UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
COMMISSION FILE NUMBER: 0-21541
BITSTREAM INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2744890
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
215 FIRST STREET
CAMBRIDGE, MASSACHUSETTS 02142
------------------------ -----
(Address of principal executive offices) (Zip Code)
(617) 497-6222
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
On May 11, 2001 there were 8,020,199 shares of Class A Common Stock, par
value $0.01 per share, and no shares of Class B Common Stock, par value $0.01
per share, outstanding.
BITSTREAM INC. AND SUBSIDIARIES
INDEX
PAGE
NUMBERS
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2001 AND
DECEMBER 31, 2000 .......................................................................... 2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 2001 AND 2000 ....................................................... 3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE
MONTHS ENDED MARCH 31, 2001 AND 2000........................................................ 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.............................................. 5-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................................... 10-16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ..................................... 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................................................... 18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS....................................................... 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................................................. 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................. 18
ITEM 5. OTHER INFORMATION............................................................................... 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................ 19
SIGNATURES.............................................................................................. 19
1
ITEM 1. FINANCIAL STATEMENTS
BITSTREAM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2001 2000
---- ----
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents.................................................... $ 6,924 $ 7,149
Accounts receivable, net of allowance of $557 and $663 at
March 31, 2001 and December 31, 2000, respectively....................... 1,213 2,043
Prepaid expenses and other current assets.................................... 204 198
--------------- ---------------
Total current assets.................................................... 8,341 9,390
--------------- ---------------
Property and equipment, net.................................................... 604 636
--------------- ---------------
Other assets:
Restricted cash 300 300
Goodwill, net of amortization of $1,267 and $1,149 at March
31, 2001 and December 31, 2000, respectively............................. 1,078 1,196
Investment in DiamondSoft, Inc. ............................................ 524 449
Other....................................................................... 175 136
--------------- ---------------
Total other assets..................................................... 2,077 2,081
--------------- ---------------
Total assets........................................................... $ 11,022 $ 12,107
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................ $ 237 $ 261
Accrued expenses............................................................ 1,314 1,287
Deferred revenue............................................................ 558 471
--------------- ---------------
Total current liabilities.............................................. 2,109 2,019
--------------- ---------------
Long-term deferred revenue.................................................... 19 39
--------------- ---------------
Total liabilities 2,128 2,058
--------------- ---------------
Stockholders' equity : Common stock, $.01 par value.
Authorized - 30,500 shares.
Issued 8,146 and 7,903 at March 31, 2001 and
December 31, 2000, respectively......................................... 81 79
Additional paid-in capital.................................................. 32,061 31,960
Accumulated deficit......................................................... (22,888) (21,630)
Treasury stock, at cost; 126 shares at March 31, 2001 and
December 31, 2000........................................................ (360) (360)
--------------- ---------------
Total stockholders' equity............................................. 8,894 10,049
--------------- ---------------
Total liabilities and stockholders' equity............................. $ 11,022 $ 12,107
=============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
2
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
BITSTREAM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE THREE MONTHS
--------------------
ENDED MARCH 31,
---------------
2001 2000
---- ----
Revenues:
Software licenses......................................... $ 1,296 $ 1,743
Services ................................................. 332 439
---------- -----------
Total revenues....................................... 1,628 2,182
Cost of revenues:
Software licenses......................................... 200 145
Services ................................................. 84 257
---------- -----------
Total cost of revenues............................... 284 402
---------- -----------
Gross profit................................................. 1,344 1,780
---------- -----------
Operating expenses:
Selling and marketing..................................... 825 980
Research and development.................................. 1,328 1,288
General and administrative................................ 412 599
---------- -----------
Total operating expenses.............................. 2,565 2,867
---------- -----------
Loss from operations................................ (1,221) (1,087)
Other income:
(Loss) income on investment in DiamondSoft, Inc. (75) 8
Interest income, net...................................... 87 115
---------- -----------
Loss before provision for income taxes . (1,209) (964)
---------- -----------
Provision for income taxes................................... 49 20
---------- -----------
Net loss.............................................. $ (1,258) $ (984)
=========== ===========
Basic and diluted net loss per share $ (0.16) $ (0.13)
=========== ===========
Basic and diluted weighted average shares outstanding 7,949 7,590
=========== ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
3
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
