<PAGE>
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, 1999
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 August 1, 1999 there were 7,375,547 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.
<PAGE>
BITSTREAM INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBERS
-------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1999 AND
DECEMBER 31, 1998.................................................................................. 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998 ................................................ 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998...................................................................... 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.............................................................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................................... 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ..................................... 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................................................... 22
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS....................................................... 22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................................................. 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................. 22
ITEM 5. OTHER INFORMATION............................................................................... 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................ 23
SIGNATURES............................................................................... 23
</TABLE>
2
<PAGE>
PART I -- FINANCIAL STATEMENTS
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,480 $ 14,252
Accounts receivable, net of allowance of $898 and $1,025 at
June 30, 1999 and December 31, 1998, respectively 1,495 1,206
Current portion of long-term accounts receivable, net of
allowance of $71 and $135 at June 30, 1999 and December
31, 1998, respectively 312 304
Deferred tax assets 868 868
Prepaid expenses and other current assets 350 390
-------- --------
Total current assets 14,505 17,020
-------- --------
Property and equipment, net 844 853
Other assets:
Long-term accounts receivable, net of allowance of $13 and
$73 at June 30, 1999 and December 31, 1998, respectively 13 93
Goodwill, net 1,899 2,133
Investment in DiamondSoft, Inc. 437 444
Other 136 168
-------- --------
Total other assets 2,485 2,838
-------- --------
Total assets $ 17,834 $ 20,711
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of capital lease obligations $ 29 $ 27
Accounts payable 285 171
Accrued income taxes 21 692
Accrued expenses 1,994 2,344
Deferred revenue 706 1,148
-------- --------
Total current liabilities 3,035 4,382
-------- --------
Long-term liabilities:
Capital lease obligations, net of current maturities 13 27
Other long-term liabilities 21 27
-------- --------
-------- --------
Total long-term liabilities 34 54
-------- --------
Stockholders' equity:
Common Stock, $.01 par value, 30,500 shares authorized, 7,250 and 7,055
issued as of June 30, 1999 and December 31,
1998, respectively 73 70
Additional paid-in capital 30,901 30,714
Accumulated deficit (16,149) (14,449)
Treasury stock, 39 shares at cost (60) (60)
-------- --------
Total stockholders' equity 14,765 16,275
-------- --------
Total liabilities and stockholders' equity $ 17,834 $ 20,711
-------- --------
-------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
<PAGE>
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $ 1,745 $ 3,304 $ 4,116 $ 6,145
Cost of revenue 305 691 786 884
------- ------- ------- -------
GROSS PROFIT 1,440 2,613 3,330 5,261
Operating expenses:
Selling and marketing 983 1,980 1,827 3,871
Research and development 1,277 1,304 2,556 2,625
General and administrative 512 437 965 613
Severance and other
non-recurring -- 520 -- 960
compensation
------- ------- ------- -------
TOTAL OPERATING EXPENSES 2,772 4,241 5,348 8,069
------- ------- ------- -------
Loss from operations (1,332) (1,628) (2,018) (2,808)
Loss on investment in
DiamondSoft, Inc. (38) (50) (7) (50)
Other income, net 232 64 353 170
------- ------- ------- -------
Loss before provision for income
taxes (1,138) (1,614) (1,672) (2,688)
Provision for income taxes (30) (45) (29) (69)
------- ------- ------- -------
NET LOSS $ (1,168) $(1,659) $(1,701) $(2,757)
------- ------- ------- -------
------- ------- ------- -------
Basic and diluted net loss per share $ (0.16) $ (0.25) $ (0.24) $ (0.42)
------- ------- ------- -------
------- ------- ------- -------
Basic and diluted weighted average
shares outstanding 7,212 6,701 7,170 6,650
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
<PAGE>
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,701) $ (2,757)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 263 347
Amortization 250 228
Compensation on grant of stock options 13 322
Loss on investment in DiamondSoft, Inc. 7 50
Changes in assets and liabilities:
Accounts receivable (297) 579
Long-term accounts receivable 80 1,087
Prepaid expenses and other current assets 40 228
Accounts payable 116 (39)
Accrued expenses (350) 96
Accrued Income Taxes (671) --
Deferred revenue (442) --
-------- --------
Net cash provided by (used in) operating activities (2,692) 141
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (262) (246)
Proceeds from disposition of property and equipment 8 --
Investment in DiamondSoft, Inc -- (500)
(Increase) decrease in other assets 17 (27)
-------- --------
Net cash used in investing activities (237) (773)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (14) (13)
Increase (decrease) in other long-term liabilities (5) (18)
Proceeds from the exercise of stock options and warrants 176 142
-------- --------
Net cash provided by financing activities 157 111
-------- --------
Net decrease in cash and cash equivalents (2,772) (521)
Cash and cash equivalents, beginning of period 14,252 6,364
-------- --------
Cash and cash equivalents, end of period $ 11,480 $ 5,843
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 2 $ 4
-------- --------
-------- --------
Cash paid for income taxes $ 671 $ --
-------- --------
-------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
5
<PAGE>
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements of Bitstream Inc. (the "Company" or
"Bitstream") 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, 1998 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, 1998 included in the Company's Annual Report on Form 10-K which was
filed by the Company with the SEC on March 31, 1999.
