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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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.
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(Exact name of registrant as specified in its charter)
DELAWARE 04-2744890
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
215 FIRST STREET
CAMBRIDGE, MASSACHUSETTS 02142
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(Address of principal executive offices) (Zip Code)
(617) 497-6222
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(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Class A Common Stock, par value $0.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.[ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 21, 2000 was approximately $75.5 million.
On March 21, 2000, there were 7,746,329 shares of Class A Common Stock, par
value $0.01 per share, and no shares of Class B Common Stock, par value $0.01
per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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INDEX
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PAGE
NUMBERS
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PART I.
ITEM 1. BUSINESS..................................................................................... 2
ITEM 2. PROPERTIES................................................................................... 23
ITEM 3. LEGAL PROCEEDINGS............................................................................ 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................... 24
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................................................ 24
ITEM 6. SELECTED FINANCIAL DATA...................................................................... 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................................... 27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................... 38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................. 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................................... 38
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................... 39
ITEM 11. EXECUTIVE COMPENSATION....................................................................... 41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT......................................................................... 45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................... 48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K........................................................................ 49
SIGNATURES................................................................................... 53
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PART I
ITEM 1. BUSINESS
GENERAL
Bitstream Inc. ("Bitstream" or the "Company"), headquartered in
Cambridge, Massachusetts. Bitstream is comprised of three separate and
distinct business segments: (a) type and technology in which Bitstream
develops and licenses Internet font display technology and digital typefaces
for the graphics communications industry; (b) Myfonts.com, a showcase of the
world's fonts in one easy-to-use e-commerce Web site operated by Bitstream's
wholly-owned subsidiary, Myfonts.com, Inc.; and (c) on-demand marketing in
which the Company's wholly-owned subsidiary Pageflex, Inc. develops, markets
and supports on-demand marketing software which automatically produces
customized business marketing collateral such as datasheets and brochures
directly from XML text and graphics data stored in web servers and/or
databases.
Bitstream was founded in 1981 as a digital type supplier to computer
hardware and software developers. The Company's library of typeface products
is used by original equipment manufacturers ("OEMs"), independent software
vendors ("ISVs"), and end users around the world in the creation of
electronic documents. The Company was also an early developer of typographic
enabling software for hardware and software developers. Its font display
technologies are used to provide font-scaling functionality to operating
systems (like Linux), applications, network servers, computer printers,
set-top boxes, personal digital assistants (PDAs), and other embedded systems
and Internet appliances. More recently, the Company has focused its product
development and marketing efforts on technology solutions that address the
font-related issues of embedded systems and Internet appliances, and Linux
operating systems and applications, including the need to create compact
fonts of large character sets, typical of Asian languages.
In April 1997, the Company acquired Archetype, Inc. ("Archetype"), a
Delaware corporation primarily engaged in the business of developing and
marketing server-based information management computer software for the
graphic arts industry. Archetype was founded in 1985 to develop page layout
technology to capture the look of a document in a digital "archetype", a
kind of V page flexible template. Archetype's first product was
InterSep-TM-, an advanced open prepress interface and print management
product for raster image processors and servers. In late 1995, Archetype
introduced its second product, MediaBank-TM-(TM), a digital asset management
product that allows for the cataloging, archiving, and management of
electronic images, text and documents. In August 1998, the Company sold the
MediaBank and InterSep product lines to Inso Providence Corporation.
Archetype also developed NuDoc-TM-, an advanced XML-based composition engine.
In January 1999, the Company established Pageflex, Inc. as a wholly owned
subsidiary for the purpose of developing, marketing and supporting on-demand
marketing software based on its NuDoc-TM- XML-based composition engine and
related technology. Driven by the profile of a particular target customer,
on-demand marketing involves the automatic production of customized business
marketing collateral such as datasheets and brochures directly from XML text and
graphics data stored in web servers and/or databases. Flexible templates based
on page design rules ensure the generated PostScript or PDF documents meet high
stylistic quality standards. Pageflex also licenses its underlying NuDoc-TM-
XML-based composition engine on an OEM basis to independent software vendors.
In December 1999, Myfonts.com, Inc. was founded as a wholly-owned
subsidiary of Bitstream to provide the world's most complete source of digital
fonts in a single comprehensive web site. The myfonts.com Web site provides the
largest collection of fonts ever assembled for on-line delivery, and offers easy
ways to find and purchase fonts on-line, unique typographic resources, and a
forum for interacting with type experts. By hosting fonts from all font
foundries and designers, myfonts.com aims to be the single obvious choice for
finding (and purchasing) fonts on the Web.
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PART I, ITEM 1. BUSINESS, CONTINUED
INDUSTRY BACKGROUND
TYPE AND TECHNOLOGY
The rapid growth in the use of personal computers, advanced software
applications and laser printers has dramatically transformed the document
creation, production and distribution process, giving rise to the widespread use
of word processing and desktop publishing applications. Underlying the growth in
word processing and desktop publishing were enabling technologies such as page
description languages, printer control languages and outline font technologies.
Adobe Systems Corporation's ("Adobe") PostScript Type One format ("Type One"),
the original outline font technology, gained acceptance among graphic artists
and the high-end electronic publishing market due to the technology's close
links to high-resolution output devices used in service bureaus and publishing
houses. TrueType was developed by Apple Computer, Inc. ("Apple") as an
alternative outline font technology to Type One and is integrated into the
Windows and Macintosh operating systems.
The increased use of distributed client/server network architectures in the
1990s has resulted in complex computing environments comprised of mixed
operating systems and multiple networking protocols. To create, transport, view
and print text-based digital information in such an environment, while
preserving the appearance intended by the document's author, each individual
computer must have resident on it specific font software and hardware drivers to
display or print the document as the author intended. If a user's system should
lack a particular typeface used by the author or attempt to output a document to
a device that differs from the device on which the document was originally
created, the user's end-product often lacks the appearance intended by the
creator. For example, if an output device prints a document with a font used in
substitution of the author's original font, a complete loss of original
pagination or formatting within the document can often result. Such a result
would make it difficult, if not impossible, for multiple users to review and
comment collaboratively on the same document. Difficulties in retaining text
integrity can be further complicated when users try to incorporate non-Latin
fonts, such as Kanji, Greek or Hebrew, because font substitution for non-Latin
fonts is typically not available in most operating systems and output devices.
Currently, techniques used to present text and graphics are based on
existing desktop publishing technologies and, when used in new distribution
media, often result in a loss of visual integrity, degraded system performance,
or both. To efficiently deliver digital information that retains the author's
intended visual impression, computer systems must utilize enabling technologies
that reduce file size, minimize bandwidth consumption and operate reliably
across heterogeneous computing environments.
MYFONTS.COM
Traditionally, individual digital fonts and font packages consisting of a
variety of fonts are sold through a variety of channels including: (a) catalog
sales; (b) sales through resellers who typically handle fonts from multiple
foundries together with other graphic arts supplies; and (c) CD ROMs containing
many fonts which can be unlocked by means of a purchased key code.
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PART I, ITEM 1. BUSINESS, CONTINUED
While these approaches to selling fonts are generally satisfactory for
professionals, they represent a very large barrier for the non-professional who
is simply looking for a particular font. For example, if someone sees a font
used in a magazine, there is currently no quick and easy way of finding out what
it is. Even when the name of the font can be determined, it is not obvious where
to buy it from among the hundreds, if not thousands, of font foundries offering
their fonts on the Web. As a result of such obstacles, font sales to
non-professionals have historically been almost non-existent. Bitstream believes
that this represents a large untapped market for fonts that should be pursued.
ON-DEMAND MARKETING
Corporate marketing departments in the United States spend $20 billion on
commercial printing each year. It is estimated that for every dollar spent on
printed product, ten dollars is spent in the process of creation, revision
control, ordering, warehousing, distribution and discarding obsolete inventory.
(Source: CAPV 1999 Market Research). Marketing documents are created using an
expensive, labor intensive process. After all of the content (text and imagery)
has been created, the process of laying this content out on a page and getting
it ready for the printing press involves handoffs between two or three separate
departments and/or firms, and manual intervention and rework. The desktop
publishing revolution has made the process of developing the individual text,
image, tables, charts and illustrations very efficient. However, the task of
page layout is, for the most part, not automated.
In the last few years, corporate marketing departments have quickly
learned to take advantage of the Web as a new marketing medium. These
departments are becoming familiar with the Web's qualities and new
opportunities, such as how easy the Web is to update, the ability to generate
Web pages dynamically directly from corporate databases, and the potential
for personalization. The Web is becoming the FIRST place that a potential
customer goes to search for information and learn about a company and its
offerings. Web sites are, or will soon be, the primary information source for
customers and potential customers. Compared to the Web, traditionally
produced print is slow, cumbersome and expensive. In addition, the speed in
which the Web is updated has made printed materials far more likely to be
out-dated and thrown away.
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PART I, ITEM 1. BUSINESS, CONTINUED
With today's manual page layout and slow, expensive prepress stages, it
is impossible to personalize printed pages the way you can with the Web. It
is also not economically feasible with today's offset presses to print less
than 1,000 copies of any document, let alone a run of one, as would be
required for personalization. Today, companies have separate teams dedicated
to print and Web publishing. The only time that these teams interact is when
they copy content by manually cutting and pasting between Web and print
authoring tools and databases. Each team publishes out of its own database
and each database must be independently updated. This is the case even with
very sophisticated operations like THE SHARPER IMAGE and PC catalogs and
websites like PC CONNECTION or PC MALL.
Companies are realizing the increased share of customer loyalty and
profits that result from treating customers as individuals. Companies are
also realizing that it is important to identify their most valuable customers
and lavish attention on them in a personalized manner. Retail banks, for
example, derive 50% of their profits from the top 2% of their customers.
Retaining the top 2% of its customers is therefore critical to a bank's
profitability. The heart of these systems is the maintenance of a unique
profile of each customer. Companies must leverage these profiles to drive
the creation of personalized communications. Credit card companies, airlines,
auto manufacturers and computer manufacturers all have databases of their
customers and their unique purchase profiles. CRM software, working as
front-end to Pageflex to create personalized marketing communications for
customers, can enhance both customer loyalty and future revenues.
Marketing industry consultants Don Peppers and Martha Rogers have
popularized the notion of marketing to an audience of one. One-to-one
marketing is largely recognized as a good concept that could lead to
increased marketing efficiencies and customer loyalty. While one-to-one
marketing has been acknowledged by many as a good concept, finding solutions,
which allow companies to capitalize on this concept, has been problematic. To
implement one-to-one communications, all marketing communications must be
moved from a one-size-fits-all approach, to a custom manufacturing model,
where thousands of variations may be produced at low cost. The market needs
solutions to implement the one-to-one idea. Pageflex, together with
high-speed color printers and digital presses, brings the concept of
one-to-one marketing to fruition. With or without the added complexity of
one-to-one marketing, companies must create thousands of unique marketing
documents to meet the needs of their distribution partners and to present all
of their products and services. The number of variations required can be
computed by considering combinations of the following factors:
o The number of revisions of the document in a year;
o The number of basic document templates;
o The number of product/service variations of content that need to go
through the template;
o The number of distributors of the product in each tier who each want
the document customized;
o The number of languages needed for each country; and
o The combinations of variations from one-to-one marketing.
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PART I, ITEM 1. BUSINESS, CONTINUED
THE BITSTREAM SOLUTION
TYPE AND TECHNOLOGY
Key elements of the Company's strategy include the following:
Since its founding over 18 years ago, Bitstream has played a leading
role in the development of industry-standard type products and enabling
technologies (e.g. font display software). Bitstream has also been
actively developing font portability and compaction technology. The Company
has built substantial expertise in digital type design and production,
technical font formats, and font portability and compression software.
Bitstream intends to continue to develop or acquire technology to support its
leadership position in these areas.
The Company believes that certain features of its products such as their
small file and application size, high typographic quality, performance,
system scalability and cross-platform portability will facilitate their
adaptation to new and emerging markets. These markets include the Internet,
Internet appliances, corporate intranets, embedded systems, set-top boxes,
high definition television, multi-function devices (e.g. combined
printer/fax/copiers) and information appliances. Bitstream is currently
developing, adapting and marketing its enabling technologies and type
products to third parties whose products address these new and developing
markets.
Bitstream's products and technologies have been designed to support
existing technological and typographic standards, such as UNICODE, TrueType
and Type One, and to be embedded within full-featured products produced by
OEMs and ISVs. The Company's products have also been designed to function in
multi-platform computing environments, including Windows, UNIX, Linux,
Macintosh, OS/9, and Java. The Company plans to continue to promote the use
of its products in multi-vendor configurations and is a member of the World
Wide Web Consortium (W3C) and the Unicode Consortium.
MYFONTS.COM
During 1999, Myfonts.com developed a prototype web site. This web site
included a few thousand fonts together with powerful search facilities to help
users find a particular font. Some of these search facilities, such as the
ability to browse fonts of a selected style, are commonly found on other web
sites featuring fonts. A keyword search engine, more powerful than commonly
found on such sites, was developed to make it easier to pick fonts suitable, for
example, for a wedding invitation. In addition, two novel capabilities allowing
the user to ask to see fonts similar to a particular font were developed and
tested.
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PART I, ITEM 1. BUSINESS, CONTINUED
But the most powerful search technology included in the prototype allows
any user to upload an image scanned from a magazine and to get a list of the
closest matching fonts. This technology, called Identafont, is believed to be
one of the keys to making myfonts.com easy and accessible to non-professionals.
Bitstream has filed for a U.S. Patent relating to the use of automatic font
recognition in conjunction with e-commerce.
Myfonts.com is designed to handle virtually all fonts available
irrespective of their source. The Company's strategy for the myfonts.com Web
site is to become the universal source for fonts from all font vendors. To
implement its strategy, the Company approached a number of key font foundries
and invited them to participate in the myfonts.com Web site.
Three levels of participation are currently available:
1. Level 1 - A participating font foundry provides copies of its fonts for
addition to the myfonts.com database. This makes their fonts available to
all searching and browsing facilities. In addition, it allows users to see
images of the fonts for evaluation and comparison. If a user wishes to
purchase a font from a participating foundry, he follows a link to the
foundry's web site where the purchase actually takes place. Myfonts.com
collects no revenue from these sales.
2. Level 2 - Similar to level 1 but the participating foundry allows its fonts
to be sold directly by myfonts.com. With each sale, myfonts.com collects a
commission of between 20% and 50% of the purchase price.
3. Level 3 -Similar to level 2 but the participating foundry shares in the
ownership and control of myfonts.com.
As of December 31, 1999, Agfa-Monotype, Bitstream, Galapagos, Linotype,
P22, and Paratype decided to participate at level 1. Fonts from Adobe, Apple,
Microsoft, ITC are also included at this level of participation. In addition,
two foundries (Bitstream and Agfa-Monotype) have already decided to make some of
their fonts available for direct sale at level 2. For foundries that have not
yet decided to participate, myfonts.com lists them as a foundry with a link to
their web site if one is available. All links that users follow to foundries are
tallied to assist recruiting efforts for additional foundries and participation
upgrades.
Myfonts.com expects to launch the e-commerce portion of its site in the
second quarter of 2000. The Company believes that the launch of e-commerce
capabilities is important to the future success of the site.
ON-DEMAND MARKETING
Pageflex Inc. has developed leading edge technologies that are
revolutionizing the publishing world and causing major corporations to
rethink their marketing strategies. The Company's flagship product, Mpower,
is an on-demand marketing application suite that enables users to create
marketing documents with a click of a button and makes variable data printing
(VDP) and print-on-demand (POD) available to the average user. Marketing
managers, writers, editors, printers, graphic designers and others are now
able to create a document that is aimed to satisfy or reach their entire
world of readers or customers. They have the ability to use their knowledge
of their target audiences and their creativity to form customized documents
for each of these groups or even for each individual.
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PART I, ITEM 1. BUSINESS, CONTINUED
Variable data printing changes the focus from marketing one product to
thousands of customers to marketing many products to a selected group of
customers or to an individual customer. A merging of database information and
digital imaging technology, VDP makes it possible for each printed page to be
different from all the others. A recent study from CAP Ventures indicates
that even very basic uses of variable data printing offers a 36% increase in
response rates over conventional direct mail. Pageflex combines VDP
capabilities with print-on-demand marketing, the ability to print flexible
run lengths "just in time" for delivery and to create a complete on-demand
marketing solutions. Companies will have the ability to create customized
materials for their customers and print them on an as-needed basis. Not only
does this improve the response rates of customers, but it also allows a
company to maintain up-to-date, accurate information in its materials.
Writers, editors and graphic designers can customize their documents to
contain interesting material for each reader while making sure that the
latest product descriptions and updates are included with each new
distribution.
Within a short period of time, the Company expects that the marketplace
will quickly adopt these new publishing ideas. As acceptance for one-to-one
marketing and targeted audiences grows, the Company's software products should
become widely-used, necessary tools in the publishing industry. Pageflex has
the potential to become a de facto standard in VDP much like Quark Xpress is
in DTP, adopted by all major corporations and accessible to consumers via the
Internet. As this revolution in the way we view publishing evolves, Pageflex
will continue to develop its products to POD capabilities in the marketplace.
Pageflex's products and technologies have been designed to support existing
technological standards. Pageflex is a member of Print On Demand Initiative
(PODi), an alliance of key vendors and service providers working in the digital
color printing market. PODi promotes a greater awareness about the applications
and benefits of digital color printing through the publication of articles,
independent research, industry seminars and special events. Membership in PODi
is open to leading vendors and service providers involved in digital printing,
database marketing and mail products. PODi's focus and activities are set by the
Board of Directors, which includes Adobe, Scitex, Electronics for Imaging (EFI)
and Xerox. Other leading industry supporters include AGFA, GammagraphX (GGX),
GretagMacbeth, Hewlett Packard, Lanier, Minolta, NexPress, Splash, Tektronix,
Xeikon, the United States Postal Service, and Varis. PODi also includes as
Associate Members many leading digital print service providers.
Pageflex also participates in PODi's Personal Printing Initiative (PPI). The
PPI is an industry initiative focused on understanding and quantifying the value
of variable color digital printing as a means of improving customer acceptance
and application. The goal of the PPI is to eliminate some of the obstacles
facing variable data users, thus accelerating market acceptance. At present, the
program is being supported by Adobe, EFI, NexPress, Scitex, the United States
Postal Service, Xeikon, Xerox, IBM, and Varis.
The PPI has recently completed and released the Personalized Printing
Machine Language (PPML) standard. This standard harmonizes the ten different,
vendor-specific proprietary protocols currently used to drive digital presses
at high speed. All can be driven by vanilla PostScript, but only at low
performance. Today, for example, to drive an Indigo press at rated speed, the
front-end software must output Indigo's proprietary "JLYT" format. Whereas to
drive a Xerox DocuColor 70 that uses a Scitex RIP, you must output Scitex's
VPS format. The PrintReady standard is designed to eliminate these competing
alternatives. Once implemented, front-end software (like Pageflex's Server)
should be able to send the same PrintReady file to any vendor's output
device. Pageflex Inc. is unique in that it seeks to drive all brands of
digital printer. Our neutral position has enabled Pageflex to play a central
role within the PPI working group.
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PART I, ITEM 1. BUSINESS, CONTINUED
Pageflex is actively involved in the XSL working group of the World Wide
Web Consortium (W3C). The Company was invited onto the committee by the chair
of that group based on years of experience developing style sheet languages.
XSL is one of the components of the W3C's XML standards effort. Dr. Jeffrey
Caruso represents Pageflex along with representatives from Adobe, Sun, IBM,
Microsoft, and about 20 other prominent firms. Dr. Caruso is
co-editing the print-oriented formatting part of the standard, and works
particularly closely with Adobe in this effort.
The XSL standard is of great strategic importance to Pageflex for two
reasons. First, Pageflex's underlying composition engine, NuDoc, currently uses
its own proprietary TSL style language. The Company is working towards the goal
of having NuDoc use XSL as soon as the specifications are released by the W3C.
This will make it the first solution on the market to be completely based on
open systems; using XML for content and XSL for form, and joining them together
to create PDF, PostScript and other output standards. Second, once this work is
completed, the Company has designed its implementation to allow Pageflex to
license this XML/XSL-compatible NuDoc engine to hardware OEMs and software ISVs.
The Company believes that it is the only vendor with an "OEM-able" XML/XSL-based
composition technology.
[GRAPHIC]
PRODUCTS AND TECHNOLOGIES
TYPE AND TECHNOLOGY
The Company's type and technology products and technologies can be
separated into two major groups (a) type and technology OEM/ISV products for
developers and (b) type and technology retail products for end users. Each of
the product groups is described in greater detail below.
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PART I, ITEM 1. BUSINESS, CONTINUED
OEM/ISV PRODUCTS
OEM/ISV products consist of the following enabling technologies that
deliver typographic capabilities to hardware devices and software applications:
(i) Font Fusion-TM-, released in 1999, is a font engine software that allows
developers of operating systems, software applications, Web applications,
low-resolution screen devices, multimedia servers, high-definition television
screens (HDTVs), set-top boxes, continuous tone printers, personal digital
assistants (PDAs), and other embedded systems and Internet appliances to render
high-quality characters in any format, at any resolution, on any device; (ii)
the FontTastic-TM- font engine software that allows Linux and Unix developers to
render high-quality characters in industry-standard formats; (iii) the
TrueDoc-R-, portable font technology providing for the efficient distribution
of text, with fidelity, in a highly compact format; (iv) the TrueDoc Imaging
System (TDIS) font engine software for developers of operating systems, servers,
applications, printer controllers, and other environments where a complete font
solution is needed to provide scaleable resident fonts and support for
downloaded, industry-standard fonts; (v) Font Navigator for Windows, a font
manager for Windows available as an SDK (software development kit) for
developers; and (vi) Jet, a font engine written entirely in Java that provides a
complete font scaling and rasterizing solution for Java applets, applications,
Internet appliances and embedded systems. Each of these products is described in
greater detail below:
FONT FUSION
In 1999, Bitstream released Font Fusion-TM-, a font engine that combined
its simple, fast T2K-R- font engine with its robust TrueDoc-R- font engine.