BITSTREAM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
CASH FLOWS FROM OPERATING ACTIVITIES: 2001 2000
-------- --------
Net loss ................................................................... $ (1,258) $ (984)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation ........................................................... 94 113
Amortization............................................................ 126 130
Compensation on grant of stock options.................................. (1) 25
Loss (income) on investment in DiamondSoft, Inc. ....................... 75 (8)
Changes in assets and liabilities--
Accounts receivable................................................... 830 479
Long-term and extended plan accounts receivable....................... --- (9)
Prepaid expenses and other current assets............................. (6) 36
Accounts payable...................................................... (24) 94
Accrued expenses...................................................... 27 89
Deferred revenue...................................................... 87 (157)
Long-term deferred revenue............................................ (20) 42
---------- ---------
Net cash used in operating activities........................... (70) (150)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................................... (62) (113)
Investment in DiamondSoft................................................... (150) ---
Change in other assets...................................................... (47) 25
---------- ---------
Net cash used in investing activities.. (259) (88)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options/warrants........................ 104 404
---------- ---------
Net cash provided by financing activities....................... 104 404
---------- ---------
Net (decrease) increase in cash and cash equivalents.......................... (225) 166
Cash and cash equivalents, beginning of period................................ 7,149 9,037
---------- ---------
Cash and cash equivalents, end of period...................................... $ 6,924 $ 9,203
========== =========
Cash paid for Interest........................................................ $ 1 $ 1
Cash paid for Income Taxes.................................................... $ 78 $ 21
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
4
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements of Bitstream Inc. (the "Company" or
"Bitstream") presented herein, without audit, have been prepared pursuant to the
rules of the Securities and Exchange Commission (the "SEC") for quarterly
reports on Form 10-Q and do not include all of the information and footnote
disclosures required by generally accepted accounting principles. The balance
sheet information at December 31, 2000 has been derived from the Company's
audited consolidated financial statements. These statements should be read in
conjunction with the consolidated financial statements and notes thereto for the
period ended December 31, 2000 included in the Company's Annual Report on Form
10-K, which was filed by the Company with the SEC on April 2, 2001.
The balance sheet as of March 31, 2001, the statements of operations for the
three months ended March 31, 2001 and 2000, the statements of cash flows for the
three months ended March 31, 2001 and 2000, and the notes to each thereof are
unaudited, but in the opinion of management include all adjustments necessary
for a fair presentation of the consolidated financial position, results of
operations, and cash flows of the Company and its subsidiaries for these interim
periods.
The results of operations for the three months ended March 31, 2001 may not
necessarily be indicative of the results to be expected for any future interim
period or for the year ending December 31, 2001.
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); 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.
RECLASSIFICATIONS
Certain prior year account balances have been reclassified to be consistent
with the current year's presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2000, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL
ASSETS AND EXTINGUISHMENTS OF LIABILITIES. SFAS No. 140 provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. Under SFAS No. 140, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets
when control has been surrendered, and derecognizes liabilities when
extinguished. SFAS No. 140 also provides standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS No. 140 is effective for certain transactions occurring
after March 31,
5
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
2001 and certain disclosures for the year ending December 31, 2001. The Company
does not believe that SFAS No. 140 will have a material impact on the Company's
financial position or results of operations.
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 and SFAS No. 138, is effective for
fiscal years ending December 31, 2001. The Company has adopted SFAS No. 133 as
amended, which did not have a material impact on the Company's financial
position or results of operations.
(2) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Property and equipment consists of the following (in thousands):
MARCH 31, DECEMBER 31,
2001 2000
---- ----
Office and computer equipment.................................. $ 2,287 $ 2,069
Purchased software............................................. 348 347
Equipment under capital lease.................................. --- 167
Furniture and fixtures......................................... 372 366
Leasehold improvements......................................... 659 659
--------- ---------
3,666 3,608
Less-- Accumulated depreciation and amortization 3,062 2,972
--------- ---------
Property and equipment, net.................................... $ 604 $ 636
========= =========
(3) CONCENTRATION OF CREDIT RISK
SFAS No. 105. DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATION OF CREDIT
RISK, requires disclosure of any significant off-balance sheet and credit risk
concentrations. Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash equivalents and
trade accounts receivable. The Company places a majority of its cash investments
in one financial institution. 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 March 31,
2001, no customers
6
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
accounted for 10% or more of the Company's accounts receivable. At December 31,
2000, one customer accounted for 18% of the Company's accounts receivable. The
Company does not have any off-balance sheet risks as of March 31, 2001.