The balance sheet as of June 30, 1999, the statements of operations for the
three months and six months ended June 30, 1999 and 1998, the statements of cash
flows for the six months ended June 30, 1999 and 1998, 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 three months and six months ended June 30,
1999 may not necessarily be indicative of the results to be expected for any
future interim period or for the year ending December 31, 1999.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries: Bitstream World Trade, Inc. (a
Delaware corporation), a holding company for Bitstream, B.V. (a Dutch
corporation); Bitstream B.V. France (a French corporation), which was closed in
1998; Bitstream S.A.R.L. (a French corporation); Mainstream Software Solutions,
Ltd. (an English corporation); Archetype, Inc. (a Delaware corporation);
Pageflex Inc. (a Delaware corporation) and Type Solutions, Inc. (a New Hampshire
corporation). All material intercompany transactions and balances have been
eliminated in consolidation.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standards (SFAS) No.
128 EARNINGS PER SHARE, basic earnings per share was determined by dividing net
income by weighted average shares of common stock outstanding during the year.
Diluted earnings per share reflects dilution of potentially derivative
securities, primarily stock options based on the treasury stock method. Diluted
net loss per share for the three months and six months ended June 30, 1999 and
June 30, 1998 is the same as basic net loss per share for each period as the
inclusion of the potential common stock equivalents would be antidilutive.
A reconciliation of basic and diluted weighted average shares outstanding
for basic and diluted earnings per share is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares outstanding 7,212 6,701 7,170 6,650
Dilutive effect of options - - - -
Dilutive effect of warrants - - - -
------------ ------------ ------------- ------------
Shares outstanding for diluted loss per share: 7,212 6,701 7,170 6,650
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Antidilutive options and warrants excluded 3,324 2,903 3,324 2,903
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
</TABLE>
(3) CONCENTRATION OF CREDIT RISK
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATION OF CREDIT
RISK, requires disclosure of any significant off-balance sheet and credit risk
concentrations. Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash equivalents and
trade accounts receivable. The Company places its temporary cash investments in
several financial institutions. The Company has not experienced significant
losses related to receivables from any individual customers or groups of
customers in any specific industry or by geographic area. Due to these factors,
no additional credit risk beyond amounts provided for collection losses is
believed by management to be inherent in the Company's accounts receivable. No
single customer accounted for 10% or greater of the Company's accounts
receivable at June 30, 1999 or December 31, 1998.
For the three months ended June 30, 1999, one customer represented 12.5% of
revenues. For the three months ended June 30, 1998, no customer represented
greater than 10% of revenues.
For the six months ended June 30, 1999, two customers represented 13.9% and
13.1% of revenues, respectively. For the six months ended June 30, 1998, no
customer represented greater than 10% of revenues.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) COMPREHENSIVE LOSS
The Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME, effective
January 1, 1998. SFAS No. 130 establishes standards for the reporting and
display of comprehensive income (loss) and its components in a full set of
general purpose financial statements. The components of the Company's
comprehensive income (loss) are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (1,168) $ (1,659) $ (1,701) $ (2,757)
Cumulative translation adjustment,
net of tax - (39) - (39)
-------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------
Total comprehensive loss $ (1,168) $ (1,698) $ (1,701) $ (2,796)
-------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------
</TABLE>
(5) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value pursuant to SFAS No. 137,
issued in June 1999. SFAS No, 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The Company believes that the adoption of
SFAS No. 133 will not have a material impact on its financial results or
financial position.
(6) ACQUISITIONS
ALARAS ACQUISITION
In November 1998, the Company purchased certain assets of Alaras
Corporation ("Alaras"), a North Carolina corporation primarily engaged in the
business of developing, marketing and distributing its software products to a
variety of markets, for $1,300,000 in cash. Alaras' products included: Tropix, a
workflow application to automate repetitive steps in electronic publishing
production; Mixxer, a color correction filter for Adobe Photoshop; and Apertura,
an application which enables Adobe Photoshop to open one or more smaller
portions of most popular image formats including native Scitex CT and LWs. The
acquisition was accounted for as a purchase and resulted in $1,300,000 of
goodwill.
Selected financial information for the Company and Alaras on a pro forma
basis has not been provided as it is immaterial to the consolidated financial
statements taken as a whole.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) ACQUISITIONS, CONTINUED
TYPE SOLUTIONS ACQUISITION
In December 1998, the Company acquired all of the outstanding stock of Type
Solutions, Inc. ("Type Solutions"), a New Hampshire corporation primarily
engaged in the business of developing and licensing font rendering technologies,
for $600,000 in cash. The acquisition was accounted for as a purchase and
resulted in $595,000 of goodwill.
Selected financial information for Bitstream and Type Solutions on a pro
forma basis has not been provided as it is immaterial to the consolidated
financial statements taken as a whole.
(7) INVESTMENTS
In March 1998, the Company made a $500,000 equity investment in
DiamondSoft, Inc. ("DiamondSoft"), a California corporation primarily engaged in
the business of developing, marketing and distributing software tools to a
variety of professional markets. This equity investment represents a 25%
ownership interest in DiamondSoft. Losses for the three-month and six-month
periods ended June 30, 1999 and 1998 are included on the accompanying statement
of operations.