Font Fusion provides developers with full font fidelity and high-quality
typographic output at any resolution, on any device, while maintaining the
integrity of the original character shape. It is designed to support operating
systems, software applications, Web applications, low-resolution screen devices,
multimedia servers, high-definition television screens (HDTVs), set-top boxes,
continuous tone printers, personal digital assistants (PDAs), and other embedded
systems and Internet appliances. Font Fusion is independent of processor and
operating system and compatible with all industry standard font formats. It is a
full-featured, next generation, small-footprint multilingual, outline font
technology. Font Fusion was designed for grayscale and black-and-white,
ROM-based and non-ROM-based devices in a system where the fonts may reside
locally or remotely.
FONTTASTIC
In 1999, Bitstream began re-engineering FontTastic, its font engine for
Linux and Unix. The FontTastic Software Development Kit (SDK) contains all the
tools that software developers need to enhance the font capabilities of their
Linux and Unix applications, including a font engine and a core set of fonts.
The core set of fonts also includes delta-hinted fonts, which have been
fine-tuned for the screen.
TRUEDOC
TrueDoc is a portable type compaction technology designed for the
distribution of electronic text based information. OEMs and ISVs license and
incorporate TrueDoc into their document creation and viewing products to achieve
reliable, compact and efficient recording, transport, viewing and printing of
typographic information regardless of whether the fonts used for the original
creation of the document are resident on the recipient's system. TrueDoc has
been engineered to be small in file and application size, to comply with all
industry font standards, and to be cross-platform compatible.
TrueDoc is composed of two main software components. The TrueDoc Character
Shape Recorder, approximately 75 kilobytes in size, captures character shapes
from a font processor, such as TrueType or Type One, and creates a portable font
resource ("PFR") that is transportable across networks or the Internet.
TrueDoc's Character Shape Player, approximately 65 kilobytes in size, recreates
the type shapes
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PART I, ITEM 1. BUSINESS, CONTINUED
stored in the PFR and displays the text in a manner that maintains the integrity
of the original type shapes. The Company believes that TrueDoc's small file size
and efficient playback capabilities present advantages in applications where
limitations on bandwidth and memory are significant factors.
TDIS
The modular architecture of the Company's "4-in-1" enabling technology
(TrueDoc Imaging System or TDIS) provides software hooks to allow OEMs and ISVs
to incorporate font scaling technologies into their products. The four font
scaling technologies included in TDIS are two industry standard font formats
(TrueType and Type One), the resident fonts used in Hewlett-Packard Company
LaserJet laser printers, and a Bitstream TrueDoc-based type rasterizer that
processes Bitstream-supplied resident font sets. In addition, this 4-in-1
architecture includes software that routes incoming typeface data to the
appropriate processor and prepares the final rasterized characters for imaging
by an output device or computer screen. The Company markets this technology
under the name "Bitstream 4-in-1 TrueDoc Imaging System."
JET
JET is a font engine written entirely in Java that provides a complete
font scaling and rasterizing solution for Java applets, applications, Internet
appliances and embedded systems.
RETAIL PRODUCTS
Type and technology retail products consist of: (i) typeface products,
such as libraries of typeface designs; (ii) font managers, such as Font
Navigator-TM- for Windows, and FontTastic-TM- for Unix, that allow users to find
fonts, install fonts, and view font samples; and (iii) Web publishing tools that
allow Web page designers to embed characters from fonts in Web pages. Each of
these products is described in greater detail below:
TYPEFACE PRODUCTS
Bitstream has developed a library of over 1,400 digital typefaces
deliverable in industry-standard font formats (such as TrueType and Type One).
Approximately 1,200 of these typefaces are for use with English or other western
European language-based computer systems. A large number of typefaces is
necessary to support OEMs and ISVs focused on the graphic arts market, who are
accustomed to having a wide variety of type designs from which to choose. The
remainder of the Company's typeface designs are non-Western language typefaces
such as Kanji, Greek, Chinese, Korean, Russian, Hebrew and Arabic that are
marketed only to OEM and ISV customers.
In addition to typefaces, the Company also offers custom typeface services
to its customers. Depending on the needs of the client, the Company can digitize
corporate logos, modify existing typeface designs, add special characters to
typefaces, and create new typefaces. The Company's custom type services are
marketed to its OEM, ISV and large corporate customers.
Bitstream has developed its own, proprietary, font design software tools.
These tools enable the Company's type product engineers to develop and expand
the Company's library of typeface products and to generate custom typeface
products in an efficient and cost-effective manner. By using its own tools,
Bitstream can largely avoid licensing or paying royalties for the use of third
party development tools. In addition, the Company believes that its design tools
improve its competitive position in the marketplace by assisting the Company in
adapting its products rapidly to the specific requirements of its customers.
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Specific retail products include the following:
TYPEHIGH
In 1999, Bitstream released TypeHigh, over 1,400 fonts from the Bitstream
Typeface Library, for Windows and the Macintosh.
EXPRESS YOURSELF FUN PACKS
In 1999, Bitstream released six Express Yourself Fun Packs, font packs for
the small office, home office market, for Windows and the Macintosh.
FONT NAVIGATOR
Font Navigator-TM- is a powerful font management tool that allows users a
quick and easy way to find, install, and organize fonts into manageable groups.
This tool also allows users to view and print font samples.
WEBFONT MAKER AND WEBFONT WIZARD
In 1999, Bitstream released WebFont Maker for the Macintosh and WebFont
Wizard for Windows and the Macintosh. In addition, Bitstream made trial
versions of WebFont Wizard for Windows and the Macintosh available as free
downloads from its Web site. WebFont Maker and WebFont Wizard are Web
publishing tools that allow Web page designers to embed their selected
typefaces in Web page designs. These embedded typefaces will display properly
across version 4.0 and higher of both Netscape Navigator-TM- and Microsoft
Internet Explorer-TM- browsers. WebFont Maker includes (a) over 200
high-quality TrueType fonts, including the collection of WGL4 fonts with
expanded Pan European characters and the "euro" currency symbol, (b)
Bitstream's award winning Font Navigator for typeface management, and (c) the
newly developed WebFont Wizard-TM-. The WebFont Wizard allows users to create
portable, dynamic fonts from the TrueType fonts on the CD, or from any
existing TrueType and PostScript Type 1 fonts installed on the designer's
Windows 98/95, Windows NT 4.0, or Macintosh platform. These dynamic fonts can
then be embedded in any Web page for display in Netscape Navigator and
Microsoft Internet Explorer browsers.
MYFONTS.COM
In 1999, Bitstream officially launched myfonts.com, a showcase of the
world's fonts from one easy-to-use Web site. Created by Bitstream and joined by
some of the industry's most influential font foundries, myfonts.com provides the
largest collection of fonts ever assembled. It features new ways to find and
purchase fonts on-line, and offers unique typographic resources and a forum for
interacting with font experts.
The foundries that have agreed to participate as partners with Bitstream in
MyFonts.com at the time of this filing include Agfa, Galapagos, ITC, Jack Yan
and Associates, Letraset, Monotype, Microsoft, Paratype, P22, Sooy Type Foundry,
and URW++. Fonts from Adobe, Apple, Chank, and Linotype are also represented in
the MyFonts.com catalog.
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Some of the key features of MyFonts.com include: (a) MyFonts Valet-TM-
which enables users to browse and locate fonts using keywords a novice or expert
would understand; (b) Identafont-TM- which allows users to scan images of
typefaces and upload them to MyFonts.com for identification; (c) TypeXplorer-TM-
which allows users to adjust typographic measurements to find similar fonts
based on user-defined criteria; (d) the ability to find fonts similar to a
particular typeface design using the "Show me more like this..." feature; (e)
test driving a font in your own text; (f) exploring the world of fonts with
links to typographic resources available on the Web; and (g) the ability to
interact with type experts on-line, ask questions, or join the on-line MyFonts
Forum
The mission of MyFonts.com is to make fonts accessible to everyone,
which benefits both users and the foundries. Fonts have been an anomaly to the
general computer user difficult to find, purchase, and install, and often an
unknown aspect of their desktop environment. MyFonts.com hopes to endear fonts
to all users, not just graphic arts professionals.
ON-DEMAND MARKETING
The Company's on-demand marketing products consist of: (i)
Pageflex-TM- Mpower-TM-, a suite of internet-driven software applications that
gives enterprise organizations the ability to design and produce customized
print documents that are targeted at a narrow segment or an individual reader;
(ii) Persona-TM-(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.
MPOWER
Mpower is an integrated suite of software applications that gives enterprise
organizations and digital printing service providers the ability to design and
produce customized database or Internet-driven marketing communications on
demand. No matter how complex the project, Mpower can assemble it dynamically
and deliver it instantly in print, PDF, or via the Web. Mpower can create a
variety of customized documents with highly designed layouts, such as brochures,
sophisticated color reports and direct mail pieces. Mpower uses customer profile
information about a particular reader or consumer to control the selection of
digital content, such as logos, imagery, illustrations and text for a document.
Mpower then uses intelligent, flexible templates to automatically assemble this
personalized content into final documents for output to print, PDF or the Web.
Mpower allows users to capitalize on the customer information stored in the
user's profile database, and to use that information to tailor a marketing
message aimed directly at the user's customers. It also allows users to
repurpose the content, such as text, images and other digital files used to
market their business.
Mpower is based on the principle of separating a document's content from
its form. Content refers to raw information--text, images, graphics. Form refers
to the design--how the page is laid out, what fonts are used, and how images are
to be sized and positioned on the page. Pageflex captures the form of a document
by using a flexible, intelligent template that represents the original design of
the page. These flexible templates are then populated with images, text, and
other content, customizing the page based on variables that are created as part
of your template. These variables are attached to customer information stored in
your database, as well as metadata stored within your asset management system.
Pageflex uses the tags to deduce what images, text, or graphics are selected for
the customized document it is assembling.
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By separating content and form and enabling them to be easily and
intelligently recombined, Mpower lets you assemble pages on-the-fly, based on
market profile or user preferences. It empowers the user to capitalize on the
customer information stored in their database, and to use that information to
tailor a marketing message directly aimed at individual customers. It also
allows the user to repurpose their content--the text, images, and other digital
files used to market their business--and make it work in far more productive
ways. Mpower redefines a document, from a static, single-purpose entity into a
flexible, multi-purpose asset that the user can use again and again, with far
greater results.
[GRAPHIC]
Mpower is an application layered on top of the Company's NuDoc composition
engine. The Pageflex application layer development began three years ago.
Approximately 20 engineering staff years have gone into its development. The
NuDoc engine has been under development as a separable engine with an API since
1990. In 1990, its initial code base was taken from the composition engine for
an Ad Makeup application called Archetype Designer that had been under
development since 1985. Since 1990, approximately 50 staff years have been
invested in NuDoc. Prior to 1990, 60 staff years were invested in the
development of the Archetype Designer. Total investment in Mpower/NuDoc is
approximately 130 staff-years.
In February 2000, Pageflex released Version 2.0 of Mpower. The new
features of Version 2.0 define the state of the art in customization for
offset printing and position Pageflex to enter the broader Web-to-print
market. Mpower 2.0 also carries a number of usability and performance
enhancements in each of the modules that make up the Mpower solution:
Producer, Server and Designer.
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PART I, ITEM 1. BUSINESS, CONTINUED
The new features and enhancements in each module include the following:
Mpower Producer
o Categorize and tag content with keywords using Mpower Librarian tool
o XML content source plug-in architecture
o Enhanced conditional rules for more sophisticated project variability
o Rendering plug-in for customized output formats
Mpower Server
o Speed and stability enhancements
o Improved error reporting
o Server-based composition engine for higher performance
Mpower Designer
o Image scaling that supports variable behavior
o Support for EPS clipping paths and text run-around
o Column balancing and multi-column text screening
o Support for top and bottom rules on paragraphs
o Polygon and line tools
The new features of Mpower 2.0 improve its capabilities as a marketing-on-demand
solution. The addition of Librarian and enhanced conditional rules enhance
Mpower's position as the industry-leading one-to-one marketing communications
solution. The rendering plug-in and enhancements to Mpower Designer, combined
with Mpower's Web capabilities, make it ideal for Web-driven document
customization. And the XML content source plug-in architecture brings Mpower to
the forefront of cross-media publishing.
PERSONA
In February 2000, Pageflex introduced Persona, an XML-based variable
content publishing application that allows users to create sophisticated,
personalized documents in PDF or PostScript. Persona is an easy-to-use
application for Windows NT, consisting of a subset of features from Mpower,
Pageflex's enterprise marketing-on-demand solution. Built from open standards,
Persona is the first variable content publishing solution to use XML as the
intermediate data format between databases and the page composition process.
Like Mpower, Persona uses Pageflex's advanced NuDoc page composition engine,
offering precise control over the design of page templates while maintaining a
strict separation of form and content. Using an ODBC-compliant database as a
customer profile data source, Persona users can create conditional rules that
determine what content is chosen for a particular profile. The content is then
dynamically placed in the template to create the final document.
Persona users can build a document template from scratch by creating image
containers, text containers, and other graphic elements using familiar GUI
tools. And because Persona incorporates a full composition engine, it offers the
standard composition tools such as leading, kerning, justification, and
hyphenation. Persona shares Mpower's "flex" capabilities, the ability to
automatically adjust a container size based on the size or orientation of the
content that flows into it. In addition, surrounding containers move in concert
to adjust with the change, maintaining the design integrity.
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PART I, ITEM 1. BUSINESS, CONTINUED
Other key features of Persona include:
o Support for if/then/else variable content selection rules
o Support for keyword queries of variable content with Librarian
o Previewing for each individualized record
o PDF and object-based PostScript output
o Adobe InDesign plug-in preview converts InDesign documents
o Optional output for Scitex VPS, Indigo JLYT, and Agfa
IntelliCache
Persona is currently in beta and is expected to be released in the second
quarter of 2000.
NUDOC
NuDoc is an advanced document composition engine based on the principle of
separating form from content. Leveraging object-oriented technology, NuDoc is a
reusable building block for document processing applications. NuDoc SDK object
classes provide an application programming interface (API) that supports the
import, editing, display, or printing of electronic documents. One of the
strengths of NuDoc is its ability to dynamically create layout intensive pages
from separate content and style file imports. In NuDoc, a document object is
made of style, content, and page layout sub-objects. A style object contains
rules that govern the form (or appearance) of the document. Content elements
such as words, images, movies, etc. are organized into a tagged tree structure
that represents the logical organization of the information (sections,
sub-sections, etc.). The W3C's extensible markup language (XML) is the default
content data representation. Styles are represented by a set of model objects.
NuDoc uses a new style file format called Template Style Language (TSL) to
represent the model objects. The TSL styles describe the colors, fonts, and
geometric rules that govern how structured content is formatted into its visual
appearance. The TSL uses a flexible container metaphor to describe how to adjust
the sizes and positions of text, images, and other containers to result in a
well designed page.
TROPIX
Tropix is a workflow application to automate repetitive steps in
electronic publishing production. It is unique in combining a highly visual and
configurable interface with the unparalleled extensibility and power of Smart
Object plug-ins. Also, each new Smart Object readily leverages the capabilities
of all others. With Tropix, what traditionally would have taken a large custom
development effort can now be accomplished by drag and drop.
MIXXER AND APERTURA
Mixxer is a color correction filter for Adobe Photoshop, which brings
important methodologies originating in high-end proprietary prepress
workstations to the Macintosh. Apertura enables Adobe Photoshop to open one or
more smaller portions of most popular image formats including native Scitex CT
and LWs. This dramatically increases the effectiveness of using Adobe Photoshop
for full resolution type corrections on lineworks and localized edits on even
the largest image.
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PART I, ITEM 1. BUSINESS, CONTINUED
MARKETING AND SALES
TYPE AND TECHNOLOGY
The type and technology sales organization, as of March 21, 2000,
consisted of three people focused on OEM and ISV sales and three people focused
on corporate direct sales. The Company's sales efforts are managed from its
corporate headquarters in Cambridge, Massachusetts. In addition, the Company
maintains a European sales headquarters in Cheltenham, England. The Company also
has a sales agent based in Tokyo to facilitate OEM sales to Japanese hardware
manufacturers. Sales personnel receive a base salary plus commissions based on
meeting sales targets, with additional commissions for sales in excess of annual
targets.
Marketing activities are carried out by a team of four people located at
the Company's headquarters in Cambridge, Massachusetts. In addition, the Company
promotes its products through attendance and exhibition at major industry trade
shows and its website, www.bitstream.com. The principal objective of the
Company's marketing strategy is to continue to expand the sale of the Company's
type products and software to OEMs and ISVs, who integrate the Company's
software into their own products. OEM and ISV relationships range from the
license of a small group of typefaces to agreements whereby an entire range of
type products and/or technologies are incorporated into the customer's hardware
or software products. As new opportunities arise, particularly in the newly
emerging areas of corporate intranets and portable document software, the
Company intends to evaluate other marketing approaches.
MYFONTS.COM
Marketing of myfonts.com has been focused on recruiting participation from
font foundries. When myfonts.com supports e-commerce (expected in early 2000),
additional marketing efforts will focus on making Web users aware of myfonts.com
and bringing them to the site. Initial focus will be within the United States
and Canada.
The initial visit to a web site is a strong determinant of whether the site
gets bookmarked or not. Ease of use, responsiveness and esthetics are believed
to be the key factors in enhancing this initial impression. Users will be
encouraged to register and return through two features: discounts for multiple
purchases even if they are not simultaneous, and the ability to download a font
anytime in the future if a purchased font is lost.
ON-DEMAND MARKETING
The on-demand marketing customer support organization, as of March 21,
2000, consisted of five people focused on maintaining and expanding its reseller
and channel relationships who are the primary sales force for the Company as
well as completing a limited amount of direct sales. The Company's sales efforts
are managed from its corporate headquarters in Cambridge, Massachusetts. The
Company seeks to enhance its relationships with existing and potential customers
through its two person training and technical support team that works with
existing and potential customers, resellers and strategic partners to support
the sales process and to facilitate the implementation and use of the Company's
software products and technologies.
Marketing activities are carried out by a team of two people located at the
Company's headquarters in Cambridge, Massachusetts. In addition, the Company
promotes its products through attendance and exhibition at major industry trade
shows and through its website, www.pageflexinc.com. The principal objective of
the Company's marketing strategy is to continue to expand its on-demand
marketing software to corporate direct marketing departments, design firms,
advertising agencies, digital service and print
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PART I, ITEM 1. BUSINESS, CONTINUED
providers, direct mail houses and other corporations and end users. As new
opportunities arise the Company intends to evaluate other marketing approaches.
CUSTOMERS
TYPE AND TECHNOLOGY
The Company licenses typeface products and font subsystems to a wide
variety of OEM and ISV customers. The Company also sells custom and other
typeface products directly to corporate customers and individual end users. No
single type and technology segment customer accounted for 10% or more of the
Company's revenues for any of the years ended December 31, 1999, 1998 or 1997.
During the year ended December 31, 1999, one type and technology ISV customer
accounted for 11% of the type and technology revenue for the year. From time to
time, product sales to large customers during a single fiscal quarter may
constitute more than 10% of Company revenues for such quarter. In the future,
the Company intends to further broaden its customer base through expanded
product offerings and increased marketing efforts within the OEM/ISV and
corporate channels. Revenues generated by customers located outside the United
States are included in the Notes to the financial statements enclosed herewith
on Page F-24.
MYFONTS.COM
Myfonts.com had no revenues or customers during the year ended December 31,
1999. Myfonts.com plans to launch its e-commerce Web site early in the second
quarter of 2000 and is expected to generate its revenue from this Web site
during 2000.
ON-DEMAND MARKETING
The Company licenses its on-demand marketing products directly to major
corporations and end users, and indirectly through resellers and strategic
partners. The on-demand marketing segment was identified and segregated as of
the start of 1999. For the year ended December 31, 1999 this segment generated
revenues from one customer, Atex Media Solutions, Inc. ("Atex"), which
represented 12% of the total Company's revenue during the year and 38% of the
on-demand marketing segment's revenue during the year. Revenues from Atex
represent license fees and prepaid royalties under a long-term contract which is
anticipated to generate at least an additional $504,000 in revenues during the
year ended December 31, 2000. The on-demand marketing segment had revenues from
three additional customers during 1999 which accounted for less than 10% each in
total Company revenues but 22%, 17%, and 17% respectively of that segment's
revenue during the year. One of the customers that accounted for 17% of the
on-demand marketing revenue is IBM Corporation who is a remarketer and reseller
of the Company's on-demand marketing software under a Software Vendor
Remarketing Agreement that was executed in August 1998. The Company intends to
broaden its customer base through increased marketing efforts and by developing
relationships with additional resellers and partners in 2000. The Company has
recently entered into marketing relationships with Agfa, Banta Integrated Media,
and Indigo. Revenue generated by customers located outside the United States is
included in the Notes to the financial statements enclosed herewith on Page
F-24.
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PART I, ITEM 1. BUSINESS, CONTINUED
RESEARCH AND PRODUCT DEVELOPMENT
TYPE AND TECHNOLOGY
Bitstream is committed to developing innovative software to enhance text
imaging for operating systems, software applications, Internet appliances, Web
applications, low-resolution screen devices, multimedia servers, high-definition
television screens (HDTVs), set-top boxes, continuous tone printers, personal
digital assistants (PDAs), and other embedded systems. To accomplish this goal,
the Company has invested, and expects to continue to invest, significant
resources in research and development. The Company's research and development
activities are centered around advancing the Company's software products for its
OEM, ISV and corporate customers. The Company maintains specific expertise in
the areas of font formats, multi-lingual fonts, font portability, font
compression, and font processing technology, and digital asset management
technology. The Company emphasizes cross-platform portability, small file and
application size and extensibility to new technologies in its software
development. To support these design objectives, the Company employs advanced
software development techniques.
As of March 21, 2000, the Company employed thirteen individuals who engage
in research and development activities. Of these, seven focus on type product
development, two on developing enabling technology, and four on TrueDoc and Font
Fusion.
MYFONTS.COM
The Company is committed to developing leading-edge technology for its
myfonts.com Web site to ensure that the site is the leading place to purchase
fonts on the Web. As of March 21, 2000, the Company employed two individuals who
focus exclusively on research and development activities relating to the
technology incorporated into the myfonts.com Web site. Additional Bitstream
personnel also assist in the research and development effort for the site
including Bitstream's Chief Technology Officer and internal font experts.
