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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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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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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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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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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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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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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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.
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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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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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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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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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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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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
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.
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.
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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.
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.
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.
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.
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.
PART I, CONTINUED ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation.
ITEM 4.
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.
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.
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
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.
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.
PART II, ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA, CONTINUED
SELECTED CONSOLIDATED FINANCIAL DATA
PART II, ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA, CONTINUED
SELECTED CONSOLIDATED BALANCE SHEET DATA
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(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.
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.
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.
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:
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS)
CONSOLIDATED REVENUE:
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.
PART II, ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
TYPE AND TECHNOLOGY REVENUE:
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:
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:
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
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:
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"):
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.
PART II, ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
CONSOLIDATED GENERAL AND ADMINISTRATIVE ("G&A"):
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
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:
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:
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:
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"):
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"):
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.
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.
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.
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.
PART II, CONTINUED
ITEM 7A.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The index to Financial Statements appears on page, the Independent Auditors' Report appears on page, and the Financial Statements and Notes to Financial Statements appear on pages to.
ITEM 9.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
PART III, ITEM 10.
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.
PART III, ITEM 11. EXECUTIVE COMPENSATION, CONTINUED
(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
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.
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.
(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.
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.
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.
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.
* 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.
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.
PART III , CONTINUED ITEM 13.
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.
PART IV
ITEM 14.
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).
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).
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).
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
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.
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
BITSTREAM INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
BITSTREAM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The accompanying notes are an integral part of these consolidated financial statements.
BITSTREAM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
BITSTREAM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
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.
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.
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):
Depreciation is provided on a straight-line basis over the estimated useful lives of the related assets as follows:
(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.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(k) GOODWILL
Goodwill is stated at cost, less accumulated amortization, and consists of the following (in thousands):
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):
(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.
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:
* 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.
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):
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.
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):
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):
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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
THE FOLLOWING IS A SUMMARY OF THE COMPONENTS OF THE PROVISION FOR INCOME TAXES (IN THOUSANDS):
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
(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.
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):
(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.
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.
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):
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:
(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.
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.
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):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BITSTREAM INC. AND SUBSIDIARIES
(1) Uncollectible accounts written off, net of recoveries.