(8) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Accrued payroll and related $ 390 $ 437
Accrued royalties payable 329 350
Accrued consulting and professional services 895 901
Accrued miscellaneous liabilities 380 656
-------------- -----------------
Total accrued expenses $ 1,994 $ 2,344
-------------- -----------------
-------------- -----------------
</TABLE>
(9) SEVERANCE AND OTHER NON-RECURRING CHARGES
Operating expenses for the three months and six months ended June 30, 1998
included severance and other non-recurring compensation expenses incurred in
connection with certain arrangements between the Company and certain former
employees and executives totaling $520,000 and $960,000, respectively. No such
costs were incurred for the three or six month periods ended June 30, 1999.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) SEGMENT REPORTING
In July 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 requires certain financial
and supplementary information to be disclosed on an annual and interim basis for
each reportable segment of an enterprise. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. The Company has determined it has two
reportable segments as of January 1, 1999: (i) a type and technology segment;
and (ii) an on-demand publishing segment. Prior to January 1, 1999, the Company
did not have distinctive reportable segments for its business and, as result,
the Company has not previously reported such segment information.
The Company's reportable segments are strategic business units that sell
the Company's products through distinct distribution channels. They are managed
separately as each business requires different marketing strategies. The
Company's approach is based on the way that management organizes the segments
within the enterprise for making operating decisions and assessing performance.
These reportable segments do not have any inter-segment revenues.
The Company evaluates performance based on profit or loss from operations
before income taxes, not including non-recurring gains and losses.
The following table sets forth the Company's income statement
information by segment (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1999
TYPE AND ON-DEMAND TYPE AND ON-DEMAND
TECHNOLOGY PUBLISHING TECHNOLOGY PUBLISHING
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $ 1,485 $ 260 $ 3,152 $ 964
Cost of revenue 271 34 730 56
------------ ------------- ------------ -------------
Gross profit 1,214 226 2,422 908
------------ ------------- ------------ -------------
Operating Expenses:
Selling and marketing 413 570 772 1,055
Research and development 423 854 930 1,626
General and administrative 226 286 412 553
------------ ------------- ------------ -------------
Total operating expenses 1,062 1,710 2,114 3,234
------------ ------------- ------------ -------------
Income (loss) from operations $ 152 $ (1,484) $ 308 $ (2,326)
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
</TABLE>
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) SEGMENT REPORTING, CONTINUED
The following table sets forth the Company's supplemental balance sheet
information by segment (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1999
------------------------------------
ASSETS TYPE AND ON-DEMAND
TECHNOLOGY PUBLISHING
<S> <C> <C>
Current assets $ 14,217 $ 288
Property and equipment, net 709 135
Receivable from subsidiary 3,030 -
Other Assets 1,337 1,148
------------ ----------
Total assets $ 19,293 $ 1,571
------------ ----------
------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 2,169 $ 866
Long-term liabilities 34 -
Payable to parent company - 3,030
------------ ----------
Total liabilities 2,203 3,896
------------ ----------
Stockholders' equity: 17,090 (2,325)
------------ ----------
Total liabilities and stockholders' equity $ 19,293 $ 1,571
------------ ----------
------------ ----------
</TABLE>
(11) GEOGRAPHICAL REPORTING
SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION also requires disclosures of certain "Enterprise-wide Information"
including the information about major customers included in footnote (3) and
geographical areas. The Company attributes revenues to different geographical
areas on the basis of the location of the customer. Revenues by geographic area
are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months
ended ended
June 30, 1999 June 30, 1999
--------------------- ------------------
<S> <C> <C>
Revenue:
United States $ 942 $ 2,720
Europe 379 622
Japan 364 460
Canada 39 237
Other 21 77
----------------- ---------------
Total revenue $ 1,745 $ 4,116
----------------- ---------------
----------------- ---------------
</TABLE>
Long-lived tangible assets by geographic are as follows (in thousands):
<TABLE>
<CAPTION>
June 30, 1999
-------------
<S> <C>
United States $ 826
England 18
-----
Total $ 844
</TABLE>
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto.
OVERVIEW
Bitstream Inc. develops, markets and supports software products and
technologies to enhance the creation, management and transport of electronic
documents. The Company's type and technology products and technologies
consist of: (i) type products, such as libraries of type designs (fonts) and
custom type products; (ii) enabling technologies, which deliver typographic
capabilities to hardware output devices and software applications; (iii)
TrueDoc Registered, a portable type technology providing for the efficient
distribution of text, with fidelity, in a highly compact format; (iv)
T2K-TM-, a font engine software component providing high-quality text
rendering; (v) WebFont Maker-TM-, a web publishing tool that allows web page
designers to embed their selected typefaces in web page designs. The
Company's on-demand publishing products consist of: (i) Pageflex-TM-, an
on-demand publishing server enabling the design and automatic production of
customized print documents that are targeted at a narrow segment or an
individual reader; (ii) NuDoc-TM-, an advanced document composition engine;
(iii) Tropix-TM-, a workflow application to automate repetitive steps in
electronic publishing production; (iv) Mixxer-TM-, a color correction filter
for Adobe Photoshop; and (v) Apertura-TM-, an application which enables Adobe
Photoshop to open one or more smaller portions of most popular image formats.