ON-DEMAND MARKETING
The Company's wholly-owned subsidiary Pageflex is committed to advancing
the Company's on-demand marketing products and technologies. As of March 21,
2000, the Company employed eighteen individuals who engage in research and
development activities for its on-demand marketing business. Of these, seven
focus on NuDoc, ten on Pageflex and one on documentation.
COMPETITION
The markets in which the Company participates are intensely
competitive, evolving and subject to rapid technological change. The Company
expects competition to persist and to increase in the future. The Company
believes that while it competes with no single organization across its entire
product line, a variety of companies offer products that compete with some of
its products. Certain of the Company's competitors, including Adobe and Agfa,
have greater name recognition, a larger customer base and significantly greater
financial, technical, and marketing resources than the Company.
Future sales of the Company's products will depend upon the Company's
ability to develop or acquire, on a timely basis, new products or enhanced
versions of its existing products that compete successfully with products
offered by developers of competing technologies. There can be no assurance that
the Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, financial condition and results of
operations.
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PART I, ITEM 1. BUSINESS, CONTINUED
TYPE AND TECHNOLOGY
The Company's products compete with the solutions offered by a variety of
companies, including other suppliers of enabling technologies, software
application developers, and vendors of computer operating systems. Moreover, the
market for the Company's enabling technologies and products may be adversely
impacted to the extent that computer hardware, operating system and application
software vendors incorporate similar functionality or bundle competitive
offerings with their products and thereby reduce the market for the Company's
technology or products. The Company's markets are the subject of intense
industry activity, and it is likely that a number of software developers are
devoting significant resources to developing and marketing technology and
products that may compete with the Company's technology and products. The
competition for OpenType consists primarily of software from Adobe and Monotype.
The competition for the Company's sales of type products to OEM and ISV
customers generally comes from a number of comparably sized or smaller companies
offering their own type libraries and custom type services. Competition with the
Company's enabling technologies principally comes from Agfa with its Universal
Font Scaling Technology ("UFST"). UFST has a similar architecture to the
Company's 4-in-1 enabling technology product. The competition for Font Fusion
and TrueDoc consists primarily of software from Agfa, which includes a font
compression technology known as MicroType Express.
The Company believes that the principal competitive factors affecting its
market include product features and functionalities, such as scalability, ease
of integration, ease of implementation, ease of use, quality, performance,
price, customer service and support, and effectiveness of sales and marketing
efforts. Although the Company believes that it currently competes effectively
with respect to such factors, there can be no assurance that the Company will be
able to maintain its competitive position against current and potential
competitors.
MYFONTS.COM
Although myfonts.com has no direct competitors which offer such a wide
variety of fonts on one easy-to-use Web site, there can be no assurance that
consumers will prefer to use myfonts.com over Web sites hosted by individual
font foundries. There also can be no assurances that myfonts.com will succeed in
hosting virtually all of the available digital fonts in the world. If there are
critical omissions due to non-participation by key foundries, the value of the
site as a one-stop shop will be reduced. Given that it costs a foundry nothing
to participate at the entry level, and such participation creates the
possibility of additional sales, Bitstream believes this risk to be minimal.
Even if the majority of foundries participate at level 1, there is no
assurance that they will allow their fonts to be sold directly by
myfonts.com. Without participation at a higher level, myfonts.com's will not
have a viable revenue stream. Myfonts.com intends to minimize this risk by
keeping statistics on user behavior with a view to being able to demonstrate
the benefits of allowing direct sales by myfonts.com.
The most significant risk is that even with the most powerful search tools and
the ability to find any font in one place, there is no assurance that additional
sales of fonts will occur in sufficient numbers to justify the cost of running
myfonts.com. A possible approach to minimizing this risk is to sell fonts not
just as individual items but as part of document design kits.
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PART I, ITEM 1. BUSINESS, CONTINUED
ON-DEMAND MARKETING
The Company's on-demand marketing products compete with the solutions offered by
a variety of companies, including the following sources:
o Varis Corporation
o Cardiff/AudienceOne
o MicroMass
o Digital Marketing
o Barco
o Low-end Quark Xtensions software for "variable data printing"
Mpower offers a well-rounded set of features that provides an advanced level of
power and robustness to the field of variable data publishing, allowing
publishers to push dynamic page publishing to a level not easily reached before.
Mpower's major benefits to users as compared to competitive products can be
grouped into four major areas: design flexibility, input and output flexibility,
ease of use, and speed.
VARIS CORPORATION
In terms of capabilities, Varis is the nearest competitor. Varis focuses on high
speed, mostly black and white, relatively simple page layout applications. Their
customers include Publishers Clearinghouse, who uses it to implement
personalized direct mail. The best thing about Varis is that it works for the
applications that they target, and works at high speed. Varis offers a complete
system including a proprietary RIP of their own design. They develop low level
hardware interfaces from this RIP to directly drive to print engines. Unlike all
other systems mentioned here, the Varis system implements the variable image and
text merging and formatting inside the RIP itself. Unfortunately, this means
that the RIP can only be driven by front-ends developed by Varis. They have
developed direct interfaces to several print engines in B&W and color; however,
each new interface requires a major effort. In terms of variable publishing
flexibility, Varis offers somewhat more than the low end Quark Xtensions, but
far less than Pageflex. It is able to reflow text to a limited extent as well
as make small modifications to the page layout. Unfortunately all of this
processing happens in the RIP so you can only debug your job by printing it
first. To date they have not developed user-friendly front-ends capable of
simulating what will happen to the page layout when processed by the RIP.
CARDIFF/AUDIENCEONE
AudienceOne offers products as well as consulting and implementation services.
AudienceOne is a client/server solution based on PDF technology. Lacking a
composition engine, they are even less flexible in terms of layout than the
low-end Quark-based solutions. For example, you cannot have the customer's
name in the middle of a text paragraph since different names may cause
different line-ending decisions for the rest of the paragraph requiring a
composition engine to re-hyphenate and re-justify the paragraph. Think of this
as an automated "cut-and-paste" document producer. Without a super-fast
composition engine like NuDoc, it cannot merge dynamic text elements on-demand
at printer speeds. One feature of the AudienceOne system is that it can be
driven from a Web-based interface and can be integrated with a Web server.
Pageflex offers partial functionality in this area today, and intends to offer
more functionality in Version 2.0.
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MICROMASS
MicroMass, like AudienceOne, offers both products and services. The MicroMass
solution is highly customized and can be built from scratch or integrated with
existing technologies. MicroMass offers a customized content database. It does
not include any optimized PostScript output capabilities to our knowledge.
MicroMass is a leader in HTML and email output variations of their product.
MicroMass's primary market focus is the health care industry.
DIGITAL MARKETING DIGITAL VIP
Like Varis and MicroMass, Digital Marketing offers both product and services.
The end user receives a customized Web interface that works with standard
browsers for placing variable print orders. The Digital VIP software resides
at Digital Marketing, where jobs are received and processed. The PostScript
files are then sent to a print service provider for printing on Xerox
DocuTech and DocuColor digital presses. There does not appear to be any
optimized PostScript capabilities. In addition, there is no offering today
for the software to sit at the service provider's or end user's facility. The
majority of use seems to be of an overprint nature. The variability is
limited to 12 fields. There is no support for flexible containers or variable
templates. Current pricing is a click charge model. The target market is the
installed base of Xerox DocuTech and DocuColor products as well as commercial
printers without digital print capabilities.
BARCO VIPLINE
Barco VIPLine is Barco's high-end variable publishing solution. It is based on a
fairly closed architecture running on SGI workstations. Other than Pageflex,
VIPLine is the only solution that offers the ability for page template
containers to reposition themselves dynamically based on inter-object
relationships. It is a tightly integrated system with the Barco RIP
architecture, and does not support other RIPs and PostScript-based devices. It
is also unique in its ability to dynamically generate barcodes. It is a high
performance system that supports a RIP-once approach.
LOW-END QUARK XTENSIONS
Most of the vendors of digital presses have developed their own low-end
Quark-based variable data front-end applications. Each can either produce
PostScript or can output only to that vendor's output device. For example, if
you buy an Agfa PersonalizerX, it can only drive an Agfa output device at high
speed. Here is a list of these products:
o Agfa PersonalizerX
o Scitex Darwin
o Barco VIP Designer
o Indigo Yours Truly
o IBM MergeDoc
These products are simple "mail merge" programs written on top of the very
popular Quark Xpress page layout application. These applications are all fairly
similar. They are not client/server and thus cannot be driven by external
systems such as Web servers or CRM systems. They require manual operation to set
up a project and initiate printing operations. Because they are based on Quark's
composition engine, they are limited to simply replacing text and imagery in the
text and image containers on the Quark page. What Pageflex can do with a single
flexible template would require many hand-made Quark-based templates.
Scalability and multi-media targeting are also limitated for this class of
solutions.
22
<PAGE>
PART I, ITEM 1. BUSINESS, CONTINUED
INTELLECTUAL PROPERTY
The Company relies on a combination of trade secret, copyright, patent, and
trademark laws and contractual restrictions to establish and protect proprietary
rights in its technology. The Company has entered into confidentiality and
invention assignment agreements with its employees, and when obtainable, enters
into non-disclosure agreements with its suppliers, distributors and others so as
to limit access to and disclosure of its proprietary information. There can be
no assurance that these statutory and contractual arrangements will prove
sufficient to deter misappropriation of the Company's technologies or that the
Company's competitors will not independently develop non-infringing technologies
that are substantially similar to or superior to the Company's technology. The
laws of certain foreign countries in which the Company's products are or may be
developed, manufactured or licensed may not protect the Company's products or
intellectual property rights to the same extent as do the laws of the United
States and thus make the possibility of piracy of the Company's technology and
products more likely. The Company believes that, because of the rapid pace of
technological change in the software and electronic commerce markets, legal
protection for its products will be a less significant factor in the Company's
future success than the knowledge, ability and experience of the Company's
employees, the frequency of product enhancements and the ability of the Company
to satisfy its customers.
The Company's policy is to apply for U.S. patents with respect to its technology
and seek copyright registration of its technology or trademark registration of
its marks from time to time when management determines that it is competitively
advantageous and cost effective to do so. The Company has been granted three
patents by the United States Patent and Trademark Office and each is directed to
certain aspects or applications of the Company's TrueDoc technology.
Additionally, the Company has sought foreign patent rights to certain aspects of
its TrueDoc technology by filing an International Application under the Patent
Cooperation Treaty. The Company is currently in the process of registering
several trademarks and preparing a variety of patent applications relating to
myfonts.com and its on-demand marketing software. Bitstream-R-, TrueDoc-R-
and T2K-R- are federally registered trademarks of the Company. All other
trademarks, service marks or tradenames referred to in this Annual Report on
Form 10-K are the property of their respective owners.
EMPLOYEES
As of March 21, 2000, the Company employed 74 persons, including 22 in
sales and marketing, 33 in research and development and 19 in general
administrative functions. Of the Company's 74 employees, 72 are full time and 2
are part time. The Company also retains consultants from time to time to assist
it with particular projects for limited periods of time. The Company believes
that its future success will depend in part on its ability to attract, motivate
and retain highly qualified personnel. None of the Company's employees is
represented by a labor union and the Company has not experienced any work
stoppages. The Company considers its employee relations to be good.
ITEM 2. PROPERTIES
The Company's corporate headquarters is located in Cambridge,
Massachusetts where it currently leases approximately 27,500 square feet under a
lease expiring in October 2003. The Company currently subleases to a third party
approximately 4,700 square feet of its leased premises under a sublease expiring
in January 2001. Management believes that these facilities are adequate for the
Company's current needs and that suitable additional space, should it be needed,
will be available on commercially reasonable terms.
23
<PAGE>
PART I, CONTINUED
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Class A Common Stock of the Company began trading publicly on the
Nasdaq National Market tier of The Nasdaq Stock Market on October 30, 1996 under
the symbol "BITS." Prior to October 30, 1996, there was no public market for
Bitstream's Class A Common Stock. The following table sets forth the high and
low closing sale prices of the Company's Class A Common Stock as reported on the
Nasdaq National Market for the periods commencing January 1, 1998 through
December 31, 1998 and January 1, 1999 through December 31, 1999. Such
information reflects interdealer prices, without retail markup, markdown, or
commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
1998 1999
---- ----
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter 3.375 1.750 2.188 1.500
Second Quarter 2.500 1.750 2.000 1.313
Third Quarter 2.000 1.313 2.313 1.188
Fourth Quarter 1.625 1.313 10.750 1.938
---------------------------------------- ----------------------------------- --------------------
</TABLE>
As of March 21, 2000, the Company's Class A Common Stock was held by
approximately 110 holders of record and the Company believes that the Company's
Class A Common Stock was beneficially held by more than 500 holders. The
Company's Class B Common Stock was not held by any holders of record.
DIVIDENDS
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain earnings, if any, to support its growth
strategy and does not anticipate paying cash dividends on its capital stock in
the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
During the fiscal year ended December 31, 1997, the Company issued an
aggregate of 137,895 shares of Class A Common Stock in connection with the
exercise of 137,895 vested options and warrants issued under the Company's 1994
Stock Plan and 1996 Stock Plan and 510,322 shares of Class A Common Stock were
issued in connection with the acquisition of Archetype, Inc. During the fiscal
year ended December 31, 1998, the Company issued an aggregate of 498,603 shares
of Class A Common Stock in connection with the exercise of 498,603 vested
options and warrants issued under the Company's 1994 Stock Plan, 1996 Stock Plan
and 1997 Stock Plan. During the fiscal year ended December 31, 1999, the Company
24
<PAGE>
PART II, ITEM 5, MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS MARKET INFORMATION, CONTINUED
issued an aggregate of 494,863 shares of Class A Common Stock in connection with
the exercise of 494,863 vested options and warrants issued under the Company's
1994 Stock Plan, 1996 Stock Plan and 1997 Stock Plan. There were no unregistered
securities sold by the Company during the fiscal year ended December 31, 1999.
The sales and issuances of securities in the transactions described above
were deemed to be exempt from registration under the Securities Act of 1933, as
amended, by virtue of Rule 701 promulgated thereunder, in that they were issued
either pursuant to written compensatory benefits plans or pursuant to a written
contract relating to compensation, as provided by Rule 701. In addition, on
September 30, 1997, the Company filed a Registration Statement on Form S-8 under
the Securities Act of 1933, as amended, registering up to an aggregate of
3,500,000 shares of the Company's Class A Common Stock, par value $.01 per
share, which may be issued upon exercise of stock options and warrants granted
or which may be granted under the Company's 1997 Stock Plan, 1996 Stock Plan and
1994 Stock Plan.
USE OF PROCEEDS
As of December 31, 1999, the approximately $12,200,000 net proceeds from
the Company's initial public offering (IPO) of its Class A Common Stock pursuant
to its Registration Statement on Form S-1, Commission File No. 333-11519,
declared effective October 30, 1996, have been used as follows: (i)
approximately $200,000 for the buildout of Bitstream's leased facilities in
Cambridge, Massachusetts to accommodate the additional personnel that joined the
Company as a result of the acquisition of Archetype, Inc.; (ii) approximately
$6,041,000 for the acquisitions of Mainstream Software Solutions, Ltd.,
Archetype, Inc., Type Solutions, Inc., and certain assets of Alaras Corporation;
(iii) approximately $1,500,000 for the repayment of indebtedness, of which
approximately $548,000 was paid to officers, directors and 10% stockholders of
the Company and approximately $762,000 of which was paid to third parties; (iv)
approximately $938,000 for royalty payments to others; (v) $500,000 for the
investment in DiamondSoft, Inc.; and (vi) approximately $1,259,000 for the
purchase and installation of equipment. The remaining net proceeds from the IPO
are invested in short-term, interest-bearing, investment-grade securities.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of December
31, 1999, and 1998, and for the three years ended December 31, 1999, 1998 and
1997 have been derived from, and are qualified by reference to, the Company's
consolidated financial statements which have been audited by Arthur Andersen
LLP, independent public accountants, whose report thereon is included
elsewhere in this Report. The selected consolidated financial data presented
below as of December 31, 1997, 1996, 1995, and September 1995, and for the
year ended December 31, 1997, for the year ended December 31, 1996, the year
ended September 30, 1995 and the three months ended December 31, 1995 have
been derived from, and are qualified by reference to, the Company's audited
financial statements, which are not included in this Report. The selected
consolidated financial data set forth below should be read in conjunction
with, and are qualified by reference to, the Consolidated Financial
Statements of the Company and Notes thereto, with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Report, and other financial data appearing elsewhere herein.
25
<PAGE>
PART II, ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA, CONTINUED
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS
ENDED YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
(IN THOUSANDS EXCEPT PER SHARE 1999 1998(4) 1997(3) 1996(1) 1995(1) 1995(1)
DATA) ---- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements of Operations
Data:
Revenues ............................................... $ 8,921 $ 8,870 $ 13,102 $ 10,551 $ 2,355 $ 8,970
Cost of revenues ....................................... 1,461 1,522 1,518 1,858 411 1,579
-------- -------- -------- -------- -------- --------
Gross profit ......................................... 7,460 7,348 11,584 8,693 1,944 7,391
-------- -------- -------- -------- -------- --------
Operating expenses:
Marketing and selling ................................ 4,197 5,696 6,621 4,386 978 3,264
Research and development ............................. 5,037 4,404 2,826 1,512 331 1,071
General and administrative ........................... 1,829 1,742 2,104 1,533 385 1,261
In-process research and
Development ........................................ -- -- 4,930 -- -- --
Severance and other non-
recurring compensation ............................ -- 2,647 1,371 -- -- --
Restructuring charge ................................. -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total operating expenses .......................... 11,063 14,489 17,852 7,431 1,694 5,596
Gain on sale of assets ............................... -- 10,317 -- -- -- --
-------- -------- -------- -------- -------- --------
Operating (loss) income ................................ (3,603) 3,176 (6,268) 1,262 250 1,795
Gain (loss) on investment in
DiamondSoft, Inc. ................................... 18 (56) -- -- -- --
Other income (expense), net ............................ 533 489 510 (19) 17 11
-------- -------- -------- -------- -------- --------
(Loss) income before provision
(Benefit) for income taxes .......................... (3,052) 3,609 (5,758) 1,243 267 1,806
-------- -------- -------- -------- -------- --------
Provision for (benefit from)
income taxes ........................................ 990 775 232 (94) (471) 118
-------- -------- -------- -------- -------- --------
Net (loss) income ...................................... $ (4,042) $ 2,834 $ (5,990) $ 1,337 $ 738 $ 1,688
======== ======== ======== ======== ======== ========
Basic net (loss) income per
share (2) ........................................... $ (0.56) $ 0.42 $ (0.95) $ 1.07 $ 0.21 $ 0.45
======== ======== ======== ======== ======== ========
Basic weighted average shares
outstanding (2) ..................................... 7,261 6,752 6,303 1,248 3,486 3,765
======== ======== ======== ======== ======== ========
Diluted net (loss) income per
share(2) ............................................ $ (0.56) $ 0.38 $ (0.95) $ 0.25 $ 0.16 $ 0.34
======== ======== ======== ======== ======== ========
Weighted average shares
outstanding and dilutive
potential common shares (2) ......................... 7,261 7,443 6.303 5,404 4,730 5,009
======== ======== ======== ======== ======== ========
Footnotes are listed after the Consolidated Balance Sheet Data following this
schedule.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
PART II, ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA, CONTINUED
SELECTED CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
AS OF
AS OF DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------------------- -----------------
(IN THOUSANDS) 1999 1998(4) 1997 1996(1) 1995(1) 1995
----------- ------------ ----------- ------------ ------------ ----
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................... $ 9,037 $14,252 $ 6,364 $11,718 $ 390 $ 523
Working capital............................. 9,668 12,638 9,213 14,220 1,245 881
Total assets................................ 14,603 20,711 17,009 17,477 4,328 3,194
Long-term obligations....................... 7 54 73 99 210 124
Stockholders' equity........................ 12,742 16,275 12,683 15,359 1,806 1,066
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------------
(1) Effective December 31, 1995, the Company changed its fiscal year end from a
fiscal year end of September 30 to a calendar year end. The fiscal year
ended December 31, 1996 commenced January 1, 1996. Because of this change
in fiscal year, the Company is presenting certain consolidated statement of
operations data for the three months ended December 31, 1995, as well as
consolidated balance sheet data as of December 31, 1995.
(2) Calculated on the basis described in Note 4 of Notes to the Consolidated
Financial Statements.
(3) In April 1997, the Company acquired Archetype, Inc. and recorded an
In-process research and development charge as well as severance and other
non-recurring compensation charges. This activity is further detailed in
the Notes to the Consolidated Financial Statements contained herewith.
(4) In August 1998, the Company sold substantially all of the assets relating
to its MediaBank and InterSep OPI product lines for approximately
$10,317,000 in cash. This transaction is further described in the Notes to
the Consolidated Financial Statements contained herewith.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Bitstream Inc. ("Bitstream" or the "Company"), headquartered in Cambridge,
Massachusetts, develops, markets and supports software products and technologies
to enhance the creation, management and transport of electronic documents.
Bitstream currently has three separate and distinct business segments: (a) type
and technology in which Bitstream develops and licenses Internet font technology
and digital typefaces for the graphics communications industry; (b) Myfonts.com,
a showcase of the world's fonts in one easy-to-use e-commerce Web site operated
by Bitstream's wholly-owned subsidiary, Myfonts.com, Inc.; and (c) on-demand
marketing in which the Company's wholly-owned subsidiary Pageflex, Inc.
develops, markets and supports on-demand marketing software which automatically
produces customized business marketing collateral such as datasheets and
brochures directly from XML text and graphics data stored in web servers and/or
databases.
In January 1997, the Company purchased substantially all of the assets of
Mainstream Software Solutions ("Mainstream"), a corporation organized under the
laws of England primarily engaged in the business of marketing, selling,
distributing and supporting Bitstream type products in the United Kingdom, for
approximately $505,000. As a result, Bitstream directly distributes its own
products in the United Kingdom.
27
<PAGE>
PART II, ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
In April 1997, the Company acquired Archetype, Inc. ("Archetype" and
together with Mainstream, the "Acquired Subsidiaries"), a Delaware corporation
primarily engaged in the business of developing and marketing server-based
information management computer software for the graphic arts industry.
