, an aggregate of $295,334 in cash,
130,382 shares of Common Stock and 35,460 Options issued to the former Archetype
stockholders in connection with the Merger were deposited with a third party
escrow agent to be held for up to one year to satisfy certain amounts which may
be payable to the Company in connection with certain adjustments which may be
made to the consideration payable under the Merger Agreement or certain claims
for indemnification which may be made by the Company under the terms of the
Merger Agreement.
The Merger was accounted for as a purchase, and accordingly,
the initial purchase price and acquisition costs aggregating approximately $6.3
million has preliminarily
<PAGE> 4
been allocated to the assets acquired which consists of approximately $4.6
million of in-process research and development, which will be charged to
operations in the second quarter, and approximately $1.7 million of intangible
assets.
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 amount allocated to in-process research and development relates to
projects that had not yet reached technological feasibility and that, until
completion of the development, have no alternative future use. These projects
will require substantial high risk development and testing by the Company prior
to reaching technological feasibility.
Basis of Accompanying Unaudited Pro Forma Combined Financial Statements
The following unaudited pro forma combined financial statements give
effect to the Merger. The pro forma combined balance sheet of the Company and
Archetype assumes the Merger was consummated on December 31, 1996. The pro forma
combined statement of operations combine the historical statements of operations
of the Company and Archetype for the year ended December 31, 1996 assuming the
Merger was consummated January 1, 1996. The pro forma combined statement of
operations does not reflect the nonrecurring charges for acquired in-process
research and development and for bonuses paid to executives of Archetype. The
unaudited pro forma combined statement of operations does not purport to be
indicative of the results which would actually have been reported if the
acquisition had been effected at those dates or which may be reported in the
future. These unaudited financial statements should be read in conjunction with
the accompanying notes and the respective historical financial statements and
related notes contained in the Company's Report on Form 10-K for the fiscal year
ended December 31, 1996 and of Archetype included in this Form 8K/A.
Notes to Pro Forma Combined Balance Sheet:
A. The pro forma adjustments of $(3,058,000) to cash and cash equivalents
reflects the cash used in the Merger, including cash used for the
repayment of certain obligations of Archetype and professional fees.
B. The pro forma adjustment of $1,712,000 to goodwill reflects the
goodwill recorded for the Merger.
C. The pro forma adjustment of $155,000 to accrued expenses reflects the
assumption by the Company of certain additional liabilities of
Archetype pursuant to the Merger.
D. The pro forma adjustment of $(899,000) to notes payable to stockholders
reflects the repayment of amounts due to officers and stockholders of
Archetype.
-2-
<PAGE> 5
E. The pro forma adjustment of $5,000 to Common Stock, $1,187,000 to
additional paid-in-capital and $53,000 to treasury stock reflects the
fair value of shares and options issued pursuant to the Merger and the
elimination of Archetype equity accounts.
F. The pro forma adjustment of $(1,845,000) to accumulated deficit
reflects a charge for the acquired research and development and the
elimination of Archetype's accumulated deficit.
Notes to Pro Forma Combined Statement of Operations:
G. The pro forma adjustments do not include a nonrecurring charge of
$5,112,000 related to in-process research and development acquired by
the Company and bonuses paid to executives of Archetype.
H. The pro forma adjustment of $(277,000) to cost of revenues reflects a
reduction of royalties related to a license agreement which was
terminated upon the Merger.
I. The pro forma adjustment of $342,000 to general and administrative
reflects one year of amortization of goodwill as a result of the
Merger.
J. The pro forma adjustment of $74,000 to other income (expense), net,
includes a $93,000 reduction of interest expense for stockholder debt
which was paid down on consummation of the Merger and a reduction of
interest income of $18,000 on the cash used in the Merger.
K. Pro forma combined income per common and common equivalent share and
the pro forma combined weighted average common and common equivalent
shares outstanding includes the shares of Common Stock of the Company
and the shares issued and the dilutive effect of options issued
pursuant to the Merger.
-3-