Bitstream was founded in 1981 as a digital type supplier to computer
hardware and software developers. The Company's library of type products is used
by original equipment manufacturers ("OEMs"), independent software vendors
("ISVs") and end users around the world in the creation of electronic documents.
The Company was also an early developer of typographic enabling software for
hardware and software developers. The Company's font processor products are used
to provide type scaling functionality to operating systems, network servers and
a wide variety of computer printers and other output devices. Recently, the
Company has focused its product development and marketing efforts on technology
solutions that address the font-related issues of document creation and
portability in the Internet and corporate intranets.
The Company derives revenues principally from the following sources: (i)
licensing fees and royalty payments paid by OEM and ISV customers for text
imaging and page layout technologies; (ii) direct and indirect sales of software
publishing applications for the creation, enhancement, management, transport,
viewing and printing of electronic information; (iii) direct sales of custom and
other type products to end users such as graphic artists, desktop publishers and
corporations; and (iv) sales of type products to foreign customers primarily
through distributors. Royalty payments due from OEM and ISV customers, who
generally pay specified minimums or fixed fees for the right to include the
Company's products as a component of a larger product for a specified time
period or volume limit, are generally recognized as revenue at the time the
software is delivered to the OEM or ISV customer. Certain OEM and ISV customers
pay royalties only upon the sublicensing of the Company's products to end users.
Royalties due from these OEM and ISV customers are recognized when such
sublicenses are reported to the Company by the OEM or ISV
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
customer. Revenues from sales to end users and foreign distributors are
generally recognized at the time the software products are delivered to the
customer. The Company recognizes revenue under software development contracts as
services are provided for per diem contracts or by using the
percentage-of-completion method of accounting for long-term fixed price
contracts.
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.
IMPACT OF YEAR 2000 ISSUE
YEAR 2000 READINESS DISCLOSURE - MADE PURSUANT TO THE YEAR 2000 INFORMATION AND
READINESS DISCLOSURE ACT, PUB. L. NO. 105-271 (1998)
The Year 2000 presents potential concerns and issues for the Company as well
as other companies in the software industry. In general, Year 2000 readiness
issues typically arise in computer software and hardware systems that use two
digit date formats, instead of four digit dates, to represent a particular year.
Users must test their unique combination of hardware, system software (including
databases, transaction processors, and operating systems) and application
software in order to achieve Year 2000 readiness. This issue creates risk for
the Company from unforeseen problems in its own computer and embedded systems
and from third parties with whom the Company deals on financial and other
transactions worldwide. Failure of the Company's and/or third parties' computer
systems could have a material impact on the Company's ability to conduct its
business.
YEAR 2000 COMMITTEE
The Company has established a Year 2000 steering committee to evaluate, plan
and implement policies and practices, including contingency planning, and to
address the impact of the Year 2000 on the Company and its products. The
Company's Year 2000 readiness preparations fall into three categories: (1)
product readiness, addressing product functionality; (2) internal readiness,
addressing the Year 2000 operability of internal information technology ("IT")
systems and mission critical non-IT systems; and (3) third party readiness,
addressing the preparedness of relevant third parties and the Year 2000
operability of products furnished for internal use and resale. After reviewing
these areas, the committee will report to the Board of Directors specific areas
of concern and a plan for resolving and further testing of any remaining Year
2000 issues. The committee will also formulate a contingency plan in the event
that the committee reasonably determines that certain Year 2000 issues may not
be resolved by the end of 1999 or if unforeseen problems arise.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
STATUS OF INVESTIGATION - PRODUCT READINESS
The Company has established Year 2000 date operability standards against
which it is testing the most current versions of its software products. During
1997, the Company initiated a program to update its accounting and information
systems, where applicable, to ensure that its computer systems are Year 2000
compliant. Bitstream has substantially completed its analysis of its current
internal systems. In addition, the Company maintains a Year 2000 expert on its
staff to continue to assess, plan and implement solutions that will prepare its
internal systems for January 1, 2000. Bitstream believes that these solutions
will not pose significant operational problems for the Company, and that the
costs of such preparations will not be material. However, if contingency plans
were to fail or new non-compliance issues are identified, the Company's results
of operations or financial condition could be materially adversely affected.
The Company has completed testing of its current software products and
believes the most current versions conform to these standards and are Year 2000
ready. Despite the Company's testing, there can be no assurance that the
Company's products do not contain undetected errors or defects related to Year
2000 operability that may result in material costs to the Company or that the
Company's products contain all features and functionality considered necessary
by customers, end users and distributors to be Year 2000 ready.
While the Company believes that most of its current releases of products are
Year 2000 ready, other factors may result in an application created using the
Company's products not being Year 2000 ready. Some of these factors include
improper programming techniques used by third parties in creating the
application, customization, or non-compliance of hardware, software or firmware
not provided by the Company with which the products operate. The Company does
not believe that it would be liable in such an event. However, due to the
unprecedented nature of the potential litigation related to Year 2000 readiness
as discussed in the industry and popular press, the most likely worst case
scenario is that the Company would be subject to litigation. It is uncertain
whether or to what extent the Company may be affected by such litigation.