Archetype's products include: MediaBank, a digital asset management product that
allows for the cataloging, archiving, and management of electronic images, text
and documents; InterSep OPI and InterSep Output Manager, advanced open prepress
interface and print management products for raster image processors and servers;
and NuDoc, an advanced document composition technology. Pursuant to an Asset
Purchase Agreement dated August 28, 1998, the Company sold substantially all of
the assets relating to its MediaBank and InterSep OPI product lines to Inso
Providence Corporation of Boston, Massachusetts ("Inso") for net cash proceeds
of$11,400,000.
In November 1998, the Company purchased certain assets of Alaras
Corporation ("Alaras"), a North Carolina corporation primarily engaged in the
business of developing, marketing and distributing its software products to the
electronic publishing market. Alaras' product lines acquired by the Company
include: Tropix, a workflow application to automate repetitive steps in
electronic publishing production; Mixxer, a color correction filter for Adobe
Photoshop; and Apertura, an application which enables Adobe Photoshop to open
one or more smaller portions of most popular image formats.
In December 1998, the Company acquired all of the outstanding stock of Type
Solutions, Inc., a New Hampshire corporation primarily engaged in the business
of developing and licensing font rendering technologies, for $600,000 in cash.
In January 1999, the Company established Pageflex, Inc. as a wholly owned
subsidiary for the purpose of developing on-demand marketing software.
In December 1999, myfonts.com Inc. was founded as a wholly owned subsidiary
of Bitstream. The business goal of myfonts.com is to provide the world's most
complete source of digital fonts in a single comprehensive web site. Visitors to
myfonts.com can explore, search and browse fonts and then purchase and download
selected fonts. By hosting fonts from all font foundries and designers,
myfonts.com aims to be the single obvious choice for finding (and purchasing)
fonts on-line.
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, this Annual Report
on Form 10-K may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Investors are cautioned that
forward-looking statements are inherently uncertain. Actual performance and
results of operations may differ materially from those projected or suggested in
the forward-looking statements due to certain risks and uncertainties,
including, without limitation, market acceptance of the Company's products,
competition and the timely introduction of new products. Additional information
concerning certain risks and uncertainties that would cause actual results to
differ materially from those projected or suggested in the forward-looking
statements is contained in the Company's filings with the Securities and
Exchange Commission, including those risks and uncertainties discussed in the
Company's final Prospectus, dated October 30, 1996, included as part of the
Company's Registration Statement on Form S-1 (333-11519), in the section
entitled "Risk Factors." The forward-looking statements contained herein
represent the Company's judgment as of the date of this report, and the Company
cautions readers not to place undue reliance on such statements. Management
undertakes no obligation to publicly release any revisions to the
forward-looking statements or reflect events or circumstances after the date of
this document.
28
<PAGE>
PART II, ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PERCENT AMOUNTS)
The following table sets forth the percentage of revenues represented by
certain items reflected in the Company's Statements of Operations Data for the
periods presented:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
REVENUES
Software licenses .......................... 81.8% 87.5% 91.4%
Services ................................... 18.2 12.5 8.6
----- ----- -----
Total revenues ................................ 100.0 100.0 100.0
Cost of revenues .............................. 16.4 17.2 11.6
----- ----- -----
Gross profit ................................ 83.6 82.8 88.4
----- ----- -----
Operating expenses:
Marketing and selling ....................... 47.0 64.2 50.5
Research and development .................... 56.5 49.7 21.6
General and administrative .................. 20.5 19.6 16.1
In-process research and development ......... -- -- 37.6
Severance and other nonrecurring compensation -- 29.8 10.5
----- ----- -----
Total operating expenses ................. 124.0 163.3 136.3
----- ----- -----
Gain on sale of assets ........................ -- 116.3 --
----- ----- -----
Operating (loss) income ................... (40.4) 35.8 (47.9)
Other income (expense), net ................... 6.2 4.9 3.9
Provision for income taxes .................... (11.1) (8.7) (1.8)
----- ----- -----
Net (loss) income ......................... (45.3)% 32.0% (45.8)%
----- ----- -----
- --------------------------------------------------------------------------------------
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31,
1998 (IN THOUSANDS)
CONSOLIDATED REVENUE:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
% OF % OF CHANGE
1999 REVENUE 1998 REVENUE DOLLARS PERCENT
---- ------- ---- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Software licenses $ 7,299 82.8% $ 7,760 87.5% $ (461) (5.9)%
Services 1,622 18.2 1,110 12.5 512 46.1 %
---------- ----- ---------- ----- --------- -----
Total revenue $ 8,921 100.0% $ 8,870 100.0% $ 51 .6 %
========== ===== ========== ===== ========= =====
-----------------------------------------------------------------------------------
</TABLE>
The increase in revenue for the year ended December 31, 1999 as compared to
the year ended December 31, 1998 was attributable to revenue for the on-demand
marketing segment, which was $2,735. This increase was partially offset by the
loss of revenues from the Mediabank and InterSep OPI product lines, which were
sold to Inso in August of 1998, of $2,593.
29
<PAGE>
PART II, ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
TYPE AND TECHNOLOGY REVENUE:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
CHANGE
% of % of ------
1999 REVENUE 1998 REVENUE DOLLARS PERCENT
---- ------- ---- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Software licenses $ 5,422 87.7% $ 5,220 83.2% $ 202 3.9%
Services 764 12.3 1,057 16.8 (293) (27.7)%
----------------- -------- ------- -------- -------
Type and technology revenue $ 6,186 100.0% $ 6,277 100.0% $ (91) (1.5)%
----------------- -------- ------- -------- -------
Percentage of total revenue 69.3% 70.8%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The increase in type and technology license revenue for the year ended
December 31, 1999 versus the year ended December 31, 1998 was caused by an
increase in OEM sales of $773 partially offset by decreases in retail and
international revenues of $123 and $448, respectively. The increase in OEM sales
is primarily attributable to an increase in technology licensing, including
licenses for Font Fusion and FontTastic. The decrease in international revenues
was primarily caused by a decrease in sales from the Company's UK office. The
decrease in retail license revenue is attributable to four large direct sales
made during the third quarter of 1998, which were not duplicated in 1999. The
decrease in revenue from services is related to development services provided to
two customers during 1998 totaling $316, which were not duplicated during 1999.
ON-DEMAND MARKETING REVENUE:
<TABLE>
<CAPTION>
CHANGE
% OF % OF -------
1999 REVENUE 1998 REVENUE DOLLARS PERCENT
---- ------- ---- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Software licenses $1,877 68.6% $ -- -- $1,877 N/A
Services 858 31.4 -- -- 858 N/A
------------------- ---------------- -----------------
On-demand publishing revenue $2,735 100.0% $ -- -- $2,735 N/A
------------------- ---------------- -----------------
Percentage of total revenue 30.7% --
</TABLE>
The Company began shipping its on-demand publishing products during the
first quarter of 1999. Software license revenues for the year ended December 31,
1999 included $688 of license fees and royalties from an existing long-term
contract with Atex Media Solutions, Inc. ("Atex"), a leading worldwide supplier
of publishing systems for the collection, processing, management and
distribution of information by newspapers, and $600 from a one-time license
agreement with Inso Providence Corporation. Revenue from services includes $356
from the above-mentioned Atex contract and $502 in Mpower consulting.
CONSOLIDATED GROSS PROFIT:
<TABLE>
<CAPTION>
CHANGE
-------
1999 1998 DOLLARS PERCENT
---- ---- ---------- -------
<S> <C> <C> <C> <C>
Gross profit $ 7,460 $ 7,348 $ 112 1.5%
-------- ---------
Percentage of total revenue 83.6% 82.8%
</TABLE>
The increase in the gross profit for the year ended December 31, 1999 as
compared to the year ended December 31, 1998 is attributable to on-demand
marketing software sales, which generated $2,449 in gross profit during 1999 and
gross profit from the type and technology business which increased $38 from
$4,973 to $5,011. This increase was partially offset by a decrease of $2,375
attributable to the sale of
30
<PAGE>
PART II, ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
substantially all of the assets relating to the Company's MediaBank and
InterSep OPI product lines to Inso in August 1998. Gross profit as a
percentage of sales for the year ended December 31, 1999 compared to the year
ended December 31, 1998 reflects lower sales for the first two quarters of
1999 and higher costs resulting from higher shipping and production expenses
during the last two quarters of 1999. 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.
CONSOLIDATED SELLING AND MARKETING:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
CHANGE
------
1999 1998 DOLLARS PERCENT
---- ---- ---------- -------
<S> <C> <C> <C> <C>
Selling and marketing $ 4,197 $ 5,696 $ (1,499) (26.3)%
------------ -------------
Percentage of total revenue 47.0% 64.2%
- ----------------------------------------------------------------------------------------------------
</TABLE>
The decrease in selling and marketing expenses in dollars and as a
percentage of revenues for the year ended December 31, 1999 as compared to the
year ended December 31, 1998 reflects a reduction in type and technology salary
expense resulting from headcount reductions in March and June of 1998 and the
loss of the personnel associated with the MediaBank and InterSep OPI product
lines in August 1998 offset by an increase in selling and marketing costs
associated with the Company's new on-demand marketing segment of $2,316 for the
year ended December 31, 1999. Selling and marketing expenses for the type and
technology segment decreased $1,303 or 40.9% from $3,184 for the year ended
December 31, 1998 to $1,881 the year ended December 31, 1999. The decrease in
selling and marketing expenses associated with the sale of the MediaBank and
InterSep OPI product lines was $2,512 for the year ended December 31, 1999
compared to the year ended December 31, 1998.
CONSOLIDATED RESEARCH AND DEVELOPMENT ("R&D"):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
CHANGE
------
1999 1998 DOLLARS PERCENT
---- ---- ---------- -------
<S> <C> <C> <C> <C>
Research and development $ 5,037 $ 4,404 $ 633 14.4%
------------ -------------
Percentage of total revenue 56.5% 49.7%
- ----------------------------------------------------------------------------------------------------
</TABLE>
Research and development expenses increased in dollars and as a percentage
of sales for the year ended December 31, 1999 versus the year ended December 31,
1998. These increases reflect the ongoing investment in additional personnel to
support expanded development of the Company's on-demand marketing technologies,
Mpower, Persona and NuDoc and expenses associated with the creation of
Myfonts.com. R&D costs associated with the on-demand marketing and myfonts.com
segments were $3,039 and $292, respectively, for the year ended December 31,
1999. R&D expenses for the type and technology segment decreased $1,619 or 48.7%
from $3,325 for the year ended December 31, 1998 to $1,706 for the year ended
December 31,1999. The decreases in R&D expenses associated with the sale of the
MediaBank and InterSep OPI product lines in August 1998 was $1,079 for the year
ended December 31, 1999 compared to the year ended December 31. 1998.
31
<PAGE>
PART II, ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
CONSOLIDATED GENERAL AND ADMINISTRATIVE ("G&A"):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
CHANGE
1999 1998 DOLLARS PERCENT
---- ---- --------- -------
<S> <C> <C> <C> <C>
General and administrative $ 1,829 $ 1,742 $ 87 5%
------------ ----------
Percentage of total revenue 20.5% 19.6%
- -------------------------------------------------------------------------------------------------------
</TABLE>
The increase in G&A expenses in dollars and as a percentage of
revenues for the year ended December 31, 1999 versus the year ended December 31,
1998 is primarily due to increases in administrative positions at the end of
1998 to handle the growth necessitated by the Company's investment in the
on-demand marketing business.
G&A costs associated with the on-demand marketing segment were $1,092 for
the year ended December 31, 1999. G&A expenses for the type and technology
segment decreased $954 or 56.4% from $1,691 for the year ended December 31, 1998
to $737 for the year ended December 31, 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 $2,647 for the year ended December 31, 1998. There were no such
expenses incurred during the year ended December 31, 1999.
GAIN ON SALE OF ASSETS:
The Company recognized a gain on the sale of substantially all assets of the
Company's MediaBank and InterSep OPI product lines to Inso during the year ended
December 31, 1998 totaling $10,317.
INCOME (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. The Company's pro rata
share of DiamondSoft's income (loss) was $18 for the year ended December 31,
1999 versus $(56) for the year ended December 31, 1998.
OTHER INCOME, NET.
Other income consists primarily of interest income earned.
PROVISION FOR INCOME TAXES.
The Company recorded a tax provision of $990 for the year ended December 31,
1999, of which $868 is a valuation reserve for the deferred tax assets recorded
during 1995 and 1996. The tax provision for the year ended December 31, 1998 was
$775, of which $ 671 was related to the $10,317 gain recognized on
32
<PAGE>
PART II, ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
the sale of the MediaBank and InterSep OPI product lines. See Note 7 in the
Notes to the Consolidated Financial Statements filed herewith for a more detail
breakdown of this provision.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1997 (IN THOUSANDS)
CONSOLIDATED REVENUE:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
CHANGE
% OF % OF --------
1998 REVENUE 1997 REVENUE DOLLARS PERCENT
---- ------- ---- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Software licenses $ 7,760 87.5% $ 11,971 91.4% $ (4,211) (35.2)%
Services 1,110 12.5 1,131 8.6 (21) (0.2)%
------------------- -------------------- -----------------------
Total revenue $ 8,870 100.0% $ 13,102 100.0% $ (4,232) (32.3)%
=================== ==================== =======================
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The decrease in revenues for the year ended December 31, 1998 as compared
to the year ended December 31, 1997 is primarily a result of (a) the sale of
substantially all of the assets relating to the Company's MediaBank(TM) and
InterSep(TM) OPI product lines to Inso Providence Corporation in August, 1998,
(b) weaker than expected demand in OEM channels for the Company's traditional
type products; and (c) slower than anticipated growth in emerging markets for
the Company's type and technology products. Revenues relating to the product
lines sold to Inso Providence Corporation in the year ended December 31, 1998
totaled approximately $2.6 million.
Revenues from product sales to OEM and ISV customers for the year ended
December 31, 1998 decreased by approximately $4.6 million, or 51.1%, to
approximately $4.4 million, from approximately $9.0 million for the year ended
December 31, 1997, as a result of weaker than expected demand in OEM channels
for the Company's traditional type products and slower than anticipated growth
in emerging markets for the Company's type and technology products. Revenues
from product sales to end users and distributors for the year ended December 31,
1998 increased by $500,000, or 12.5%, to $4.5 million, from $4.0 million for the
year ended December 31, 1997, as a result of increased demand for the Company's
retail type and technology products.
CONSOLIDATED GROSS PROFIT:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
CHANGE
------
1998 1997 DOLLARS PERCENT
---- ---- ---------- -------
<S> <C> <C> <C> <C>
Gross profit $ 7,348 $ 11,584 $ (4,236) (36.6)%
-----------------------
Percentage of total revenue 82.8% 88.4%
- ---------------------------------------------------------------------------------------------
</TABLE>
The decreases in gross profit and gross profit as a percentage of revenues
are a result of the sale of substantially all of the assets relating to the
Company's MediaBank and InterSep OPI product lines to Inso Providence
Corporation in August, 1998.
CONSOLIDATED SELLING AND MARKETING:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
CHANGE
------
1998 1997 DOLLARS PERCENT
---- ---- ---------- -------
<S> <C> <C> <C> <C>
Selling and marketing $ 5,696 $ 6,621 $ (925) (14.0)%
-----------------------
Percentage of total revenue 64.2% 50.5%
- ---------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
PART II, ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
The decrease in selling and marketing expenses reflects a reduction in
salary expense of sales and marketing personnel from the headcount reductions
that occurred in March and June of 1998 offset by the addition of travel, trade
show and other marketing program expenses from Archetype operations for the year
ended December 31, 1998.
CONSOLIDATED RESEARCH AND DEVELOPMENT ("R&D"):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
CHANGE
------
1998 1997 DOLLARS PERCENT
---- ---- ---------- -------
<S> <C> <C> <C> <C>
Research and development $ 4,404 $ 2,826 $ 1,578 55.8%
--------- ---------
Percentage of total revenue 49.7% 21.6%
- ---------------------------------------------------------------------------------------------
</TABLE>
The increase in research and development expenses in dollars, and as a
percentage of revenues, reflects the ongoing investment in additional personnel
to support expanded development of the Company's enabling technologies such as
NuDoc and Pageflex.
CONSOLIDATED GENERAL AND ADMINISTRATIVE ("G&A"):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
CHANGE
------
1998 1997 DOLLARS PERCENT
---- ---- ---------- -------
<S> <C> <C> <C> <C>
General and administrative $ 1,742 $ 2,104 $ (362) (17.2)%
--------- ---------
Percentage of total revenue 19.6% 16.1%
- ---------------------------------------------------------------------------------------------
</TABLE>
The decreases in general and administrative expenses, is primarily due to
the elimination of duplicative general and administrative functions and
administrative costs, including rent, utilities and other costs associated with
Archetype's Burlington, Massachusetts office and a reduction in salary expense
of general and administrative personnel as a result of the headcount reductions
that occurred in March and June of 1998.
SEVERANCE AND OTHER NON-RECURRING COMPENSATION.
Operating expenses for the year ended December 31, 1998 include $2.7
million for severance and other non-recurring compensation expenses related to
certain former executives and employees as a result of the headcount reductions
that occurred in March and June of 1998. Operating expenses for the year ended
December 31, 1997 reflect $1.4 million for severance and other non-recurring
compensation expenses incurred in connection with the acquisition of Archetype
and certain arrangements between the Company and certain former high-level
executives.
GAIN ON SALE OF ASSETS.
Reflected in income from operations for the year ended December 31, 1998 is
a gain of approximately $10.3 million on the sale of substantially all assets of
the Company's MediaBank and InterSep OPI product lines to Inso Providence
Corporation in August 1998.
34
<PAGE>
PART II, ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
INCOME TAX PROVISION.
The Company recorded a tax provision for the year ended December 31, 1998
of $775. This provision consisted of foreign tax liabilities of $104 relating
mainly to sales to customers in Asia and approximately $671 to record federal
and state income taxes payable in connection with a pre-tax gain of
approximately $10.3 million on the sale of substantially all assets of its
MediaBank and InterSep OPI products lines to Inso Providence Corporation in
August 1998. The Company recorded a tax provision for the year ended December
31, 1997 of $232. This provisions consists of foreign tax liabilities of $190
relating to sales to customers in Japan and federal and state income tax
provision totaling $42.
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. As of December 31, 1999, the Company had net
working capital of $9,668 versus $12,638 at December 31, 1998.
The Company's operating activities used cash of approximately $5,164 during
the year ended December 31, 1999 as compared to using cash totaling $1,227
during the year ended December 31, 1998. The cash used during the year ended
December 31, 1999 was primarily due to the net losses from the on-demand
marketing and myfonts.com businesses, partially offset by the income from the
type and technology business. This net loss adjusted for non-cash expenses
resulted in a use of $2,164 in cash during the year ended December 31, 1999.
During the year ended December 31, 1999 the Company also used cash to pay
accrued expenses of $1,095 and income taxes of $692, and generated cash of $280
through an increase in accounts payable and a decrease in prepaid expenses and
other assets. During the year ended December 31, 1999, the Company recognized
$798 in deferred revenue greater than the additional deferred revenue booked and
increased accounts receivable by $695. During the year ended December 31, 1998,
the net loss adjusted for non-cash expenses resulted in the use of $6,006 in
cash. During the year ended December 31, 1998 the Company also used $648 in cash
to pay down payables and accrued expenses, and generated $6,173 in cash by
collecting receivables and deferred revenues.
The Company's investing activities used cash of approximately $488 during
the year ended December 31, 1999 as compared to generating $8,685 during the
year ended December 31, 1998. Investing activities for the year ended December
31, 1999 consisted primarily of the purchase of property and equipment. The cash
provided during the year ended December 31, 1998 is primarily due to the net
cash receipt of $11,430 from the sale of substantially all of the assets
relating to the Company's MediaBank and InterSep OPI product lines to Inso
Providence Corporation in August 1998. This was partially offset by an equity
investment of $500 in DiamondSoft, Inc., the purchase of all of the outstanding
stock of Type Solutions, Inc. for $600; the purchase of certain assets of Alaras
Corporation for $1,300; and the purchase of property and equipment of $335.
The Company's financing activities provided cash of $437 during the year
ended December 31, 1999 as compared to $430 during the year ended December 31,
1998. The cash provided during both of these years primarily resulted from the
exercise of stock options.
35
<PAGE>
PART II, ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
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.
As of December 31, 1999 the Company had no material commitments for capital
expenditures. From time to time, the Company evaluates potential acquisitions of
products, businesses and technologies that may complement or expand the
Company's business. Any such transactions consummated may use a portion of the
Company's working capital or require the issuance of equity or debt.
In November 1996, the Company completed an initial public offering ("IPO")
of 2,415,000 shares of its Class A Common Stock. Net proceeds from the IPO were
approximately $12.2 million, of which approximately $1.5 million was used to
repay outstanding indebtedness.
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 presented 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. The Company 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 fell 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. 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 does not
believe that it will have additional Year 2000 expenses, but will fund any
unanticipated expenses through cash flows from operations.
36
<PAGE>
PART II, ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
STATUS OF INVESTIGATION - PRODUCT READINESS
The Company completed testing of its current software products in 1999 and
believed 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. 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 encouraged these to upgrade to current versions
of the products. 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.
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. As of
the date of this report the Company has not received any Year 2000 related
complaints on its products.
STATUS OF INVESTIGATION - INTERNAL READINESS
The Company engaged in conducting a Year 2000 readiness audit of its
internal IT and non-IT systems (including telecommunication, facilities
management, safety and security systems). Bitstream completed its evaluation of
these systems and it's business application software. As a result of this
evaluation, Bitstream implemented the necessary changes and tested its internal
systems to achieve Year 2000 compliance in this area. As of the date of this
report, Bitstream has experienced no material issues or problems relating to
Year 2000 readiness of its internal systems.
STATUS OF INVESTIGATION - THIRD PARTY READINESS
The Company's assessment of the Year 2000 readiness of material third
parties, such as public utilities and key clients or suppliers, who provide
external services to the Company was completed during December of 1999. The
Company has certain key relationships with suppliers which furnish components
and software used by the Company in its products. If these suppliers fail to
adequately address the Year 2000 issue for the products they supply to the
Company, such failure could have a material adverse effect on the Company's
operations, reputation, and financial results. Certain of the Company's products
contain third party components and software that are integral to their operation
for which the cost and time to integrate alternative components or software into
these products would be material. The Company had received assurances from these
parties that they are "Y2K Ready." As of the date of this report, Bitstream has
experienced no material issues or problems relating to Year 2000 readiness of
its external agents.