For the three months ended March 31, 2001, no customers accounted for 10%
or more of the Company's revenue. For the three months ended March 31, 2000, one
customer accounted for 16% of the Company's revenue. Furthermore, for the three
months ended March 31, 2001, one customer of the Company's type and technology
segment accounted for 12% of the revenue for that segment, one customer of the
Pageflex segment accounted for 22% of that segment's revenue, and no customers
accounted for 10% or more of the MyFonts.com segment's revenue. For the three
months ended March 31, 2000, two customers of the Company's type and technology
segment accounted for 21% and 12% of the revenue for that segment, three
customers of the Pageflex segment accounted for 26%, 25% and 22% of that
segment's revenue, and no customers accounted for 10% or more of the MyFonts.com
segment's revenue.
(4) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
MARCH 31, DECEMBER 31,
2001 2000
---- ----
Accrued royalties...................................................... $276 $ 210
Payroll and other compensation......................................... 648 648
Accrued professional and consulting services........................... 173 169
Other.................................................................. 217 260
------- -------
Total............................................................. $ 1,314 $ 1,287
======= =======
(5) LOSS PER SHARE (IN THOUSANDS)
In accordance with SFAS No. 128, EARNINGS PER SHARE, basic earnings per
share was determined by dividing net loss by the weighted average shares of
common stock outstanding during the applicable period. Diluted earnings per
share reflect 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. Thus potential common shares were not included for the
three months ended March 31, 2001 or 2000. Had the numerator been a profit, the
potential common shares would have increased the weighted average shares
outstanding by 891,355 and 2,415,343 shares for the three months ended March 31,
2001 and 2000, respectively. In addition, there were warrants and options to
purchase 229,346 and 76,517 shares as of March 31, 2001 and 2000, 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.
7
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(6) 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 March
31, 2001: (1) its type and technology segment; (2) its Pageflex segment and (3)
its MyFonts.com segment. 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.
MyFont.com's revenues include revenue from products it purchases from the type
and technology segment. The inter-segment revenues created by these transactions
have been eliminated from MyFonts.com's revenue below, as well as from the
Company's consolidated financial statements. The Company evaluates performance
based on profit or loss from operations before income taxes, not including
non-recurring gains and losses.
THREE MONTHS ENDED
(IN THOUSANDS) MARCH 31,
----------------------------------
REVENUE (FROM EXTERNAL CUSTOMERS): 2001 2000
---- ----
Type and technology $ 1,119 $ 1,708
MyFonts.com 80 ---
Pageflex 429 474
------------ ------------
Consolidated revenue $ 1,628 $ 2,182
============ =============
SEGMENT INCOME (LOSS) FROM OPERATIONS:
Type and technology $ (147) $ 290
MyFonts.com (151) (109)
Pageflex (923) (1,268)
------------- ------------
Consolidated loss from operations $ (1,221) $ (1,087)
============= =============
8
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(7) GEOGRAPHICAL REPORTING
SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION also requires disclosures of certain "Enterprise-wide Information"
including the information about major customers included in Note 3 and
geographical areas. The Company attributes revenues to different geographical
areas on the basis of the location of the customer. All of the Company's product
sales for the three months ended March 31, 2001 and 2000 were shipped from its
headquarters located in the United States or its office located in Cheltenham,
England. Revenues by geographic area are as follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
------------------------------------
Revenue: 2001 2000
------------ -----------
United States $ 789 $ 1,638
Japan 343 167
Finland 83 ---
Other (countries less than 5% individually, by region):
Europe 308 280
Asia, excluding Japan 45 33
Other 60 64
---------- ---------
Total revenue $ 1,628 $ 2,182
=========== ==========
Long-lived tangible assets by geographic area are as follows (in thousands):
MARCH 31, DECEMBER 31,
2001 2000
---- ----
United States $ 590 $ 628
England 14 8
---------- ---------
Total $ 604 $ 636
========== =========
9
PART I -- FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto.
OVERVIEW
Bitstream Inc. ("Bitstream" or the "Company"), headquartered in Cambridge,
Massachusetts, is composed of three separate and distinct businesses: (1) type
and technology in which Bitstream develops and licenses font technology and
custom font designs to manufacturers of Internet appliances, wireless devices,
set-top boxes, embedded systems, printers, and personal digital assistants; (2)
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.