The Company has tested only the current versions of its products, and does
not plan to test earlier versions of products. The Company believes a
substantial number of the Company's customers are running product versions which
have not been tested and may experience Year 2000 date related operability
issues. The Company is in the process of identifying these customers and
encouraging them to upgrade to current versions of the products. Further, the
Company cautions users of such products to conduct their own Year 2000
operability testing to determine if continued use of the products allows them to
meet their own Year 2000 readiness objectives. While many customers will be
upgraded to Year 2000 ready versions of products under maintenance coverage, if
eligible, in the normal course the Company expects to incur some increased
expenses associated with the furnishing of upgrades and modifications. In
addition, the ability of the Company to implement upgrades in time to meet
customers' Year 2000 readiness requirements requires the continued availability
of qualified technical personnel and the Company may incur additional costs to
attract and retain such personnel as the Year 2000 draws closer. At this time
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
the Company does not believe that the cost of potential upgrades or
modifications will have a material effect on the Company's business, financial
condition and operating results.
STATUS OF INVESTIGATION - INTERNAL READINESS
The Company is engaged in conducting a Year 2000 readiness audit of its
internal IT and non-IT systems (including telecommunication, facilities
management, safety and security systems). Although the Company is not presently
aware of any material operational issues or costs associated with preparing its
internal IT and non-IT systems for the Year 2000, the Company is continuing its
investigation and there can be no assurance that the Company will not experience
unanticipated negative consequences or material costs caused by undetected
errors or defects in the technology used in its internal systems, which include
third party hardware, firmware, and software. The Company anticipates finalizing
its testing of internal IT and non-IT systems on or about September 30, 1999.
STATUS OF INVESTIGATION - THIRD PARTY READINESS
The Company is continuing to assess the Year 2000 readiness of material
third parties, such as public utilities and key clients or suppliers, who
provide external services to the Company. The Company expects to substantially
complete these assessments and testing by September 30, 1999. The Company has
certain key relationships with suppliers which furnish components and software
used by the Company in its products. If these suppliers fail to adequately
address the Year 2000 issue for the products they supply to the Company, such
failure could have a material adverse effect on the Company's operations,
reputation, and financial results. Certain of the Company's products contain
third party components and software that are integral to their operation for
which the cost and time to integrate alternative components or software into
these products would be material.
CONTINGENCY PLANS AND WORST CASE SCENARIO
At the present time, the Company is in the process of outlining contingency
plans to operate in the event that its products, systems, or business partners
are not Year 2000 ready. If the Company's investigations suggest that there is a
significant risk that certain products, systems, or business partners might not
be Year 2000 ready, the Company will modify its contingency plans accordingly.
COSTS, SOURCE OF FUNDS AND ACCOUNTING TREATMENT
The Company's policy is to expense all costs related to its Year 2000
compliance program unless the useful life of the technological asset is extended
or increased. The expenses incurred to date have not had a material impact on
the Company's results of operations or financial condition. At this time, the
Company intends to fund Year 2000 expenses through cash flows from operations.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (in thousands, except share and per share and percent
amounts)
CONSOLIDATED REVENUE:
<TABLE>
<CAPTION>
June 30, June 30, Change
1999 1998 Dollars Percent
------------------------------- --------------- -----------
<S> <C> <C> <C> <C>
Three months ended:
Revenue $ 1,745 $ 3,304 $ (1,559) (47.2)%
Six months ended:
Revenue $ 4,116 $ 6,145 $ (2,029) (33.0)%
</TABLE>
The decreases in revenues for the three and six month periods ended June
30, 1999 as compared to the three and six month periods ended June 30, 1998,
were primarily attributable to the loss of revenues associated with the
Company's MediaBank and InterSep OPI product lines, which were sold to Inso
Providence Corporation in August of 1998. Revenue generated by these products
during the three and six month periods ended June 30, 1998, were $1,466 and
$2,689, respectively. The Company retained its type and technology business and
entered into the on-demand publishing business. The discussion of these segments
follows:
Type and technology revenue:
<TABLE>
<CAPTION>
June 30, Change
1999 1998 Dollars Percent
----------- ----------- ----------------- ------------
<S> <C> <C> <C> <C>
Three months ended:
Type and technology revenue $ 1,485 $ 1,838 $ (353) (19.2)%
Percentage of total revenue 85.1% 55.7%
Six months ended:
Type and technology revenue $ 3,152 $ 3,456 $ (304) (8.8)%
Percentage of total revenue 76.6% 56.2%
</TABLE>
The decreases in type and technology revenues were primarily caused by
decreases in OEM sales of $618 and $416 for the three and six month periods,
respectively, offset by increases in direct sales of $265 and $112 during the
same periods. The decrease in OEM revenue was caused by a generally weaker
demand for the Company's traditional type products and slowed growth in the
emerging markets, which began during the first quarter of 1998. The increase in
direct sales is a direct result of an increased retail marketing effort.
On-demand publishing revenue:
<TABLE>
<CAPTION>
June 30, Change
1999 1998 Dollar Percent
----------- ----------- ----------------- ------------
<S> <C> <C> <C> <C>
Three months ended:
On-demand publishing revenue $ 260 $ - $ 260 100%
Percentage of total revenue 14.9%
Six months ended:
On-demand publishing revenue $ 964 $ - $ 964 100%
Percentage of total revenue 23.4%
</TABLE>
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company began shipping its on-demand publishing products during the
first quarter of 1999. Revenue for the six months ended June 30, 1999 included
$555 from a one-time license agreement with Inso Providence Corporation.