37
<PAGE>
PART II, CONTINUED
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INTRUMENTS, AND
DERIVATIVE COMMODITY INTRUMENTS
As of December 31, 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 intercompany transactions was immaterial for the year
ended December 31, 1999. Currently the Company does not engage in foreign
currency hedging activities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The index to Financial Statements appears on page F-1, the Independent
Auditors' Report appears on page F-2, and the Financial Statements and Notes to
Financial Statements appear on pages F-3 to F-24.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
38
<PAGE>
PART III
PART III, ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
THE COMPANY'S DIRECTORS AND THEIR AGES AS OF MARCH 21, 2000 ARE AS FOLLOWS:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Charles Ying(1) 53 Chairman of the Board, Chief Executive Officer and Director
George B. Beitzel(2) 71 Director
Amos Kaminski(1)(2) 70 Director
David G. Lubrano(1)(2) 69 Director
</TABLE>
(1) Member of Executive Committee.
(2) Member of the Compensation Committee and Audit Committee.
Charles Ying has been Chief Executive Officer of the Company since May 1997 and
Chairman of the Board since April 1997. From January 1992 to January 1996, Mr.
Ying served as Chief Executive Officer of Information International Inc., a
corporation engaged in the business of designing, manufacturing and marketing
computer-based systems that automate document production and publishing. Mr.
Ying also serves as a member of the Board of Directors of NodeWarrior Networks
Inc., an Internet Service Provider located in Los Angeles, California. Mr. Ying
holds a B.S. and M.S. in Electrical Engineering from Massachusetts Institute of
Technology.
George B. Beitzel has been a director of the Company since April 1989. Mr.
Beitzel retired in 1987 from International Business Machines Corporation where
he had been a Senior Vice President and a director. Mr. Beitzel currently serves
on the Board of Directors of: Bankers Trust Company, a subsidiary of Deutsche
Bank, Computer Task Group, Inc., Actuate, Inc., and Staff Leasing, Inc.
Amos Kaminski has been a director of the Company since 1985 and was
Chairman of the Board from 1991 through 1996. Mr. Kaminski founded Interfid Ltd.
("Interfid"), a private investment advisory firm, in 1984 and has served as its
President and on its Board of Directors since its formation. Mr. Kaminski is
also the founder, President and Chairman of the Board of Directors of AFA Asset
Services, Inc., a private real estate asset management company.
David G. Lubrano has been a director of the Company since 1987. Mr. Lubrano
retired in 1985 from Apollo Computer Inc., a corporation engaged in
manufacturing workstations, which he co-founded and where he had been a Senior
Vice President of Finance and Administration, Chief Financial Officer and a
director.
THE COMPANY'S EXECUTIVE OFFICERS AND THEIR AGES AS OF MARCH 21, 2000 ARE AS
FOLLOWS:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Charles Ying 53 Chairman of the Board and Chief Executive Officer
Paul Trevithick 40 President
Anna M. Chagnon 33 Executive Vice President, Chief Financial Officer, Chief Operating
Officer and General Counsel
John S. Collins 60 Vice President and Chief Technology Officer.
Costas Kitsos 39 Vice President of Engineering
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
PART III, ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT CONTINUED
Charles Ying has been Chief Executive Officer of the Company since May 1997
and Chairman of the Board of Directors since April 1997. From January 1992 to
January 1996, Mr. Ying served as Chief Executive Officer of Information
International Inc., a corporation engaged in the business of designing,
manufacturing and marketing computer-based systems that automate document
production and publishing. Mr. Ying also serves as a member of the Board of
Directors of NodeWarrior Networks Inc., an Internet Service Provider located in
Los Angeles, California. Mr. Ying holds a B.S. and M.S. in Electrical
Engineering from Massachusetts Institute of Technology.
Paul Trevithick has served as President of the Company since August 1998.
From April 1997 to August 1998, he served as the Company's Vice President,
Marketing. From 1985 to April 1997, Mr. Trevithick was President, Chief
Executive Officer and founder of Archetype, Inc. which merged with Bitstream in
1997. During the 12 years of Archetype's independent operation, the company
developed the MediaBank content management system, the NuDoc XML composition
engine and the industry's first OPI Server. It also developed commercial page
layout applications, including Archetype Designer, under contract to Kodak,
Xerox, Unisys and others. Prior to Archetype, he founded Lightspeed Computers,
which was acquired by Dupont-Crosfield in 1986. Mr. Trevithick holds a B.S.E.E.
from the Massachusetts Institute of Technology.
Anna M. Chagnon has served as Executive Vice President, Chief Operating
Officer, Chief Financial Officer and General Counsel of the Company since August
1998. From July 1997 to August 1998, she served in various positions at the
Company including Vice President, Finance and Administration, Chief Financial
Officer and General Counsel and Vice President and General Counsel. From
November of 1996 to July 1997, Ms. Chagnon was Counsel to Progress Software
Corporation, a developer and worldwide supplier of solutions to build, deploy
and manage applications across Internet, client/server and host/terminal
computing environments. From August 1994 to November 1996 she was an attorney
for the Boston law firm of Peabody & Arnold LLP where she specialized in
corporate, securities, finance and intellectual property law. She holds a
Bachelor of Science degree, summa cum laude, from Northeastern University and a
Juris Doctor degree from Boalt Hall School of Law of the University of
California at Berkeley. She is also currently pursuing a Master of Business
Administration with a concentration in Finance at Babson College.
John S. Collins has been Vice President and Chief Technology Officer since
August 1998. From 1988 to August 1998, he served as Vice President of
Engineering. Mr. Collins was the inventor or a co-inventor in respect of a
number of the patents held by the Company relating to font imaging technology.
He is the principal inventor of the Company's TrueDoc technology. Mr. Collins
holds a B.Sc. and a PhD in Electrical Engineering from the University of London.
Costas Kitsos has been Vice President of Engineering since November
1999. Mr. Kitsos serves as principal architect of the Pageflex Mpower and
Personal products, and is also the technical lead for the Company end user
type application products. From October 1998 to November 1999, he served as
Director of Research and Development of the Company. From 1996 to October
1998, he was a Senior Software Engineer at the Company. Mr. Kitsos is a
veteran software developer with over ten years in type and publishing
application development. Before joining Bitstream in 1996, Mr. Kitsos headed
IconWorks which developed award winning type applications and offered
consulting services on end user programs and graphical user interfaces. He
holds a Masters degree from the University of California, Los Angeles.
OTHER KEY PERSONNEL
Sang Lee joined Bitstream's wholly-owned subsidiary, Pageflex Inc., as Vice
President of Business Development in February 2000. From January 1998 to
January 2000, Mr. Lee was a Director of Strategic Business Development of
Adobe Systems Incorporated where he was responsible for developing strategy
to drive new products into
40
<PAGE>
PART III, ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT CONTINUED
expanded business segments. From May 1997 to January 1998, Mr. Lee served as
a director of Engineering for Adobe. From Sept. 94 to Oct 96, Mr. Lee was
President and Chief Operating Officer of Harlequin, Incorporated, a globally
distributed software development company in the areas of development tools,
PostScript interpreter applications, data mining, and adaptive systems.
Sampo Kaasila joined Bitstream as Director of Research and Development,
Type Solutions, at the acquisition of Type Solutions, Inc. in November 1998.
From August, 1989 to November 1998, he was a founder and President of Type
Solutions, Inc., a leading developer of font technologies including T2K(TM),
a font renderer which provides an object oriented design, advanced
architecture and algorithms, and a clean API resulting in maximum
reliability, performance, and easy integration. From August 1987 to August
1989, Mr. Kaasila worked at Apple Computer, Inc. and was the Lead Engineer
and inventor of the TrueType technology now part of every MacIntosh and
Windows PC. Mr. Kassila holds a Masters Degree in Electrical Engineering
from the Royal Institute of Technology in Stockholm, Sweden where he
graduated first in his class January 1983.
Jeffrey Caruso has worked for the Company and its predecessors since
August 1998. He serves as the Company's "Rocket Scientist," assigned to the
team developing the NuDoc composition engine, and is the Company's
representative to the XSL Working Group. From September 1996 to July 1998, he
taught courses and performed research in pure and applied mathematics at
Cambridge University in England. From July 1991 to January 1996 he was Chief
Scientist of Information International, Inc., continuing in that role at
Autologic Information International until September 1996. From June 1987 to
June 1991, Dr. Caruso was a key member of the development team at Archetype,
Inc., during which time it developed the original Document Engine. From June
1985 to June 1987 he was Software Manager of Drane Associates in Nashua, New
Hampshire, and from October 1983 to June 1985 he was a Senior Computer
Scientist for Carlisle Systems, Inc. Prior to Carlisle Systems, he was a
founding employee and principal developer at Atex Media Solutions, Inc., and
developed the original editing and operating system software of the Atex
publishing system. Dr. Caruso holds a Ph.D. in Mathematics from the
University of Chicago, and a B.S. in Mathematics from the Massachusetts
Institute of Technology.
Eric Mohr has served as architect of the NuDoc engine and Director of NuDoc
Development of the Company and its predecessors since 1993. He coordinates NuDoc
design and development, enabling both the Company and its customers to create
state-of-the-art publishing applications. He received his PhD in Computer
Science from Yale University in 1991, and has published 5 articles in Computer
Science journals and conference proceedings.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning
compensation by the Company to its Chief Executive Officer (the "CEO") during
the fiscal year ended December 31, 1999 and the four most highly compensated
executive officers, other than the CEO, who were serving as executive officers
on December 31, 1999 (together with the CEO, the "Named Executive Officers")
whose aggregate salary and bonus exceeded $100,000 for the fiscal year ended
December 31, 1999.
41
<PAGE>
PART III, ITEM 11. EXECUTIVE COMPENSATION, CONTINUED
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ------
Other Annual All Other
Name and Compen- Securities Underlying Compen-
Principal Position Year Salary ($) Bonus($) sation ($) Options/warrants(1) sation($)(2)
------------------ ---- ---------- -------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Charles Ying 1999 147,692 --- --- --- ---
Chief Executive Officer 1998 46,154 --- --- 150,000 (3) ---
1997 86,538 --- --- 150,000 (4) ---
Paul Trevithick 1999 148,077 95,000 --- --- 3,577
President 1998 129,896 50,000 --- 150,000 (5) 3,606
1997(6) 117,724 300,000 --- 165,000 (7) ---
Anna M. Chagnon 1999 139,769 65,000 --- 50,000 (8) 3,870
Executive Vice President, 1998 115,754 25,000 --- 85,000 (9) 3,235
Chief Financial Officer 1997 38,500 7,500 --- 15,000 (10) ---
and Chief Operating Officer
John S. Collins 1999 130,000 10,000 --- --- 3,750
Vice President, 1998 135,000 --- --- --- 3,750
and Chief Technology Officer 1997 130,738 1,200 --- 30,000 (11) 3,922
Costas Kitsos 1999 111,346 25,000 --- 30,000 (12) 3,964
Vice President of 1998 88,635 --- --- --- ---
Engineering 1997 76,886 --- --- --- ---
</TABLE>
(1) The Company did not make any restricted stock awards, grant any stock
appreciation rights or make any long-term incentive plan payouts during the
fiscal years ended December 31, 1997, December 31, 1998 and December 31,1999.
(2) Represents matching contributions by the Company for the account of the
Named Executive Officer under the Company's 401(k) Plan.
(3) Represents (i) options to purchase 50,000 shares of Class A Common Stock
with an exercise price of $1.875 per share, which was the fair market value of
the shares on the date of grant (April 22, 1998). These options expire on April
22, 2008 and vest in twelve monthly installments beginning on April 1,1999; and
(ii) options to purchase 100,000 shares of Class A Common Stock with an exercise
price of $1.875 per share, which was the fair market value of the shares on the
date of grant (April 22, 1998). These options expire on April 22, 2008 and vest
in twelve monthly installments beginning on April 1,1999.
(4) Represents options to purchase 150,000 shares of Class A Common Stock with
an exercise price of $2.00 per share, which was the fair market value of the
shares on the date of grant (August 5, 1997). These options expire on August 5,
2007 and vest in three equal annual installments on the first, second and third
anniversaries of the date of grant.
(5) Represents (i) options to purchase 50,000 shares of Class A Common Stock
with an exercise price of $1.375 per share, which was the fair market value of
the shares on the date of grant (July 8, 1998). These option expire on July 8,
2008 and vest in three equal annual installments on the first, second and third
anniversaries of the date of grant; and (ii) options to purchase 100,000 shares
of Class A Common Stock
42
<PAGE>
PART III, ITEM 11. EXECUTIVE COMPENSATION, CONTINUED
with an exercise price of $1.56 per share, which was the fair market value of
the shares on the date of grant (November 6, 1998). These options expire on
November 6, 2008 and vest in three equal annual installments on the first,
second and third anniversaries of the date of grant.
(6) In fiscal 1997, all bonus compensation was paid to Mr. Trevithick in
connection with his employment agreement with the Company. This employment
agreement expired on April 27, 1999 and Mr. Trevithick had received all of the
bonus compensation set forth under that agreement at that time.
(7) Includes options to purchase 100,000 shares of Class A Common Stock with an
exercise price of $3.94 per share, which was the fair market value of the shares
on the date of grant (April 28, 1997). These options expire on April 28, 2004
and vest in three equal annual installments on the first, second and third
anniversaries of the date of grant. Also includes options to purchase 65,000
shares of Class A Common Stock at a price of $0.90 per share which were issued
on April 28, 1997 in exchange for an equal number of options originally issued
to Mr. Trevithick by Archetype. These options are fully vested.
(8) Includes options to purchase 50,000 shares of Class A Common Stock with an
exercise price of $2.031 per share, which was the fair market value of the
shares on the date of grant (November 4, 1999). These options expire on November
3, 2009 and vest in three equal annual installments on the first, second and
third anniversaries of the date of grant.
(9) Represents (i) options to purchase 10,000 shares of Class A Common Stock
with an exercise price of $2.00 per share, which was the fair market value of
the shares on the date of grant (January 23, 1998). These options expire on
January 23, 2008 and vest in three equal annual installments on the first,
second and third anniversaries of the date of grant; (ii) options to purchase
10,000 shares of Class A Common Stock with an exercise price of $1.875 per
share, which was the fair market value of the shares on the date of grant (April
22, 1998). These options expire on April 22, 2008 and vest in three equal annual
installments on the first, second and third anniversaries of the date of grant;
and (iii) options to purchase 65,000 shares of Class A Common Stock with an
exercise price of $1.56 per share, which was the fair market value of the shares
on the date of grant (November 6, 1998). These options expire on November 6,
2008 and vest in three equal annual installments on the first, second and third
anniversaries of the date of grant.
(10) Represents options to purchase 15,000 shares of Class A Common Stock with
an exercise price of $1.50 per share, which was the fair market value of the
shares on the date of grant (July 15, 1997). These options expire on July 15,
2007 and vest in three equal annual installments on the first, second and third
anniversaries of the date of grant.
(11) Represents options to purchase 30,000 shares of Class A Common Stock with
an exercise price of $4.94 per share, which was the fair market value of the
shares on the date of grant (March 10, 1997). These options expire on March 10,
2007 and vest in two equal annual installments on the first and second
anniversaries of the date of grant.
(12) Includes options to purchase 30,000 shares of Class A Common Stock with an
exercise price of $2.031 per share, which was the fair market value of the
shares on the date of grant (November 4, 1999). These options expire on November
3, 2009 and vest in three equal annual installments on the first, second and
third anniversaries of the date of grant.
All of the Company's Named Executive Officers are employed on an at-will
basis and none of the Named Executive Officers is party to any employment
agreements with the Company. Each of the executive officers may also receive
discretionary bonuses as may be determined by the Compensation Committee.
43
<PAGE>
PART III, ITEM 11. EXECUTIVE COMPENSATION, CONTINUED
OPTION GRANTS DURING THE YEAR ENDED DECEMBER 31, 1999, INDIVIDUAL GRANTS
The following table shows all options granted to each of the Names Officers
of the Company during the year ended December 31, 1999 and the potential value
of stock price appreciation rates, 5% and 10%, over the ten year term of the
options. The 5% and 10% rates of appreciation are required to be disclosed by
the Securities and Exchange Commission ("SEC") and are not intended to forecast
possible future actual appreciation, if any, in the Company's stock prices. The
Company did not use an alternative present value formula permitted by the SEC
because the Company is not aware of any such formula that can determine with
reasonable accuracy the present value based on future unknown or volatile
factors.
<TABLE>
<CAPTION>
% OF TOTAL POTENTIAL REALIZABLE
OPTIONS VALUE AT ASSUMED
NUMBER OF GRANTED TO ANNUAL RATES OF STOCK
SECURITIES EMPLOYEES PRICE APPRECIATION FOR
UNDERLYING IN FISCAL EXERCISE EXPIRATION OPTION TERM
NAME OPTIONS YEAR PRICE ($) DATE 5% ($) (2) 10% ($) (2)
---- ------- ---- --------- ---- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Anna M. Chagnon 50,000 (1) 6.74% $ 2.031 11/03/2009 $ 63,900 $ 161,850
Costas Kitsos 30,000 (1) 4.05% $ 2.031 11/03/2009 $ 38,300 $ 97,100
</TABLE>
(1) These are options to purchase shares of Class A Common Stock with an
exercise price of $2.031 per share, which was the fair market value of the
shares on the date of grant (November 4, 1999). These options expire on
November 3, 2009 and vest in three equal annual installments on the first,
second and third anniversaries of the date of grant.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based upon assumed rates of share price appreciation set by the
Securities and Exchange Commission of five percent and ten percent
compounded annually from the date the respective options were granted to
their expiration date. The gains shown are net of the option exercise
price, but do not include deductions for taxes or other expenses associated
with the exercise. Actual gains, if any, are dependent on the performance
of the Class A Common Stock and the date on which the option is exercised.
There can be no assurance that the amounts reflected will be achieved.
OPTION EXERCISES DURING THE YEAR ENDED DECEMBER 31, 1999, INDIVIDUAL GRANTS
The following table sets forth information with respect to the exercise of
options by the Named Executive Officers during the year ended December 31, 1999
and unexercised options held as of the end of that year.
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES
ACQUIRED UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
ON VALUE OPTIONS AT THE-MONEY OPTIONS AT
EXERCISE REALIZED DECEMBER 31, 1999 DECEMBER 31, 1999 (2)
----------------- ---------------------
NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --- ------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles Ying -- -- 249,998 200,002 $818,744 $662,507
Paul Trevithick -- -- 181,665 133,335 557,662 418,838
Anna M. Chagnon -- -- 38,331 111,669 139,525 383,775
John S. Collins -- -- 179,941 -- 661,061 --
Costas Kitsos -- -- 9,997 50,003 35,002 166,605
</TABLE>
44
<PAGE>
PART III, ITEM 11. EXECUTIVE COMPENSATION, CONTINUED
(1) Value realized equals fair market value on the date of exercise, less the
exercise price, times the number of shares acquired, without deducting
taxes or commissions paid by employee.
(2) Value of unexercised options equals fair market value of the shares
underlying in-the-money options at December 31, 1999 ($5.250 per share),
which was the last trading day of the Company's fiscal year, less the
exercise price, times the number of options outstanding.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 21, 2000,
with respect to the Class A Common Stock of the Company owned or deemed
beneficially owned as determined under the rules of the Securities and Exchange
Commission, directly or indirectly, by each stockholder known to the Company to
own beneficially more than 5% of the Company's Class A Common Stock, by each
director, by the executive officers named in the Summary Compensation Table
included elsewhere herein, and by all directors and executive officers of the
Company and its subsidiaries as a group. In accordance with Rule 13d-3 under the
Exchange Act, a person is deemed to be the beneficial owner, for purposes of
this table, of any shares of Class A Common Stock of the Company if he or she
has or shares voting power or investment power with respect to such security or
has the right to acquire beneficial ownership at any time within 60 days of
March 21, 2000. As used herein "voting power" is the power to vote or direct the
voting of shares, and "investment power" is the power to dispose of or direct
the disposition of shares.
45
<PAGE>
PART III, ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT, CONTINUED
Except as indicated in the notes following the table below, each person named
has sole voting and investment power with respect to the shares listed as being
beneficially owned by such person.
<TABLE>
<CAPTION>
PERCENT OF
COMMON
NAME AND ADDRESS(2) NUMBER (1) STOCK (1)
------------------- --------- ---------
<S> <C> <C>
PRINCIPAL STOCKHOLDERS
Intrinsic Value Asset Management 671,000 8.74%
24955 Pacific Coast Highway, Suite C-204
Malibu, CA 90265
Bell Lane, LLC 437,000 5.69%
2070 Naamans Road, Suite 317
Wilmington, DE 19810
DIRECTORS AND EXECUTIVE OFFICERS
Paul Trevithick(3) 367,607 4.79%
Charles Ying (4) 335,290 4.37%
David G. Lubrano(5) 256,707 3.34%
94 Otis Street
Hingham, Massachusetts 02043
Amos Kaminski(6) 255,615 3.33%
c/o Interfid Ltd.
150 E. 58th Street, 27th Floor
New York, New York 10155-2798
George B. Beitzel(7) 221,603 2.89%
29 King Street
Chappaqua, New York 10514
John S. Collins(8) 190,829 2.49%
Anna M. Chagnon (9) 44,997 *
Costas Kitsos (10) 14,997 *
All directors and executive officers as a group (8 persons) 1,687,547 21.97%
(3)(4)(5)(6)(7)(8)(9)(10)
</TABLE>
* Less than one percent
(1) Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares
of Class A Common Stock shown as beneficially owned by them, subject to
community property laws where applicable. The information presented with
respect to the Principal Stockholders is based on reports of beneficial
ownership on Schedules 13D and 13G delivered to the Company pursuant to the
Exchange Act and such other information as may have been provided to the
Company by any such Principal Stockholder.
46
<PAGE>
PART III, ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT, CONTINUED
In accordance with the rules of the Securities and Exchange Commission,
Class A Common Stock, subject to stock options or warrants which are
currently exercisable or which become exercisable within 60 days after
March 31, 2000, are deemed outstanding for computing the share ownership
and percentage ownership of the person holding such options or warrants,
but are not deemed outstanding for computing the percentage ownership of
any other person. The inclusion herein of shares listed as beneficially
owned does not constitute an admission of beneficial ownership.