("MyFonts.com"); and (3) Pageflex, formerly referred to as the Company's
on-demand marketing segment, in which the Company's wholly-owned subsidiary
Pageflex, Inc. ("Pageflex") develops, markets and supports on-demand document
composition solutions which automatically produce customized one-to-one
marketing collateral such as datasheets and brochures directly from XML text and
graphics data stored in web servers and/or databases.
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, this Quarterly
Report on Form 10-Q may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Investors are cautioned that
forward-looking statements are inherently uncertain. Actual performance and
results of operations may differ materially from those projected or suggested in
the forward-looking statements due to certain risks and uncertainties,
including, without limitation, market acceptance of the Company's products,
competition and the timely introduction of new products. Additional information
concerning certain risks and uncertainties that would cause actual results to
differ materially from those projected or suggested in the forward-looking
statements is contained in the Company's filings with the Securities and
Exchange Commission, including those risks and uncertainties discussed in the
Company's final Prospectus, dated October 30, 1996, included as part of the
Company's Registration Statement on Form S-1 (333-11519), in the section
entitled "Risk Factors", the Company's 2000 Annual Report on Form 10-K filed on
April 2, 2001, and Quarterly Reports to be filed in 2001. 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.
10
PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PERCENT AMOUNTS)
CONSOLIDATED REVENUE:
THREE MONTHS ENDED MARCH 31,
% of % of CHANGE
2001 REVENUE 2000 REVENUE DOLLARS PERCENT
---- ------- ---- ------- ----------- -------
Revenue
Software licenses $ 1,296 79.6% $ 1,743 79.9% $ (447) (25.7)%
Services 332 20.4% 439 20.1% (107) (24.4)%
------- ------ ------- ------ --------
Total revenue $ 1,628 100.0% $ 2,182 100.0% $ (554) (25.4)%
======= ====== ======= ====== ========
The decrease in revenue for the three months ended March 31, 2001 as
compared to the three months ended March 31, 2000 was attributable to decreases
in revenue for the type and technology segment of $589 and the Pageflex segment
of $45. These decreases were partially offset by an increase in Myfonts.com
revenues of $80. These segments are discussed in more detail below.
TYPE AND TECHNOLOGY REVENUE:
THREE MONTHS ENDED MARCH 31,
% of % of CHANGE
2001 REVENUE 2000 REVENUE DOLLARS PERCENT
---- ------- ---- ------- ----------- -------------
Revenue
Software licenses $ 967 86.4% $1,555 91.0% $ (588) (37.8)%
Services 152 13.6% 153 9.0% (1) (0.7)%
------- ------ ------ ------ -------
Type and technology revenue $1,119 100.0% $1,708 100.0% $ (589) (34.5)%
======= ====== ====== ====== =======
Percentage of total revenue 68.7% 78.3%
Type and technology OEM and retail license revenues decreased $437 or 37%
and $151 or 40% from $1,180 and $375 for the three months ended March 31, 2000
to $743 and $224 for the three months ended March 31, 2001, respectively. The
decrease in type and technology license revenue for the three months ended March
31, 2001 versus the three months ended March 31, 2000 was primarily due to the
softening of the market for high technology products in general and increased
concern over future economic conditions.
MYFONTS.COM REVENUE:
THREE MONTHS ENDED MARCH 31,
% of % of CHANGE
2001 REVENUE 2000 REVENUE DOLLARS PERCENT
---- ------- ---- ------- ----------- -------------
Software licenses $ 80 100.0% $ - - $ 80 NA
Services - - - - - NA
---- ----- ---- ----- ----
MyFonts.com revenue $ 80 100.0% $ - - $ 80 NA
==== ===== ==== ===== ====
Percentage of total revenue 5.0%
11
PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
MyFonts.com began selling through its web site at the end of the first
quarter of 2000. Revenues attributable to this segment after the inter-company
elimination of royalties due on the resale of type and technology products were
$80 for the three months ended March 31, 2001. Revenue from the Company's
MyFonts.com segment, prior to the elimination of royalties described above,
increased by 61% or $39 to $103 as compared to $64 for the three months ended
December 31, 2000, and by 7% or $7 as compared to $96 for the year ended
December 31, 2000.