Management expects revenues will increase during the remainder of 1999, but
there can be no assurances as to the extent of such increases.
CONSOLIDATED GROSS PROFIT:
<TABLE>
<CAPTION>
June 30, Change
1999 1998 Dollars Percent
----------- ----------- ----------------- -------------
<S> <C> <C> <C> <C>
Three months ended:
Gross profit $ 1,440 $ 2,613 $ (1,173) (44.9)%
Percentage of total revenue 82.5% 79.1%
Six months ended:
Gross profit $ 3,330 $ 5,261 $ (1,931) (36.7)%
Percentage of total revenue 80.9% 85.6%
</TABLE>
The decreases in gross profit dollars are a result of the sale of
substantially all of the assets relating to the Company's MediaBank and InterSep
OPI product lines to Inso Providence Corporation in August of 1998. Gross profit
associated with the on-demand publishing segment was $226 and $908,
respectively, for the three and six month periods ended June 30, 1999. Gross
profit for the type and technology segment decreased $109 or 8.2% and $349 or
12.6% to $1,214 and $2,422, respectively, for the three and six month periods
ended June 30, 1999 compared to the same periods in 1998. Decreases in gross
profit associated with the sale of the above-mentioned product lines were $1,290
and $2,490, respectively, for the three and six month periods ended June 30,
1999 compared to the same periods in 1998. Gross profit as a percentage of
revenue increased for the three month period ended June 30, 1999 compared to
June 30, 1998 as a result of the reorganizations completed during 1998. Gross
profit as a percentage of sales for the six months ended June 30, 1999 compared
to 1998 reflect the lower sales for the period and costs incurred in the
shipping and production areas that were higher in anticipation of higher revenue
generation. Cost of revenue is composed of direct costs of licenses and
royalties, as well as direct costs of product sales to end users. Included in
the 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 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
product. Management expects that gross profit as a percentage of sales will
increase over the remainder of 1999 and remain above the 1998 levels.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED SELLING AND MARKETING:
<TABLE>
<CAPTION>
June 30, Change
1999 1998 Dollars Percent
----------- ----------- ----------------- --------------
<S> <C> <C> <C> <C>
Three months ended:
Selling and marketing $ 983 $ 1,980 $ (997) (50.4)%
Percentage of total revenue 56.3% 59.9%
Six months ended:
Selling and marketing $ 1,827 $ 3,871 $ (2,044) (52.8)%
Percentage of total revenue 44.4% 63.0%
</TABLE>
The decrease in selling and marketing expenses in dollars, and as a
percentage of revenues, for the three and six month periods ended June 30, 1999
as compared to the three and six month periods ended June 30, 1998 reflect a
reduction in salary expense resulting from the headcount reductions that took
place in March and June of 1998. Selling and marketing costs associated with the
on-demand publishing segment were $570 and $1,055 for the three and six month
periods ended June 30, 1999. Selling and marketing expenses for the type and
technology segment decreased $380 or 47.9% and $888 or 53.5% to $413 and $772,
respectively, for the three and six month periods ended June 30, 1999 versus the
same periods in 1998. Decreases in selling and marketing expenses associated
with the sale of the MediaBank and InterSep OPI product lines were $1,187 and
$2,211, respectively, for the three and six month periods ended June 30, 1999
compared to 1998.
CONSOLIDATED RESEARCH AND DEVELOPMENT ("R&D"):
<TABLE>
<CAPTION>
June 30, Change
1999 1998 Dollar Percent
----------- ----------- ----------------- -------------
<S> <C> <C> <C> <C>
Three months ended:
Research and development $ 1,277 $ 1,304 $ (27) (2.1)%
Percentage of total revenue 73.2% 39.5%
Six months ended:
Research and development $ 2,556 $ 2,625 $ (69) (2.6)%
Percentage of total revenue 62.1% 42.7%
</TABLE>
Research and development expenses decreased in absolute dollars, but
increased as a percentage of revenue, for the three and six month periods ended
June 30, 1999 as compared to the three and six month periods ended June 30,
1998, respectively. These decreases reflect the ongoing investment in additional
personnel to support expanded development of the Company's on-demand publishing
technologies, NuDoc and Pageflex. R&D costs associated with the on-demand
publishing segment were $854 and $1,626, respectively, for the three and six
month periods ended June 30, 1999. R&D expenses for the type and technology
segment decreased $497 or 54% and $882 or 48.7% to $423 and $930, respectively,
for the three and six month periods ended June 30, 1999 compared to the same
periods in 1998. Decreases in R&D expenses associated with the sale of the
mediabank and InterSep OPI product lines were $384 and $813, respectively, for
the three and six month periods ended June 30, 1999 compared to 1998. Management
expects R&D costs to approximate the levels of 1998 for the remainder of 1999.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED GENERAL AND ADMINISTRATIVE ("G&A"):
<TABLE>
<CAPTION>
June 30, Change
1999 1998 Dollar Percent
----------- ----------- ----------------- -------------
<S> <C> <C> <C> <C>
Three months ended:
General and administrative $ 512 $ 437 $ 75 17.2%
Percentage of total revenue 29.3% 13.2%
Six months ended:
General and administrative $ 965 $ 613 $ 352 57.4%
Percentage of total revenue 23.5% 10.0%
</TABLE>
The increases in G&A expenses in dollars, and as a percentage of revenues,
for the three and six month periods ended June 30, 1999 as compared to the three
and six month periods ended June 30, 1998, respectively, are primarily due to
increases in administrative positions at the end of 1998 to handle the growth
necessitated by the commitment to enter and invest in the on-demand publishing
business. These increases, as a percentage of sales, are higher because of the
decrease in sales associated with the sale of the MediaBank and InterSep OPI
product lines. G&A costs associated with the on-demand publishing segment were
$286 and $553, respectively, for the three and six month periods ended June 30,
1999. G&A expenses for the type and technology segment decreased $110 or 33% and
$100 or 19.5% to $226 and $412, respectively, for the three and six month
periods ended June 30, 1999 compared to the same periods in 1998. Decreases in
G&A expenses associated with the sale of the above-mentioned product lines were
$101 and $101, respectively, for the three and six month periods ended June 30,
1999 compared to 1998. Management expects G&A expenses to remain above the 1998
levels during the remainder of 1999.