(2) Unless otherwise indicated, the address of the officer listed is: c/o
Bitstream Inc., 215 First Street, Cambridge, MA 02142.
(3) Includes 214,999 shares issuable to Mr. Trevithick upon the exercise of
options.
(4) Includes 299,998 shares issuable to Mr. Ying upon the exercise of options.
(5) Includes 60,687 shares and 92,665 shares issuable to Mr. Lubrano upon the
exercise of warrants and options, respectively.
(6) Includes 61,154 shares issuable to Mr. Kaminski upon the exercise of
warrants and 92,665 shares issuable to Mr. Kaminski upon the exercise of
options. Also includes 1,110 shares issuable upon the exercise of warrants
held of record by Interfid of which Mr. Kaminski is President and a
director and, therefore, Mr. Kaminski may be deemed to a beneficial owner
of such shares.
(7) Includes 60,776 shares and 92,665 shares issuable to Mr. Beitzel upon the
exercise of warrants and options, respectively. Also includes 524 shares
issuable upon the exercise of warrants, all held of record by the Beitzel
Family Trust. Since Mr. Beitzel and his family are the beneficiaries of the
Beitzel Family Trust and Mr. Beitzel's wife and children share voting power
therein, Mr. Beitzel may be deemed beneficial owner of such shares.
(8) Includes 39,941 shares and 140,000 shares issuable to Mr. Collins upon the
exercise of warrants and options, respectively, and 10,888 shares held by
Mr. and Mrs. Collins as joint tenants.
(9) Includes 44,997 shares issuable to Ms. Chagnon upon the exercise of
options.
The Company is not aware of any arrangements including any pledge by any
person of securities of the Company, the operation of which may at a subsequent
date result in a change in control of the Company.
47
<PAGE>
PART III , CONTINUED
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INTERFID
Amos Kaminski, a member of the Board, is a director and the controlling
stockholder of Interfid. Interfid rendered investment advisory services to
Premier Resources, Ltd., ("Premier"), a Bahamanian corporation until its
dissolution on November 5, 1999. Premier served as an investment advisor to each
of Privest I N.V. and Privest II N.V. funds and may be deemed to have been the
beneficial owner of the Company's stock owned of record by such entities.
Interfid has rendered investment advice to Premier in connection with the
investments by Privest I N.V. and Privest II N.V. in the Company. Upon the
dissolution of Premier and the liquidation of the Privest I N.V. and Privest II
N.V. funds, all stock or rights thereto were transferred to Gesfid, S.A. a
fiduciary corporation established under the laws of Switzerland. Gesfid, S.A. is
indirectly controlled by Mr. Antonio Saladino, a citizen of Switzerland, who has
a principal place of business at Via Adamini, 10a, Lugano, Switzerland. Mr.
Saladino may be deemed to be the beneficial owner of the shares of the Company
held by Gesfid, S.A. to the extent that Gesfid, S.A. is delegated the authority
to vote or direct the vote or to dispose of such shares. As of March 21, 2000,
Gesfid, S.A. owned 125,701 shares of the Company's stock, including 28,886
shares issuable to Gesfid, S.A. upon the exercise of warrants.
HART AGREEMENT
Effective May 1, 1996, James D. Hart, former Vice President, Finance and
Administration, and Chief Financial Officer of the Company, entered into an
agreement with the Company pursuant to which he became a full-time employee of
the Company, on an at will basis, and Vice President, Finance and
Administration, Treasurer and Chief Financial Officer. Pursuant to such
agreement, Mr. Hart, among other things, received a $65,000 loan from the
Company. Such loan bears interest at the rate of 6.66% per annum, is payable
quarterly, and provides for payment of interest only until June 30, 1999. The
principal balance of such loan is payable in equal quarterly installments from
July 1, 1999 until June 30, 2006, at which time, such loan is due and payable in
full. In August 1997, Mr. Hart resigned as an officer of the Company. Pursuant
to a letter agreement dated August 26, 1997, Bitstream agreed to extend the
repayment terms for the principal balance of the loan such that the principal
balance of the Loan is payable in the following three installments: (a)
$21,667.00 on the date of execution of the letter agreement, (b) $21,667.00 on
or before August 31, 1998, and (c) $21,666.00 on or before August 31, 1999.
Interest on the outstanding principal balance of the Note continues to accrue at
the rate of 6.66% per annum and is payable in arrears on the last day of each
and every March, June, September and December until Mr. Hart's obligations are
paid in full. In January 2000, Mr. Hart paid the last installment and has
fulfilled all his obligations as of that time.
48
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS.
(a) The following documents are included as part of this report:
(1) Financial Statements
Report of Independent Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Report of Independent Public Accounts on Financial Statements
Schedule II - Valuation and Qualifying Accounts
(3) Exhibits.
Certain of the exhibits listed hereunder have been previously filed
with the Commission as exhibits to certain registration statements and
periodic reports as indicated in the footnotes below and are
incorporated herein by reference pursuant to Rule 411 promulgated under
the Securities Act and Rule 24 of the Commission's Rules of Practice.
The location of each document so incorporated by reference is indicated
in parenthesis.
3 CERTIFICATE OF INCORPORATION AND BYLAWS
3.1.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1,
Registration No. 333-11519, filed on September 6, 1996).
3.1.2 Certificate of Amendment to Restated Certificate of
Incorporation of the Company (incorporated by reference
to Exhibit 3.1.2 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996).
3.2.1 Bylaws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on
Form S-1, Registration No. 333-11519, filed on September
6, 1996).
3.2.2 By law Amendments adopted by the Board of Directors of
the Company on November 6, 1998 (incorporated by
reference to Exhibit 2 to the Company's current report
on Form 8-K filed on November 16, 1998).
49
<PAGE>
ITEM 14. EXHIBITS, CONTINUED
4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
4.1 Specimen Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1, Registration No. 333-11519, filed
on September 6, 1996).
4.2 Rights Agreement dated as of November 12, 1998 between
the Company and BankBoston N.A., as Rights Agent, which
includes: as Exhibit A thereto, the form of Certificate
of Designation of Series A Junior Participating,
Preferred Stock of the Company; as Exhibit B thereto,
the Form of Right Certificate; and as Exhibit C thereto,
the summary of Rights to Purchase Preferred Shares.
10 MATERIAL CONTRACTS
10.1 1996 Stock Plan (incorporated by reference to Exhibit
10.1 to the Company's Registration Statement on Form
S-1, Registration No. 333-11519, filed on September 6,
1996).
10.2 1994 Stock Plan (incorporated by reference to Exhibit
10.2 to the Company's Registration Statement on Form
S-1, Registration No. 333-11519, filed on September 6,
1996).
10.3 Agreement and Plan of Recapitalization dated October 28,
1994 (incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1,
Registration No. 333-11519, filed on September 6, 1996).
10.4 Lease between Athenaeum Group and the Company dated
March 17, 1992 (incorporated by reference to Exhibit
10.4 to the Company's Registration Statement on Form
S-1, Registration No. 333-11519, filed on September 6,
1996).
10.4.1 First Amendment to Lease between Athenaeum Group and the
Company dated September 7, 1993 (incorporated by
reference to Exhibit 10.4.1 to the Company's
Registration Statement filed on Form S-1, Registration
No. 333-11519, on September 6, 1996).
10.4.2 Second Amendment to Lease between Athenaeum Group and
the Company dated July 13, 1994 (incorporated by
reference to Exhibit 10.4.2 to the Company's
Registration Statement on Form S-1, Registration No.
333-11519, filed on September 6, 1996).
10.4.3 Third Amendment to Lease between Athenaeum Group and the
Company dated July 15, 1996 (incorporated by reference
to Exhibit 10.4.3 to the Company's Registration
Statement on Form S-1, Registration No. 333-11519, filed
on September 6, 1996).
10.4.4 Fourth Amendment to Lease between Athenaeum Property LLC
and the Company dated March 3, 1997 (incorporated by
reference to Exhibit 10.4.4 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1996).
10.4.5 Fifth Amendment to Lease between Athenaeum Property LLC
and the Company dated April 15, 1997 (incorporated by
reference to Exhibit 10.4.5 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1997).
50
<PAGE>
ITEM 14. EXHIBITS, CONTINUED
10.4.6 Sixth Amendment to Lease between Athenaeum Property LLC
and the Company dated June 6, 1997 (incorporated by
reference to Exhibit 10.4.6 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1997).
10.4.7 Seventh Amendment to Lease between Athenaeum Property
LLC and the Company dated October 1, 1998.
10.5 First Amendment to Credit Agreement dated August 29,
1997 between BankBoston, N.A. and Company (incorporated
by reference to Exhibit 10.4.7 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997).
10.5.1 Amended and Restated Revolving Credit Note dated August
29, 1997 between BankBoston, N.A. and the Company
(incorporated by reference to Exhibit 10.4.6 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997).
10.5.2 Fourth Amendment to Amended and Restated Credit
Agreement dated as of July 15, 1998 between BankBoston,
N.A. and the Company (incorporated by reference to
Exhibit 10.4.9 to the Company's quarterly report on Form
10-Q for the quarter ended June 30, 1998).
10.5.3 Commercial Demand Note dated August 10, 1998 between
BankBoston, N.A. and the Company (incorporated by
reference to Exhibit 10.4.10 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1998).
10.5.4 Pledge Agreement dated August 10, 1998 between
BancBoston N.A and the Company (incorporated by
reference to Exhibit 10.4.11 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1998).
10.6 Bridge Loan Agreement, dated February 22, 1996 among the
Company and certain bridge lenders named therein
(incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1,
Registration No. 333-11519, filed on September 6, 1996).
10.6.1 Amendment to Loan Agreement and to Waiver and
Subordination Agreements dated August 22, 1996 among the
Company and certain bridge lenders named therein
(incorporated by reference to Exhibit 10.5.1 to the
Company's Registration Statement on Form S-1,
Registration No. 333-11519, filed on September 6, 1996).
10.6.2 Amendment No. 2 to Loan Agreement and to Waiver and
Subordination Agreements dated October 9, 1996 among the
Company and certain bridge lenders named therein
(incorporated by reference to Exhibit 10.5.2 to
Pre-effective Amendment No. 1 to the Company's
Registration Statement on Form S-1, Registration No.
333-11519, filed on October 15, 1996).
10.7 Software License Agreement between Novell, Inc. and the
Company, dated as of September 6, 1996 (incorporated by
reference to Exhibit 10.6 Pre-effective Amendment No. 1
to the Company's Registration Statement on Form S-1,
Registration No. 333-11519, filed on October 15, 1996).
10.8 Agreement between Tumbleweed Software Corporation and
the Company dated as of June 10, 1996 (incorporated by
reference to Exhibit 10.7 to the Company's Registration
Statement on Form S-1, Registration No. 333-11519, filed
on October 15, 1996).
51
<PAGE>
ITEM 14. EXHIBITS,CONTINUED
10.9 Agreement dated as of May 1, 1996 among the Company and
James D. Hart (incorporated by reference to Exhibit 10.8
to the Company's Registration Statement on Form S-1,
Registration No. 333-11519, filed on September 6, 1996).
10.10 Form of Indemnification Agreement between the Company,
its directors and certain of its officers (incorporated
by reference to Exhibit 10.9 to Pre-effective Amendment
No. 1 to the Company's Registration Statement on Form
S-1, Registration No. 333-11519, filed on October 15,
1996).
10.11 Agreement and Plan of Merger dated as of March 27, 1997
among the Company, Archetype Acquisition Corporation and
Archetype, Inc. (incorporated by reference to Exhibit
10.10 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996).
10.12 1997 Stock Plan (incorporated by reference to Exhibit
10.11 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996).
10.13 Asset Purchase Agreement among the Company, Archetype,
Inc., Inso Corporation and Inso Providence Corporation
dated August 28, 1998 (incorporated by reference to
Exhibit 99(a) to the Company's Form 8-K filed on
September 14, 1998).
21 SUBSIDIARIES OF REGISTRANT
*21.1 Subsidiaries of the Company
23 CONSENTS
*23.1 Consent of Independent Public Accounts
27 FINANCIAL DATA SCHEDULE
*27.1 Financial Data Schedule
# Pursuant to Rule 406 under the Securities Act, confidential treatment
requested as to certain provisions.
* Filed herewith.
(b) REPORTS ON FORM 8-K
NONE
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized, in the City of
Cambridge, Commonwealth of Massachusetts on this 28 day of March, 2000.
BITSTREAM INC.
By: /s/ CHARLES YING
--------------------------
Charles Ying
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ CHARLES YING Chairman of the Board, Director and March 28, 2000
- -------------------------------
Charles Ying Chief Executive Officer (Principal
Executive Officer)
/s/ ANNA M. CHAGNON Executive Vice President, Chief March 28, 2000
- -------------------------------
Anna M. Chagnon Financial Officer, Chief Operating
Officer, Treasurer and Secretary
(Principal Financial Officer)
/s/ JAMES P. DORE Controller, Principal Accounting Officer March 28, 2000
- -------------------------------
James. P. Dore
/s/ AMOS KAMINSKI Director March 28, 2000
- -------------------------------
Amos Kaminski
/s/ DAVID G. LUBRANO Director
- -------------------------------
David G. Lubrano March 28, 2000
/s/ GEORGE B. BEITZEL Director March 28, 2000
- -------------------------------
George B. Beitzel
</TABLE>
53
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF BITSTREAM INC. AND SUBSIDIARIES
Report of Independent Public Accountants........................................................ F-2
Consolidated Balance Sheets as of December 31,1999 and 1998..................................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1999,
1998 and 1997 ............................................................................. F-4
Consolidated Statement of Stockholders' Equity for the Years Ended December
31, 1999, 1998 and 1997.................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999,
1998 and 1997.............................................................................. F-6
Notes to Consolidated Financial Statements...................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Bitstream Inc.:
We have audited the accompanying consolidated balance sheets of Bitstream
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Bitstream Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 9, 2000
F-2
<PAGE>
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------
ASSETS 1999 1998
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................... $ 9,037 $14,252
Accounts receivable, net of allowance for doubtful accounts of
$980 and $1,025 in 1999 and 1998, respectively.......................... 2,184 1,206
Current portion of long-term accounts receivable and extended
plan accounts receivable, net of allowance for doubtful
accounts of $50 and $135 in 1999 and 1998, respectively 4 304
Deferred tax assets.......................................................... -- 868
Prepaid expenses and other current assets.................................... 297 390
------- -------
Total current assets.................................................... 11,522 17,020
------- -------
Property and equipment, net.................................................... 763 853
------- -------
Other assets:
Long-term accounts receivable, net of current portion
and allowance for doubtful accounts of $12 and $73 in 1999
and 1998, respectively..................................................... 4 93
Goodwill, net of amortization of $680 and $212 in
1999 and 1998, respectively............................................... 1,665 2,133
Investment in DiamondSoft, Inc. ............................................. 462 444
Other........................................................................ 187 168
------- -------
Total other assets............................................................. 2,318 2,838
------- -------
Total assets......................................................... $14,603 $20,711
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of capital lease obligations............................. 27 27
Accounts payable............................................................ 351 171
Accrued income taxes........................................................ -- 692
Accrued expenses............................................................ 1,126 2,344
Deferred revenue............................................................ 350 1,148
------- -------
Total current liabilities.............................................. 1,854 4,382
------- -------
Capital lease obligations, net of current portion............................. -- 27
Other long-term liabilities................................................... 7 27
------- -------
Total long-term liabilities............................................ 7 54
------- -------
Commitments and Contingencies (Notes 9 and 10): Stockholders' equity :
Common stock, $.01 par value.
Authorized - 30,500 shares.
Issued and outstanding - 7,550 and 7,055 as of
December 31, 1999 and 1998, respectively................................. 75 70
Additional paid-in capital.................................................. 31,218 30,714
Accumulated deficit......................................................... (18,491) (14,449)
Treasury stock, at cost; 39 shares as of December 31,
1999 and 1998............................................................ (60) (60)
------- -------
Total stockholders' equity............................................... 12,742 16,275
------- -------
Total liabilities and stockholders' equity............................. $14,603 $20,711
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues
Software licenses......................................... $ 7,299 $ 7,760 $ 11,971
Services ................................................. 1,622 1,110 1,131
--------- --------- ---------
Total revenues............................................... 8,921 8,870 13,102
Cost of revenues............................................. 1,461 1,522 1,518
--------- --------- ---------
Gross profit.............................................. 7,460 7,348 11,584
Operating expenses:
Marketing and selling..................................... 4,197 5,696 6,621
Research and development.................................. 5,037 4,404 2,826
General and administrative................................ 1,829 1,742 2,104
Severance and other non-recurring compensation -- 2,647 1,371
Acquired in-process research and development... -- -- 4,930
--------- --------- ---------
Total operating expenses.............................. 11,063 14,489 17,852
Gain on sale of assets.................................... -- 10,317 --
--------- --------- ---------
Operating (loss) income...................................... (3,603) 3,176 (6,268)
Gain (loss) on investment in DiamondSoft, Inc............. 18 (56) --
Interest income, net...................................... 533 489 510
--------- --------- ---------
(Loss) income before provision for income taxes (3,052) 3,609 (5,758)
Provision for income taxes................................ 990 775 232
--------- --------- ---------
Net (loss) income..................................... $ (4,042) $ 2,834 $ (5,990)
========= ========= =========
Net (loss)earnings per share:
Basic..................................................... $ (0.56) $ 0.42 $ (0.95)
========= ========= =========
Diluted................................................... $ (0.56) $ 0.38 $ (0.95)
========= ========= =========
Weighted average shares outstanding:
Basic..................................................... 7,261 6,751 6,303
========= ========= =========
Diluted................................................... 7,261 7,443 6,303
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMUL-
ATIVE
COMMON STOCK ADD- TRANS- TREASURY STOCK TOTAL COMPRE-
------------------- ------------------
NUMBER $.01 ITIONAL ACCUMU- LATION NUMBER STOCK- HENSIVE
OF PAR PAID-IN LATED ADJUST- OF HOLDERS' NET (LOSS)
SHARES VALUE CAPITAL DEFICIT MENT SHARES COST EQUITY INCOME
------ ----- ------- ------- ---- ------ ---- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER 31, 1996 .......... 5,908 $ 59 $ 26,637 $(11,293) $ (44) -- $ -- $ 15,359 $ --
-------- -------- -------- -------- -------- ------- -------- -------- --------
Exercise of stock
Options and warrants ....... 138 1 124 -- -- -- -- 125 --
Issuance of Class A
Common stock upon ......... 510 5 1,602 -- -- -- -- 1,607 --
merger
IPO related expenses ........ -- -- (68) -- -- -- -- (68) --
Issuance of options
Upon merger ............... -- -- 1,400 -- -- -- -- 1,400 --
Options issued for
Severance ................. -- -- 245 -- -- -- -- 245 --
Cumulative translation
adjustment .................. -- -- -- -- 5 -- -- 5 5
Net loss ................... -- -- -- (5,990) -- -- -- (5,990) (5,990)
-------- -------- -------- -------- -------- ------- -------- -------- --------
Comprehensive net loss
for the year ended
December 31, 1997 ......... -- -- -- -- -- -- -- -- (5,985)
========
BALANCE,
DECEMBER 31, 1997 .......... 6,556 $ 65 $ 29,940 $(17,283) $ (39) -- $ -- $ 12,683 --
======== ======== ======== ======== ======== ======= ======== ========
Exercise of stock
Options and warrants ....... 499 5 444 -- -- -- -- 449 --
Deferred compensation
expense related to options . -- -- 330 -- -- -- -- 330 --
Treasury stock received from
acquisition escrow (see ... --
Note 3) ................... -- -- -- -- -- 39 ($ 60) ($ 60) --
Cumulative translation
adjustment .................. -- -- -- -- 39 -- -- 39 39
Net income ................. -- -- -- 2,834 -- -- -- 2,834 2,834
-------- -------- -------- -------- -------- ------- -------- -------- --------
Comprehensive net income
for the year ended
December 31, 1998 ......... -- -- -- -- -- -- -- -- $ 2,873
========
BALANCE,
DECEMBER 31, 1998 ......... 7,055 $ 70 $ 30,714 $(14,449) $ -- 39 $ ( 60) $ 16,275 --
======== ======== ======== ======== ======== ======= ======== ========
Exercise of stock options and
warrants .................... 495 5 478 -- -- -- -- 483 --
Deferred compensation
expense related to options . -- -- 26 -- -- -- -- 26 --
Net loss ................... -- -- -- (4,042) -- -- -- (4,042) (4,042)
-------- -------- -------- -------- -------- ------- -------- -------- --------
Comprehensive net loss for
the year ended
December 31, 1999 ........ -- -- -- -- -- -- -- -- $ (4,042)
========
BALANCE,
DECEMBER 31, 1999 .......... 7,550 $ 75 $ 31,218 $(18,491) $ -- 39 $ (60) $ 12,742 --
======== ======== ======== ======== ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
CASH FLOWS FROM OPERATING ACTIVITIES: 1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Net (loss) income .......................................................... $ (4,042) $ 2,834 $ (5,990)
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Gain on sale of certain assets sold to Inso Providence Corporation -- (10,317) --
Acquired in-process research and development............................ -- -- 4,930
Change in cumulative translation adjustment............................. -- 39 --
Release of treasury stock from escrow................................... -- (60) --
Depreciation ........................................................... 481 709 492
Amortization............................................................ 521 384 339
Compensation on grant of stock options.................................. 26 330 --
(Gain) Loss on investment in DiamondSoft, Inc. ......................... (18) 56 --
Net loss on disposal of property and equipment.......................... -- 19 1
Options issued for severance............................................ -- -- 245
Deferred tax assets..................................................... 868 -- --
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable..................................................... (695) 4,039 (1,676)
Long-term and extended plan accounts receivable......................... 6 (54) (253)
Prepaid expenses and other current assets............................... 92 294 (37)
Accounts payable........................................................ 182 (582) --
Accrued income taxes.................................................... (692) 692 --
Accrued expenses........................................................ (1,095) (758) 230
Deferred revenue........................................................ (798) 1,148 1,242
--------- --------- --------
Net cash used in operating activities (5,164) (1,227) (477)
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired............................ -- (1,900) (4,141)
Purchases of property and equipment......................................... (513) (335) (747)
Proceeds from the sale of property and equipment............................ 8 -- --
Cash proceeds from sale of certain assets to INSO........................... -- 11,430 --
Investment in DiamondSoft, Inc. ........................................... -- (500) --
Decrease (increase) in other assets......................................... 17 (10) (5)
--------- --------- --------
Net cash (used in) provided by investing activities............. (488) 8,685 (4,893)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term capital lease obligations............................. (27) (27) (39)
Change in other long-term liabilities....................................... (19) 8 (1)
Payments on IPO offering expenses.......................................... -- -- (68)
Proceeds from the exercise of stock options/warrants........................ 483 449 124
--------- --------- --------
Net cash provided by financing activities...................... 437 430 16
--------- --------- --------
Net (Decrease) Increase in Cash and Cash Equivalents.......................... (5,215) 7,888 (5,354)
Cash and Cash Equivalents, beginning of year.................................. 14,252 6,364 11,718
--------- --------- --------
Cash and Cash Equivalents, end of year........................................ $ 9,037 $ 14,252 $ 6,364
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest...................................................... $ 5 $ 6 $ 8
Cash paid for income taxes.................................................. $ 712 $ 125 $ 190
SUPPLEMENTAL DISCLOSURE OF CASH FLOW RELATED TO ACQUISITIONS (NOTE 3):
Fair value of assets acquired excluding cash................................ $ -- $ 1,900 $ 7,454
Payments in connection with acquisitions, net of cash....................... $ -- $ (1,900) $ (1,094)
Issuance of common stock.................................................... $ -- $ -- $ 6,360
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
BITSTREAM INC. AND SUBSIDIARIES (THE "COMPANY") DEVELOP AND MARKET SOFTWARE
PRODUCTS AND TECHNOLOGIES TO ENHANCE THE CREATION, TRANSPORT, VIEWING AND
PRINTING OF ELECTRONIC DOCUMENTS.
The Company is comprised of three different businesses. First, its
traditional type and technology business which primarily licenses its products
and technologies to original equipment manufacturers ("OEMs") and independent
software vendors ("ISVs"), for inclusion in their output devices, embedded
systems, applications, Internet authoring tools, World Wide Web browsers and
other products, and to end users. The Company generally enters into a license
with such customers and charges a combination of licensing fees and royalty
payments. In addition, Bitstream sells custom and other type products and
application products directly and indirectly to end users such as graphic
artists, publishers, advertising agencies and corporations. Second, an
e-commerce business ("myfonts.com"), formed in late 1999 as Myfonts.com, Inc., a
wholly owned subsidiary, which is charged with establishing the first e-commerce
site to aggregate fonts from multiple vendors on one easy-to-use Web site. The
third business is on-demand marketing, which was formed in early 1999 and is
housed under another wholly owned subsidiary (Pageflex, Inc,). Pageflex
Mpower-TM- allows companies to create personalized and customized marketing
documents based on the preferences and interests of individual customers. Mpower
also has the ability to create output for traditional run-of-many offset
printing.
The Company is subject to risks common to technology-based companies,
including dependence on key personnel, rapid technological change, competition
from alternative product offerings and larger companies, and challenges to the
development and marketing of commercial products and services.
The accompanying consolidated financial statements reflect the application
of certain accounting policies as described in this note and elsewhere in the
accompanying consolidated financial statements and notes. The preparation of the
accompanying consolidated financial statements required the use of certain
estimates by management in determining the Company's assets, liabilities,
revenues and expenses. Actual results may differ from these estimates.
(a) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries: Bitstream World Trade, Inc. (a
Delaware corporation), a holding company for Bitstream, B.V. (a Dutch
corporation); Bitstream S.A.R.L. (a French corporation); Bitstream B.V. France
(a French corporation), which was closed in 1998; Mainstream Software Solutions
Ltd. (an English corporation); Type Solutions, Inc. (a New Hampshire
Corporation); Archetype, Inc. (a Delaware corporation); Pageflex, Inc. ( a
Delaware corporation) and Myfonts.com, Inc. (a Delaware corporation). All
material inter-company transactions and balances have been eliminated in
consolidation.
(b) REVENUE RECOGNITION
The Company adopted Statement of Position 97-2 (SOP 97-2), SOFTWARE REVENUE
RECOGNITION in 1998. The adoption of SOP 97-2 did not have a material effect on
the Company's results of operations or financial position. The Company derives
revenues from software product licenses, professional consulting, and support
maintenance services. Licenses and royalty revenues are recognized when
persuasive evidence of an agreement exists, the product has been delivered, the
Company has no remaining significant obligations with regard to implementation,
the fee is fixed or determinable and collection of the fee is probable.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Licensing fees and royalty revenues include: (i) 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. Certain OEM
and ISV customers pay royalties only upon the sublicensing of the Company's
products to end users. Royalties due from these OEM and ISV customers are
recognized when such sublicenses are reported to the Company by the OEM or ISV
customer.
Professional services include custom design and development and training.
The Company recognizes professional services 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. The Company recognizes revenue from support maintenance agreements
ratably over the term of the agreement.
Revenue from guaranteed minimum royalty licenses is recognized upon delivery
of the software, while revenue on pay-as-you-go licenses is recognized in the
period when sublicenses to end users are reported to the Company by the OEM or
ISV customer. In certain guaranteed minimum royalty licenses, the Company will
enter into extended payment programs with creditworthy customers.
Revenue from end user product sales is recognized upon delivery of the
software, net of estimated returns and allowances, if there are no significant
post delivery obligations and if collection is probable. Revenue from
maintenance contracts is recognized pro rata over the term of the contract.
Revenue on certain long-term development contracts is recognized using the
percent-of-completion method, as the services are performed. Provisions for any
estimated losses on uncompleted contracts are made in the period in which such
losses become probable.
Deferred revenue includes unearned software maintenance revenue, certain
prepaid royalties and advance billings under software development contracts.
Cost of revenues consists primarily of costs associated with consulting and
custom product development services. Costs also include costs to distribute the
product, including the cost of the media on which it is delivered. Additional
costs include fees paid to third parties for the development of unique typeface
designs and costs associated with fulfilling such orders.
The Company generally warrants that its products will function substantially
in accordance with documentation provided to customers for approximately 90 days
following initial delivery. As of December 31, 1999, the Company had not
incurred any significant expenses related to warranty claims.
(c) RESEARCH AND DEVELOPMENT EXPENSES
The Company has evaluated the establishment of technological feasibility of
its products in accordance with Statement of Financial Accounting Standards
(SFAS) No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED
OR OTHERWISE MARKETED. The Company sells products in a market that is subject to
rapid technological change, new product development and changing customer needs.
The time period during which costs could be capitalized from the point of
reaching technological feasibility until the time of general product release is
very short, and consequently, the amounts that could be capitalized are not
material to the Company's financial position or results of operations.
Therefore, the Company has charged all of such costs to research and development
in the period incurred.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(d) STOCK-BASED COMPENSATION
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, permits a company to
choose either a new fair value based method or the Accounting Principles
Board (APB) No. 25 intrinsic value based method of accounting for its stock
based compensation arrangements. The Company elected to continue to account
for its stock-based compensation plans utilizing the provisions of APB No.
25. SFAS No. 123 requires disclosure of pro forma information regarding net
(loss) income and net (loss) income per share based on fair value accounting
for stock based compensation plans. This disclosure is presented in Note 14.
(e) CASH AND CASH EQUIVALENTS
As of December 31, 1999, cash and cash equivalents included bank deposits
and approximately $7,925,000 of money market instruments. The Company considers
all highly liquid investments with original maturities of three months or less
at the time of acquisition to be cash equivalents and records such investments
at cost, which approximates market value.
(f) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Property and equipment consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------ ------
<S> <C> <C>
Equipment and computer software ................ $1,814 $2,629
Purchased software ............................ 318 48
Equipment under capital lease ................. 159 426
Furniture and fixtures ......................... 366 334
Leasehold improvements ......................... 637 787
------ ------
3,294 4,224
Less-- Accumulated depreciation and amortization 2,531 3,371
------ ------
Property and equipment, net .................... $ 763 $ 853
====== ======
</TABLE>
Depreciation is provided on a straight-line basis over the estimated useful
lives of the related assets as follows:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL
------------------------------------------------------- -----------------
LIFE
----
<S> <C>
Equipment and computer software........................... 3 Years
Purchased software....................................... 3 Years
Equipment under capital lease............................ Life of lease
Furniture and fixtures.................................... 5 Years
Leasehold improvements.................................... Life of lease
</TABLE>
(g) DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company does not have any derivatives or other financial instruments as
defined by SFAS No. 119, DISCLOSURES ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND
FAIR VALUE OF FINANCIAL INSTRUMENTS.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires disclosure of an estimate of the fair value of certain financial
instruments. The Company's financial instruments consist of cash equivalents,
accounts receivable, accounts payable and capital leases. The estimated fair
value of these financial instruments approximates their carrying value at
December 31, 1999 and 1998 due to the short-term nature of these instruments.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement, as amended by SFAS No. 137, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. The Company believes that the
adoption of the recently issued accounting standards will not have a material
impact on its financial results or financial position.
(h) FOREIGN CURRENCY TRANSLATION
The Company considers the functional currency of its foreign subsidiaries to
be the local currency, and accordingly, their financial information is
translated into U.S. dollars using exchange rates in effect at period end for
assets and liabilities and average exchange rates during each reporting period
for the results of operations. Adjustments resulting from translation of foreign
subsidiary financial statements are included in stockholders' equity.
(i) POSTRETIREMENT BENEFITS
The Company had no obligations under SFAS No. 106, EMPLOYERS' ACCOUNTING FOR
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, as it does not currently offer such
benefits.
(j) 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. At December 31, 1999 two customers accounted
for 14% and 11% of the Company's accounts receivable. At December 31, 1998
and 1997, no single customer accounted for more than 10% of the Company's
accounts receivable. For the year ended December 31, 1999, one customer
accounted for 12% of the Company's revenue. For the year ended December 31,
1998 and 1997, no single customer accounted for 10% or greater of the
Company's revenues.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(k) GOODWILL
Goodwill is stated at cost, less accumulated amortization, and consists of
the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------ ------
<S> <C> <C>
Acquisition of Mainstream Software Solutions Ltd. $ 450 $ 450
Acquisition of Type Solutions, Inc. ............. 595 595
Acquisition of Alaras Corporation ............... 1,300 1,300
------ ------
2,345 2,345
Less-- Accumulated amortization ................. 680 212
------ ------
$1,665 $2,133
====== ======
</TABLE>
Goodwill is amortized on a straight-line basis over the estimated useful
life of 5 years.
(l) IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 121, ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, the Company reviews its
long-lived assets (which include intangible assets, deferred costs and property
and equipment) for impairment as events and circumstances indicate the carrying
amount of an asset may not be recoverable. The Company evaluates the
realizability of its long-lived assets based on profitability and cash flow
expectations for the related asset or subsidiary. Management believes that, as
of each of the balance sheet dates presented, none of the Company's long-lived
assets was impaired.
(m) COMPREHENSIVE (LOSS) INCOME
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 (loss) income and its components in a full set of
general purpose financial statements. The components of the Company's
comprehensive (loss) income are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
Net (loss) income $ (4,042) $ 2,834 $ (5,990)
Foreign translation adjustment -- 39 5
---------- -------- ---------
Comprehensive (loss) income $ (4,042) $ 2,873 $ (5,985)
========== ======== =========
</TABLE>
(n) RECENTLY ISSUED ACCOUNTING STANDARD
The Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 101, REVENUE RECOGNITION, in December 1999. The Company is required
to adopt this new accounting guidance through a cumulative charge to
operations in accordance with APB No. 20, ACCOUNTING CHANGES, no later than
the second quarter of fiscal year 2000. The Company believes that the
adoption of the guidance provided in SAB No. 101 will not have a material
impact on future operations results.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) (LOSS) EARNINGS PER SHARE ( IN THOUSANDS)
In accordance with SFAS No. 128, EARNINGS PER SHARE, basic earnings
per share was determined by dividing net (loss) income by the weighted
average shares of common stock outstanding during the year. Diluted earnings
per share reflects dilution from potentially dilutive securities, primarily
stock options based on the treasury stock method. In computing diluted
earnings per share, common stock equivalents are not considered in periods in
which a net loss is reported as the inclusion of the potential common stock
equivalents would be antidilutive. Diluted net loss per share for the years
ended December 31, 1999 and 1997 are the same as basic net loss per share as
the inclusion of the potential common stock equivalents would be
antidilutive. A reconciliation of basic and diluted weighted average shares
outstanding for basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
Shares outstanding for basic (loss) earnings per share:
Weighted average shares outstanding................... 7,261 6,751 6,303
============== ============== ===============
Shares outstanding for diluted (loss) earnings per share:
Weighted average shares outstanding................... 7,261 6,751 6,303
Dilutive effect of options (*)....................... -- 473 --
Dilutive effect of warrants (*)....................... -- 220 --
-------------- -------------- ---------------
Shares outstanding for diluted (loss) income per share: 7,261 7,443 6,303
============== ============== ===============
</TABLE>
* Options and warrants, which are not included because they would be
anitdilutive are detailed in the following paragraph.
Potential common shares are not included for the years ended December 31,
1999 or 1997 because they would be antidilutive. had the numerator been a
profit, the potential common shares would have increased the weighted average
shares outstanding by 855 and 1,461 shares for the years ended December 31, 1999
and 1997, respectively. In addition, there were warrants and options to purchase
339, 1,279 and 524 shares for the years ended December 31, 1999, 1998 and 1997,
respectively that were not included in the potential common share computations
because their exercise prices were greater than the market price of the
Company's common stock. These common stock equivalents are antidilutive even
when a profit is reported in the numerator.
(3) ACQUISITIONS
MAINSTREAM ACQUISITION
In January 1997, the Company purchased substantially all of the assets of
Mainstream Software Solutions Ltd., a corporation organized under the laws of
England, primarily engaged in the business of marketing, selling, distributing
and supporting the Company's type products in the United Kingdom, for
approximately $505,000 in cash. As a result, the Company directly distributes
its own products in the United Kingdom. The acquisition was accounted for as a
purchase and resulted in approximately $450,000 of goodwill.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
ARCHETYPE ACQUISITION
In April 1997, the Company acquired Archetype, Inc. ("Archetype"), a
Delaware corporation primarily engaged in the business of developing and
marketing server-based information management computer software for the graphic
arts industry. Archetype's products included: Mediabank, a digital asset
management product that allows for the cataloging, archiving, and management of
electronic images, text and documents; InterSep OPI and InterSep Output Manager,
advanced open prepress interface and print management products for raster image
processors and servers; and NuDoc, an advanced document composition technology.
In connection with the merger, Archetype stockholders received an
aggregate of approximately $1.3 million in cash and 510,000 shares of the
Company's Class A Common Stock in exchange for their shares of Archetype capital
stock. In addition, the Company satisfied approximately $1.8 million of
obligations and indebtedness owed by Archetype, and issued options and warrants
(the "Options") to purchase approximately 605,000 shares of the Company's Class
A Common Stock. Of these options, 405,000 have an exercise price of $.90 per
share and were issued under the Company's 1996 Stock Plan and the remaining
200,000 have an exercise price of $3.94 per share and were issued under the
Company's 1997 Stock Plan. The merger was accounted for as a purchase, and
accordingly, the initial purchase price and acquisition costs aggregating
approximately $7.5 million has been allocated to the assets acquired as
described below. The aggregate purchase price of $7,454,000 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ----------- ------
<S> <C>
Common stock and stock options........................................................ $ 2,904
Cash paid to shareholders and for the retirement of certain obligations 3,056
Assumed liabilities................................................................... 1,094
Acquisition costs..................................................................... 400
-------
Total purchase price.................................................................. $ 7,454
=======
The purchase price allocations represent the fair values of assets
acquired determined by an independent appraisal. The appraisal incorporated
established valuation procedures and techniques in determining the fair value of
each asset. The purchase price has been allocated as follows (in thousands):
<CAPTION>
DESCRIPTION AMOUNT
- ------------ ------
<S> <C>
Current assets........................................................................ $ 431
Property, plant and equipment......................................................... 207
Other assets.......................................................................... 54
In-process research and development................................................... 4,930
Other acquired intangible assets...................................................... 1,832
-------
Total assets acquired................................................................. $ 7,454
=======
</TABLE>
The amount allocated to in-process research and development related to
projects that had not yet reached technological feasibility and that, until
completion of the development, had no alternative future use. These projects
will require substantial high-risk development and testing by the Company prior
to reaching technological feasibility. Accordingly, the Company charged the
purchase price to operations in the year ended December 31, 1997.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Based on the unaudited data, the following table presents selected
financial information for Bitstream and Archetype on a pro forma basis for the
year ended December 31, 1997, assuming the companies had been combined since the
beginning of 1997 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Revenues......................................... $ 14,164
Net Loss ........................................ (1,703)
Basic Net Loss per share......................... $ ( 0.26)
</TABLE>
The pro forma results are not necessarily indicative of future operations
or the actual results that would have occurred had the acquisition been made on
January 1, 1996. The pro forma amounts exclude the $4,930,000 write-off of
in-process research and development. In November 1998, the Company received
39,000 shares of treasury stock upon the release of the escrow for the Archetype
acquisition.
ALARAS ACQUISITION
In November 1998, the Company purchased certain assets of Alaras
Corporation ("Alaras"), a North Carolina corporation primarily engaged in the
business of developing, marketing and distributing its software products to a
variety of markets, for $1,300,000 in cash. Alaras' products included: Tropix, a
workflow application to automate repetitive steps in electronic publishing
production; Mixxer, a color correction filter for Adobe Photoshop; and Apertura,
an application which enables Adobe Photoshop to open one or more smaller
portions of most popular image formats including native Scitex CT and LWs. The
acquisition was accounted for as a purchase and resulted in $1,300,000 of
goodwill. Selected financial information for Bitstream and Alaras on a pro forma
basis has not been provided as it is immaterial to the consolidated financial
statements taken as a whole.
TYPE SOLUTIONS ACQUISITION
In December 1998, the Company acquired all of the outstanding stock of
Type Solutions, Inc. ("Type Solutions"), a New Hampshire corporation primarily
engaged in the business of developing and licensing font rendering technologies,
for $600,000 in cash. The acquisition was accounted for as a purchase and
resulted in $595,000 of goodwill. Selected financial information for Bitstream
and Type Solutions on a pro-forma basis has not been provided as it is
immaterial to the consolidated financial statements taken as a whole.
(4) SALE OF ASSETS
Pursuant to an Asset Purchase Agreement dated August 28, 1998, the
Company sold substantially all of the assets relating to its MediaBank and
InterSep OPI product lines to Inso Providence Corporation for net cash
proceeds of approximately $11,430,000. Included in income from operations for
the year ended December 31, 1998 is a pre-tax gain of approximately
$10,317,000 from this sale. The components of the gain are as follows (in
thousands):
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
------------ ------
<S> <C>
Net cash proceeds from buyer ........................... $ 11,430
Net book value of assets sold........................... (1,485)
Liabilities assumed by buyer............................ 472
Transaction costs....................................... (100)
--------
Total gain on sale................................. $ 10,317
========
</TABLE>
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(5) INVESTMENTS
On March 13, 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 and is accounted for under the equity method. Gains
(losses) for the year ended December 31, 1999 and 1998 related to the
Company's investment in DiamondSoft totaled approximately $18,000 and
$(56,000), respectively and are included in the accompanying 1999 and 1998
consolidated statements of operations.
(6) SEVERANCE AND OTHER NON-RECURRING EXPENSES
Included in operating expenses for the year ended December 31, 1998 are
approximately $2,647,000 of severance and other non-recurring compensation
expenses incurred in connection with certain arrangements between the Company
and certain former employees and executives. Operating expenses for the year
ended December 31, 1997 reflect $1,371,000 for severance and other non-recurring
compensation expenses incurred in connection with the acquisition of Archetype
and certain arrangements between the Company and certain former executives.
(7) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. Under the liability method in accordance with SFAS
No. 109, a deferred tax asset or liability is determined based on the difference
between the financial statement and the tax basis of assets and liabilities, as
measured by enacted tax rates assumed to be in effect when these differences are
expected to reverse.
A reconciliation between the provision for income taxes computed at
statutory rates and the amount reflected in the accompanying consolidated
statements of operations as a percentage of pre-tax income is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
--------- ---------- --------
<S> <C> <C> <C>
Computed expected federal tax (benefit) provision ......................... (34.0)% 34.0 % (34.0)%
State income taxes, net of federal (benefit) provision..................... (6.0) 6.3 (6.0)
State and foreign net operating loss and credit carryforwards -- (2.2) --
Foreign income/losses...................................................... -- (2.9) 3.4
Foreign taxes, including withholding taxes................................. 4.0 2.9 3.3
Nondeductible write-off of in-process R & D and other...................... -- 2.4 35.6
Nondeductible goodwill amortization........................................ 15.4 18.8 1.7
Change in valuation allowance.............................................. 53.0 (37.8) --
--------- ---------- --------
Provision for income taxes per accompanying
consolidated statement of operations.................................. 32.4 % 21.5 % 4.0 %
========= ========== ========
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
THE FOLLOWING IS A SUMMARY OF THE COMPONENTS OF THE PROVISION FOR INCOME
TAXES (IN THOUSANDS):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1999 1998 1997
---------------- ----------------- ----------------
<S> <C> <C> <C>
Current:
Federal...................... $ -- $ 127 $ 36
State........................ (3) 544 6
Foreign...................... 125 104 190
----------------- ----------------- ----------------
122 775 232
Deferred:
Federal...................... 868 -- --
State........................ -- -- --
Foreign...................... -- -- --
----------------- ----------------- ----------------
Total.......................... $ 990 $ 775 $ 232
================= ================= ================
The significant items comprising the deferred tax asset are as follows (in
thousands):
<CAPTION>
DECEMBER 31,
-----------------------------------
1999 1998
-------------- -------------
<S> <C> <C>
Net operating loss carryforwards............... $ 1,802 $ 1,111
Tax credit carryforwards....................... 2,929 2,786
Other temporary differences.................... 1,608 1,344
----- -----
Gross deferred tax asset............... 6,339 5,241
Valuation allowance............................ (6,339) (4,373)
-------------- -------------
Net deferred tax asset................. $ -- $ 868
-------------- =============
At December 31, 1999, the Company has available federal and state net
operating loss carryforwards for income tax purposes and federal and state tax
credit carryforwards to reduce future federal income taxes, if any. Utilization
of these NOLs is subject to certain annual limitations in accordance with
certain tax laws and regulations. These net operating loss and tax credit
carryforwards are subject to review and possible adjustment by the Internal
Revenue Service and expire as follows:
<CAPTION>
DECEMBER 31,
------------
CREDIT NOLS
($000) ($000)
----------- -----------
<S> <C> <C> <C>
2000 40 --
2001 96 --
2002 192 --
2003 250 --
2004 265 --
2005 101 --
2006 366 --
2007 113 238
2008 311 1,403
2009 164 1,130
2010 124 --
2011 111 --
2012 109 351
2018 540 --
2019 147 3,551
----------- -----------
$ 2,929 6,673
=========== ===========
</TABLE>
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Tax Reform Act of 1986 (the Reform Act) limits the amount of net
operating loss and credit carryforwards which companies may utilize in any one
year in the event of cumulative changes in ownership over a three-year period in
excess of 50%. The Company has assessed its status with respect to these
ownership changes which have occurred over the last three years, as well as the
change of ownership interests with the initial public offering and the
acquisition of Archetype, Inc., and believes that its ability to utilize its
existing net operating loss and credit carryforwards will not be materially
affected as a result of these changes in ownership interests.