A significant portion of the Company's operating expenses are fixed, and
planned expenditures in any given quarter are based on sales and revenue
forecasts. Accordingly, if products are not completed and/or shipped on schedule
and revenues do not meet the Company's expectations in any given quarter, the
Company's operating results and financial condition could be adversely affected.
SEVERANCE AND OTHER NON-RECURRING COMPENSATION EXPENSE. Severance and other
non-recurring compensation expenses are related to the reorganization and
personnel reductions, which occurred in March and June of 1998 and totaled $520
and $960, respectively, for the three and six month periods ended June 30, 1998.
There were no such expenses incurred during the same periods in 1999.
LOSS ON INVESTMENT IN DIAMONDSOFT, INC. The Company made a $500 equity
investment in DiamondSoft, Inc. representing a 25% ownership interest.
DiamondSoft, Inc. is a California corporation primarily engaged in the business
of developing, marketing and distributing software tools to a variety of
professional markets. Losses were $(38) and $(7) and $(50) and $(50),
respectively, for the three-month and six-month periods ended June 30, 1999
and1998.
OTHER INCOME, NET. Other income consists primarily of interest income
earned.
PROVISION FOR INCOME TAXES. The Company recorded a tax provision consisting
primarily of foreign tax liabilities, relating mainly to sales to customers in
Japan of $30 and $29, and $45 and $69, respectively, for the three and six month
periods ended June 30, 1999 and 1998.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily through the public sale of
equity securities, cash flows from operations and cash received from the sale of
the Company's MediaBank and InterSep OPI product lines to Inso Providence
Corporation in August of 1998.
The Company's operating activities used cash of approximately $2,692 for the
six months ended June 30, 1999 as compared to providing cash totaling $141 for
the six months ended June 30, 1998. The cash used during the six months ended
June 30, 1999 was primarily due to the net loss from the on-demand publishing
business offset by the income from the type and technology business. The net
loss adjusted for non-cash expenses resulted in a use of $1,168 in cash during
the six months ended June 30, 1999. The net loss resulted in a $1,810 use of
cash for the six months ended June 30, 1998. During the six months ended June
30, 1999 the Company also used cash to pay down accrued expenses of $350, income
taxes of $671, and recognized $442 in deferred revenue greater than the
additional deferred revenue booked during the period. During the six months
ended June 30, 1998, the Company had generated $1,894 in cash by collecting
trade and long-term receivables greater than the additional receivables booked
during the period, as well as decreases in its prepaid expense balance.
The Company's investing activities used cash of approximately $237 for the
six months ended June 30, 1999 as compared to $773 for the six months ended June
30, 1998. Investing activities for the six months ended June 30, 1999 consisted
primarily of the purchase of property and equipment totaling $262. For the six
months ended June 30, 1998, investing activities consisted primarily of an
equity investment of $500 in DiamondSoft, Inc., a California corporation
primarily engaged in the business of developing, marketing and distributing
software tools to a variety of professional markets and the purchase of property
and equipment for $246.
The Company's financing activities provided cash of $157 for the six months
ended June 30, 1999 as compared to $111 for the six months ended June 30, 1998.
The cash provided in the six months ended June 30, 1999 and June 30, 1998
primarily resulted from the exercise of stock options.
The Company believes its current cash and cash equivalent balances will be
sufficient to meet the Company's operating and capital requirements for at least
the next 12 months. There can be no assurance, however, that the Company will
not require additional financing in the future. If the Company were required to
obtain additional financing in the future, there can be no assurance that
sources of capital will be available on terms favorable to the Company, if at
all.
From time to time, the Company evaluates potential acquisitions of products,
businesses and technologies that may complement or expand the Company's
business. Any such transactions consummated may use a portion of the Company's
working capital or require the issuance of equity or debt.