The Company has established a valuation allowance against its deferred tax
asset to the extent that it believes it is more likely than not these assets
will not be realized. In determining the amount of valuation allowance required,
the Company considers numerous factors, including historical profitability,
estimated future taxable income and the volatility of the industry in which it
operates. As of December 31, 1999 the Company has fully reserved its deferred
tax asset primarily due to losses in each of the last three years excluding the
gain on the sale of the MediaBank and InterSep product line to Inso Providence
Corp in 1998.
(8) ACCRUED EXPENSES
<TABLE>
<CAPTION>
Accrued expenses consist of the following (in thousands): DECEMBER 31,
---------------------------------
1999 1998
------------ -------------
<S> <C> <C>
Accrued royalties...................................................... $ 199 $ 350
Payroll and other compensation......................................... 296 437
Accrued professional and consulting services........................... 428 861
Other.................................................................. 203 596
------------ -------------
Total............................................................. $ 1,126 $ 2,344
============ =============
</TABLE>
(9) DEBT
(a) LINE OF CREDIT
The Company had a working capital line-of-credit agreement with a bank,
which matured on July 15, 1998. The line-of-credit provided for borrowings up to
$2,000,000 based on a percentage of qualified accounts receivable, as defined.
This line bore interest at various per annum rates between the prime rate plus
1% to 2%, as defined. No balance was outstanding under this line as of December
31, 1999 or 1998.
(b) CAPITAL LEASES
The Company leases certain equipment under capital leases expiring through
fiscal 2000. These capital lease payments are due in equal monthly installments
and bear interest at rates ranging from 8.7% to 9.0%. Future minimum lease
payments under the capital lease obligations as of December 31, 1999 are all
included in current liabilities. The total liability is $29,000 of which $2,000
represents interest.
(10) OPERATING LEASES
The Company conducts its operations in leased facilities and is obligated to
pay monthly rent plus real estate taxes and certain operating expenses through
October 2003. Rent expense charged to operations for the years ended December
31, 1999, 1998 and 1997 was approximately $587,000, $493,000, and $545,000,
respectively. The Company subleased approximately 4,700 square feet of its
leased facilities to a third party for a two year period commencing on January
15, 1999 for $79,900 per annum which was netted against rent expense in 1999.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The future minimum annual lease payments as of December 31, 1999 under the
Company's leased facilities, net of sublease commitments, is as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
--------- ----------
<S> <C> <C>
2000 145
2001 225
2002 225
2003 169
---------
$ 764
=========
</TABLE>
(11) CONTINGENT LIABILITIES
On November 22, 1996, Mr. Robert S. Friedman, a former director and officer of
the Company, and Mr. Gordon Greer, and Ms. Faith G. Friedman, as trustees of the
Robert S. Friedman Family Trust, filed a lawsuit in the Middlesex County
Superior Court of Massachusetts against the Company, asserting that the Company
had breached certain obligations the plaintiffs allege are due to them under a
separation agreement dated May 22, 1991 (the "Separation Agreement") between Mr.
Friedman and the Company. The plaintiffs are seeking monetary damages from the
Company based on their claim that, in connection with the 1994 recapitalization
of the Company, the Company allegedly made adjustments to the stock and options
of the officers of the Company and that a provision in the Separation Agreement
entitled the plaintiffs to equivalent adjustments with respect to the stock and
options of the Company held by them. The plaintiffs further allege that the
breach by the Company resulted in a loss to them of stock and options valued at
$2.2 million.
On September 18, 1999 the Company reached an out of court settlement with the
plaintiffs and this lawsuit was dismissed with prejudice by mutual agreement of
the parties. The Company made a cash payment to the plaintiffs during the
quarter ended September 30, 1999 and has no further commitments to plaintiffs as
of that date.
(12) STOCKHOLDERS' EQUITY
(a) GENERAL
The Company has the following authorized capital: 30,500,000 shares of
Common Stock, $0.01 par value, (30,000,000 of which are shares of Class A
Common Stock and 500,000 of which are shares of Class B Common Stock), and
6,000,000 shares of preferred stock, $0.01 par value. Class A Common
stockholders have voting rights. Class A Common Stockholders have the option,
at any time, to convert any or all shares of Class A Common Stock held into
an equal number of shares of Class B Common Stock. The Class B Common Stock
has rights similar to Class A Common Stock, except it is nonvoting. The Class
B Common stockholders have the option to convert any or all shares of Class B
Common Stock held into an equal number of shares of Class A Common Stock, to
the extent such stockholder and its affiliates shall be permitted to own,
control or have the power to vote such Class A Common Stock under any law,
rule or regulation at the time applicable to such stockholder or its
affiliates. All outstanding shares of common stock as of December 1999 and
1998 represent Class A Common Stock.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(b) STOCK OPTION PLANS
On December 7, 1992, the Company adopted the 1993 Nonqualified Stock
Option Plan (the 1993 Plan) under which the Company is authorized to grant
options to purchase shares of Class A Common Stock. Options outstanding under
the 1993 Plan as of December 31, 1999 are exercisable immediately, expire no
later than 10 years from the date of grant and were granted at no less than
the fair market value on the date of grant, as determined by the Board of
Directors. In 1999, 1998 and 1997, the Company had not granted, and does not
intend to grant, any additional options under the 1993 plan.
On November 21, 1994, the Board of Directors approved the 1994 Stock Plan
(the 1994 Plan) under which the Company is authorized to grant incentive stock
options and nonqualified stock options (including warrants) to purchase up to
1,833,333 shares of Class A Common Stock. Incentive stock options granted under
the 1994 Plan must be granted at no less than fair market value of the shares at
the date of grant, expire no later than 10 years from the date of grant and vest
over periods of up to three years. As of December 31, 1999, the Company had
available for issuance stock options to purchase 162,122 shares of Class A
Common Stock pursuant to the 1994 Stock Plan.
On May 1, 1996, the Board of Directors adopted the 1996 Stock Plan under
which the Company is authorized to grant incentive stock options and
nonqualified stock options to purchase shares of Class A Common Stock. Options
granted under this plan are exercisable at such price as shall be determined by
the Board of Directors at the time of grant which, in the case of incentive
stock options, shall be no less than 100% of the fair market value of the shares
on the date of grant and expire no later than 10 years from the date of grant.
In addition, the 1996 Stock Plan provides that options granted thereunder,
subject to future vesting, shall immediately vest upon the occurrence of certain
events, such as the sale of all or substantially all of the assets of the
Company or a change in control of the Company. A total of 775,409 shares of
Class A Common Stock has been reserved for issuance under the 1996 Stock Plan.
As of December 31, 1999, the Company had no stock options available for issuance
to purchase shares of Class A Common Stock pursuant to the 1996 Stock Plan.
On March 10, 1997, the Board of Directors adopted the 1997 Stock Plan
under which the Company is authorized to grant warrants, incentive stock options
and nonqualified stock options to purchase shares of Class A Common Stock.
Options granted under this plan are exercisable at such price as shall be
determined by the Board of Directors at the time of grant which, in the case of
incentive stock options, shall be no less than 100% of the fair market value of
the shares on the date of grant and expire no later than 10 years from the date
of grant. In addition, the 1997 Stock Plan provides that options granted
thereunder, subject to future vesting, shall immediately vest upon the
occurrence of certain events, such as the sale of all or substantially all of
the assets of the Company or a change in control of the Company. A total of
1,391,258 shares of Class A Common Stock has been reserved for issuance under
the 1997 Stock Plan. As of December 31, 1999, the Company had available for
issuance, stock options to purchase 106,550 shares of Class A Common Stock
pursuant to the 1997 Stock Plan.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Stock option activity under all of these plans for the years ended December
31, 1999, 1998 and 1997 is as follows (in thousands, except exercise prices):
<TABLE>
<CAPTION>
NUMBER WEIGHTED
OF EXERCISE AVERAGE
OPTIONS PRICE RANGE EXERCISE PRICE
------- ----------- --------------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1996............................ 1,474 $.90 - $ 84.38 $ 1.81
Exercised............................................... (138) .90 - 1.50 1.43
Canceled................................................ (248) .90 - 4.94 1.50
Granted................................................. 1,163 .90 - 4.94 1.89
--------------- ---------------- ----------------
Outstanding, December 31, 1997............................ 2,251 .90 - 84.38 2.23
Exercised............................................... (499) .90 - 1.50 0.91
Canceled................................................ (426) .90 - 84.38 2.84
Granted................................................. 1,120 1.38 - 2.00 1.75
--------------- ---------------- ----------------
Outstanding, December 31, 1998............................ 2,446 .90 - 84.38 1.98
Exercised............................................... (407) .90 - 2.00 0.99
Canceled................................................ (164) .90 - 84.38 4.26
Granted................................................. 742 1.34 - 2.03 1.64
--------------- ---------------- ----------------
Outstanding, December 31, 1999............................ 2,617 .90 - 84.38 1.89
=============== ================ ================
Exercisable, December 31, 1999............................ 1,176 .90 - 84.38 2.03
=============== ================ ================
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
Weighted Average ------------------- -------------------
Range of Remaining Weighted Weighted
Exercise Contractual Average Average
Prices Life in Years Number Exercise Price Number Exercise Price
------ ------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$ 0.90 -$ 1.37 6.01 614 $ 0.99 521 $ 0.93
1.50 - 3.00 8.53 1,809 $ 1.76 504 $ 1.86
3.90 - 4.95 7.25 186 $ 4.37 143 $ 4.43
11.25 2.93 4 $ 11.25 4 $ 11.25
41.60 - 84.38 0.30 4 $ 82.22 4 $ 82.22
- -------------------------------------------------------------------------------------------------------------
$ 0.90 -$ 84.38 7.82 2,617 $ 1.89 1,176 $ 2.03
=============================================================================================================
(c) WARRANTS
In 1997, the Company issued warrants under the 1994 Plan for the purchase
of 150,000 shares of Class A Common Stock at $ .90 - $4.94 per share, which vest
in annual increments over a three-year period, to several members of the
Company's management team and Board of Directors and an affiliate to the Board
of Directors. The Company is recognizing compensation expense associated with
the warrants over the three year vesting period. Warrant activity for the year
ended December 31, 1999 is as follows:
<CAPTION>
NUMBER OF NUMBER OF
SHARES WARRANTS
STOCK CLASS PURCHASABLE EXERCISABLE EXERCISE PRICE RANGE
----------- ----------- ----------- --------------------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1998................. 512,109 472,107 $.90 - 111.15
Exercised.................................... (89,773)
Canceled..................................... (12,166)
-----------
Outstanding, December 31, 1999................. 410,170 390,170 $.90 - 111.15
============================================================
</TABLE>
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(d) STOCK-BASED COMPENSATION
The Company has computed the pro forma disclosures required under SFAS No. 123
for all 1999, 1998 and 1997 stock options granted to employees as of December
31, 1999 using the Black Scholes option pricing model prescribed by SFAS No.
123.
Assumptions used and the weighted average information are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
Risk-free interest rates............................ 5.64%-6.50% 4.83%-5.64% 6.21%-6.71%
Expected dividend yield............................. -- -- --
Expected lives...................................... 10 years 10 years 10 years
Expected volatility................................. 100% 100% 95%
Weighted average exercise price..................... $1.64 $1.75 $1.89
Weighted average remaining contractual life of
options outstanding 7.82 4.83 4.91
The total value of the options granted to employees during the years ended
December 31, 1999, 1998 and 1997 was computed as $1,110,000 $1,548,000 and
$1,826,000, respectively. Of these amounts, $1,726,000, $1,297,000 and $586,000
would be charged to operations for the years ended December 31, 1999, 1998 and
1997, respectively. The remaining amount of $875,000 would be amortized over the
remaining option vesting periods.
The effect of applying SFAS No 123 would be as follows (in thousands, except per
share data):
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
Net (loss) income as reported......... ($4,042) $ 2,834 ($5,990)
Pro forma net (loss) income........... ($5,768) $ 1,537 ($6,576)
Pro forma basic net (loss) income per
share................................. ($0.79) $ 0.23 ($1.04)
Pro forma diluted net (loss) income per
share................................. ($0.79) $ 0.21 ($1.04)
</TABLE>
(13) EMPLOYEE BENEFIT PLAN
The Company has an employee benefit plan under Section 401(k) of the Internal
Revenue Code. The plan allows employees to make contributions up to a specified
percentage of their compensation. Under the plan, the Company may, but is not
obligated to, match a portion of the employee's contribution up to a defined
maximum. The Company contributed $ 112,000, $126,000 and $121,000 for the years
ended December 31, 1999, 1998, and 1997, respectively.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(14) RELATED PARTY TRANSACTIONS
An employee of a company which is an affiliate of a member of the
Company's Board of Directors (the "Affiliate") rendered financial advisory
services to the Company on an as-needed basis. As compensation for the services
rendered, the Company paid the Affiliate a monthly fee and reimbursed the
affiliate for reasonable expenses incurred by the Affiliate and/or the employee
in connection with the performance of services to the Company. From January 1,
1996 through April 30, 1996, the Company paid the affiliate $10,000 per month
for such services. From May 1, 1996 to August 30, 1997, the affiliate was an
employee of the Company. Effective August 30, 1997, the employee terminated his
employment with the Company.
(15) SEGMENT REPORTING
The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes standards for
reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS No. 131 also
establishes standards for related disclosures about products and services and
geographic areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information is available for
evaluation by the chief operating decision maker, or decision making group, in
making decisions how to allocate resources and assess performance. The Company's
chief decision-maker, as defined under SFAS No. 131, is the Chief Executive
Officer. The Company has determined it has three reportable segments as of
January 1, 1999: (i) a type and technology segment; (ii) an on-demand marketing
segment and (iii) an e-commerce initiative for selling fonts over the Internet.
Prior to January 1, 1999, the Company did not have distinctive reportable
segments for its business and, as a 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 as of December
31, 1999. The Company evaluates performance based on profit or loss from
operations before income taxes, not including non-recurring gains and losses.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following table sets forth the Company's statement of operations by
segment with additional disclosures as required (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
----------------------------
TYPE AND E-COMMERCE ON-DEMAND
TECHNOLOGY MY-FONTS.COM MARKETING COMBINED
---------- ------------ --------- --------
<S> <C> <C> <C> <C>
Revenue
Software licenses $ 5,422 $ -- $ 1,877 $ 7,299
Services 764 -- 858 1,622
-------- -------- -------- --------
Revenue from external customers 6,186 -- 2,735 8,921
Cost of revenue 1,175 -- 286 1,461
-------- -------- -------- --------
Gross profit 5,011 -- 2,449 7,460
-------- -------- -------- --------
Operating expenses:
Selling and marketing 1,881 -- 2,316 4,197
Research and development 1,706 292 3,039 5,037
General and administrative 737 -- 1,092 1,829
-------- -------- -------- --------
Total operating expenses 4,324 292 6,447 11,063
-------- -------- -------- --------
Income (loss) from operations $ 687 $ (292) $ (3,998) (3,603)
======== ======== ======== ========
Non-operating income and expenses not included
in the measure of segment profit or loss:
Gain on investment in Diamondsoft, Inc 18
Interest income, net 533
Provision for income taxes (990)
--------
Consolidated net loss $ (4,042)
========
SUPPLEMENTAL SEGMENT DISCLOSURES:
Depreciation and amortization expense $ 620 $ 4 $ 378 $ 1,002
======== ======== ======== ========
Expenditures for long-lived assets $ 197 $ 57 $ 259 $ 513
======== ======== ======== ========
The following table sets forth the Company's supplemental balance sheet
information by segment:
<CAPTION>
(IN THOUSANDS) AS OF DECEMBER 31, 1999
-----------------------
TYPE AND E-COMMERCE ON-DEMAND
TECHNOLOGY MY-FONTS.COM MARKETING COMBINED
---------- ------------ --------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets $ 10,357 $ -- $ 1,165 $ 11,522
Property and equipment, net 482 30 251 763
Receivable from subsidiary 6,417 -- -- 6,417
Other assets 1,231 24 1,063 2,318
============== ============ ========= ---------
Total assets 18,487 54 2,479 21,020
============== ============ ========= ---------
Consolidating elimination entry- inter-company receivables (6,417)
---------
Total consolidated assets 14,603
=========
CONTINUED
</TABLE>
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
(IN THOUSANDS) AS OF DECEMBER 31, 1999
-----------------------
TYPE AND E-COMMERCE ON-DEMAND
TECHNOLOGY MY-FONTS.COM MARKETING COMBINED
---------- ------------ --------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C>
Current liabilities 1,450 11 393 1,854
Long-term liabilities 5 -- 2 7
Payable to parent company -- 335 6,082 6,417
-------------- --------------- -------------- --------------
Total liabilities 1,455 346 6,477 8,278
Stockholders' equity: 17,032 (292) (3,998) 12,742
-------------- --------------- -------------- --------------
Total liabilities and stockholders'
equity 18,487 54 2,479 21,020
============== =============== ============== --------------
Consolidating elimination entry- inter-company receivables (6,417)
--------------
Total Consolidated liabilities and stockholder's equity 14,603
==============
(16) 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 Note 1(j) and
geographical areas. The Company attributes revenues to different geographical
areas on the basis of the location of the customer. All of the Company's product
sales for the years ended December 31, 1999, 1998 and 1997 were shipped from its
headquarters located in the United States or its office located in Cheltenham,
England. Revenues by geographic area are as follows (in thousands):
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
-------- --------- --------
<S> <C> <C> <C>
Revenue:
United States $ 5,681 $ 4,693 $ 7,323
Canada 959 582 1,184
Japan 864 1,034 2,336
England 497 708 1,011
Other ( Countries less than 5% individually, by region)
Europe, excluding England 717 1,507 931
Asia, excluding Japan 109 251 32
Other 94 95 285
-------- --------- --------
Total revenue $ 8,921 $ 8,870 $ 13,102
======== ========= ========
Long-lived tangible assets by geographic area are as follows (in thousands):
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
United States $ 748
England 15
------------
Total $ 763
============
</TABLE>
F-24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
OF FINANCIAL STATEMENT SCHEDULE
To Bitstream Inc.:
We have audited, in accordance with auditing standards generally
accepted in the United States, the consolidated financial statements of
Bitstream Inc. and subsidiaries included in this Form 10-K and have issued our
report thereon dated February 9, 2000. Our audits were made for the purpose
of forming an opinion on the basic financial statements taken as a whole. The
schedule listed in Item 14 of this Form 10-K is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and regulations and is not part of
the basic financial statements. The schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements
and in our opinion, fairly states, in all material respects, the financial
data required to be set forth therein in relation to the basic financial
statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 9, 2000
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BITSTREAM INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ---------------------------------- ---------------- -------------------------------------- ----------------- -----------------
COL. A COL. B COL. C COL. D COL. E
- ---------------------------------- ---------------- -------------------------------------- ----------------- -----------------
Additions
--------------------------------------
Balance at Charged to Charged to
Beginning Costs and Other Accounts- Deductions- Balance at
Accounts receivable reserves: of Year Expenses Describe Describe End of Year
- ---------------------------------- ---------------- -------------------------------------- ----------------- -----------------
<S> <C> <C> <C> <C>
(1)
December 31, 1999 $ 1,233 $ 99 $ 290 $ 1,042
(1)
December 31, 1998 $ 461 $ 928 $ 156 $ 1,233
(1)
December 31, 1997 $ 318 $ 141 $ 271 $ 461
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
Archetype Inc., a Delaware corporation
Bitstream World Trade, Inc., a Delaware corporation
Bitstream, B.V., a Dutch corporation
Bitstream S.A.R.L., a French corporation
Bitstream B.V. France, a French corporation
Mainstream Software Solutions Ltd., an English corporation
Myfonts.com, Inc., a Delaware corporation
Pageflex Inc., a Delaware corporation
Type Solutions, Inc., a New Hampshire corporation
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated February 9, 2000, in this Form 10-K, included into the
Company's previously filed Registration Statement File No. 333-36789 on Form
S-8.
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE TWELVE
MONTHS ENDED 12-31-99 AND IS QUALIFIED IN ITS ENTIRETY BE REFERENCE TO THE
FINANCIAL STATEMENTS AND NOTES THERETO CONTAINED IN THE COMPANY'S ANNUAL REPORT
ON FORM 10-K.
</LEGEND>
<CIK> 0000818813
<NAME> BITSTREAM INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 9,037
<SECURITIES> 0
<RECEIVABLES> 3,164
<ALLOWANCES> 980
<INVENTORY> 0
<CURRENT-ASSETS> 11,522
<PP&E> 3,294
<DEPRECIATION> 2,531
<TOTAL-ASSETS> 14,603
<CURRENT-LIABILITIES> 1,854
<BONDS> 0
0
0
<COMMON> 75
<OTHER-SE> 12,667
<TOTAL-LIABILITY-AND-EQUITY> 14,603
<SALES> 8,921
<TOTAL-REVENUES> 8,921
<CGS> 1,461
<TOTAL-COSTS> 1,461
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,052)
<INCOME-TAX> 990
<INCOME-CONTINUING> (4,042)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,042)
<EPS-BASIC> (0.56)
<EPS-DILUTED> (0.56)
</TABLE>