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
FORWARD-LOOKING STATEMENTS
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,
competition and the timely introduction of new products. Additional information
concerning certain risks and uncertainties that would cause actual results to
differ materially from those projected or suggested in the forward-looking
statements is contained in the Company's filings with the Securities and
Exchange Commission, including those risks and uncertainties discussed in the
Company's final Prospectus, dated October 30, 1996, included as part of the
Company's Registration Statement on Form S-1 (Commission File No. 333-11519), in
the section entitled "Risk Factors." The forward-looking statements contained
herein represent the Company's judgment as of the date of this report, and the
Company cautions readers not to place undue reliance on such statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS AND DERIVATIVE
COMMODITY INSTRUMENTS.
As of June 30, 1999, the Company did not participate in any derivative
financial instruments or other financial and commodity instruments for which
fair value disclosure would be required under SFAS No. 107. All of the Company's
investments are short-term, investment-grade commercial paper, and money market
accounts that are carried on the Company's books at amortized cost, which
approximates fair market value. Accordingly, the Company has no quantitative
information concerning the market risk of participating in such investments.
PRIMARY MARKET RISK EXPOSURES.
The Company's primary market risk exposures are in the areas of interest
rate risk and foreign currency exchange rate risk. The Company's investment
portfolio of cash equivalent and short-term investments is subject to interest
rate fluctuations, but the Company believes this risk is immaterial due to the
short-term nature of these investments.
The Company's exposure to currency exchange rate fluctuations has been and
is expected to continue to be modest due to the fact that the operations of its
international subsidiaries are almost exclusively conducted in their respective
local currencies. International subsidiary operating results are translated into
U.S. dollars and consolidated for reporting purposes. The impact of currency
exchange rate movements on inter-company transactions was immaterial for the
three-month and six-month periods ended June 30, 1999. Currently, the Company
does not engage in foreign currency hedging activities.
21
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Instruments defining the rights of the holders of any class of registered
securities of the Company have not been materially modified during the six
months ended June 30, 1999.
(b) Rights evidenced by any class of registered securities of the Company have
not been materially limited or qualified by the issuance or modification of
any other class of securities during the six months ended June 30, 1999.
(c) There were no unregistered securities sold by the Company during the six
months ended June 30, 1999.
(d) Use of Proceeds
As of June 30, 1999, the approximately $12,200,000 net proceeds of the
Company's initial public offering (IPO) of its Class A Common Stock pursuant to
its Registration Statement on Form S-1, Commission File No. 333-11519, declared
effective October 30, 1996, have been used as follows: (i) approximately
$200,000 for the buildout of Bitstream's leased facilities in Cambridge,
Massachusetts to accommodate the additional personnel that joined the Company as
a result of the acquisition of Archetype, Inc.; (ii) approximately $6,041,000
for the acquisition of Mainstream Software Solutions, Ltd., Archetype, Inc.,
Type Solutions, Inc. and certain assets of Alaras Corporation; (iii)
approximately $1,500,000 for the repayment of indebtedness, of which
approximately $548,000 was paid to officers, directors and 10% stockholders of
the Company and approximately $762,000 of which was paid to third parties; (iv)
approximately $961,000 for royalty payments to others; (v) $500,000 for the
investment in DiamondSoft, Inc.; and (vi) approximately $1,008,000 for the
purchase and installation of equipment. The remaining net proceeds from the IPO
are invested in short-term, interest-bearing, investment-grade securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On June 3, 1999, 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 ratify the action of
the Board of Directors in appointing Arthur Andersen LLP as auditors for the
Company for the fiscal year ending December 31, 1999.
22
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS, CONTINUED
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.
<TABLE>
<CAPTION>
Nominee For Withheld Authority
------- --- ------------------
<S> <C> <C>
George B. Beitzel 6,292,930 12,804
Amos Kaminski 6,292,730 13,004
David G. Lubrano 6,292,930 12,804
Charles Ying 6,249,707 56,027
</TABLE>
2. To ratify the action of the Board of Directors in appointing Arthur
Andersen LLP as auditors for the Company for the fiscal year ending
December 31, 1999.
<TABLE>
<CAPTION>
For Against Abstain Broker Non-vote
--- ------- ------- ---------------
<S> <C> <C> <C>
6,297,030 2,704 6,000 0
</TABLE>
(d) Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule for the six months ended June 30, 1999.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the six months ended June 30,
1999.
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/ Anna M. Chagnon Executive Vice President, Chief Financial Officer August 13, 1999
Anna M. Chagnon and General Counsel (Principal Financial Officer)
/s/ James P. Dore Corporate Controller (Principal Accounting Officer) August 13, 1999
- -----------------
James P. Dore
</TABLE>
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SIX
MONTHS ENDED JUNE 30,1999 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.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 11,480
<SECURITIES> 0
<RECEIVABLES> 2,802
<ALLOWANCES> 982
<INVENTORY> 0
<CURRENT-ASSETS> 14,505
<PP&E> 4,478
<DEPRECIATION> 3,634
<TOTAL-ASSETS> 17,834
<CURRENT-LIABILITIES> 3,035
<BONDS> 0
73
0
<COMMON> 0
<OTHER-SE> 14,692
<TOTAL-LIABILITY-AND-EQUITY> 17,834
<SALES> 4,116
<TOTAL-REVENUES> 4,116
<CGS> 786
<TOTAL-COSTS> 786
<OTHER-EXPENSES> 5,348
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,672)
<INCOME-TAX> 29
<INCOME-CONTINUING> (1,701)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,701)
<EPS-BASIC> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