PAGEFLEX REVENUE
THREE MONTHS ENDED MARCH 31,
% of % of CHANGE
2001 REVENUE 2000 REVENUE DOLLARS PERCENT
---- ------- ---- ------- ----------- -------------
Revenue
Software licenses $249 58.0% $188 39.7% $ 61 32.5%
Services 180 42.0% 286 60.3% (106) (37.1)%
---- ----- ---- ----- -----
Pageflex Revenue $429 100.0% $474 100.0% $ (45) (9.5)%
==== ===== ==== ===== =====
Percentage of total revenue 26.3% 21.7%
Pageflex software license revenue increased $61 primarily due to an
increase in the number of new subscription-based customers for its Mpower
product. Revenues from services decreased as a result of a decreased emphasis on
consulting, and specifically due to the completion of a non-recurring consulting
project during the three months ended March 31, 2000 in connection with a
license agreement entered into during 1999.
CONSOLIDATED GROSS PROFIT:
THREE MONTHS ENDED MARCH 31,
Change
2001 2000 Dollars Percent
----------- ----------- ----------------- -------------
Gross profit $ 1,344 $ 1,780 $ (436) (24.5)%
======== ======= ======== ======
Percentage of total revenue 82.6% 81.6%
The decrease in the gross profit for the three months ended March 31, 2001
as compared to the three months ended March 31, 2000 is attributable to the
decreases in revenues discussed above totaling $554 partially offset by a
decrease in cost of revenues totaling $118. Type and technology's cost of
revenues decreased $77 or 32.4% primarily because of the elimination of outside
subcontractors whose services were utilized during 2000 and a reduction in time
spent by type engineers on customer specific projects. Pageflex's cost of
revenues decreased $104 or 63.4% to $60 for the three months ended March 31,
2001 from $164 for the three months ended March 31, 2000, as a result of a
decreased emphasis on consulting. These decreases were partially offset by an
increase in MyFonts.com cost of revenues related to royalties paid to outside
font foundries for the sale of their fonts, which began at the end of the first
quarter of 2000.
12
PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Cost of revenue is composed of direct costs of licenses, as well as direct
costs of product sales to end-users. Included in the cost of licenses 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:
THREE MONTHS ENDED MARCH 31,
Change
2001 2000 Dollars Percent
---------- ------------ ----------------- --------------
Selling and marketing $ 825 $ 980 $ (155) (15.8)%
===== ===== ======== ======
Percentage of total revenue 50.7% 44.9%
Selling and marketing costs associated with the type and technology
business segment decreased by $43 or 10.3% to $374 for the three months ended
March 31, 2001 from $417 for the three months ended March 31, 2000. Selling and
marketing costs associated with the Pageflex business segment decreased by $121
or 21.5% to $442 for the three months ended March 31, 2001 from $563 for the
three months ended March 31, 2000. These decreases were primarily the result of
decreased trade show expenses and print and production expenses of $83 and $53,
respectively. These reductions resulted from management's decision to reduce our
trade show presence and from non-recurring costs related to new product
introductions and branding which took place during 1999 and on a limited basis
during the first two quarters of 2000. Selling and Marketing expenses for
MyFonts.com increased $9 to $9, as selling and marketing expenses for this
segment did not commence until the end of 2000.
CONSOLIDATED RESEARCH AND DEVELOPMENT ("R&D"):
THREE MONTHS ENDED MARCH 31,
Change
2001 2000 Dollars Percent
----------- ----------- ----------------- -------------
Research and development $ 1,328 $ 1,288 $ 40 3.1%
======= ======= ===== ===
Percentage of total revenue 81.6% 59.0%
Research and development expenses increased slightly in absolute dollars
for the three months ended March 31, 2001 as compared to the three months ended
March 31, 2000. The increase as a percentage of revenue was caused by the
decrease in revenue discussed above. MyFonts.com R&D expenses increased $35 or
32.4% from $108 for the three months ended March 31, 2000 to $143 for the three
months ended March 31, 2001 primarily because of the expenses associated with
the addition of one software engineer. R&D costs associated with the type and
technology segment increased $43 or 9.7% from $443 for the three months ended
March 31, 2000 to $486 for the three months ended March 31, 2001 primarily
because of a reduction in the amount of engineering time spent on customer
specific projects which were included in cost of revenues. These increases were
partially offset by a decrease in Pageflex R&D expenses of $38 or 5.2% from $737
for the three months ended March 31, 2000 to $699 for the three months ended
March 31, 2001.
13
PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED GENERAL AND ADMINISTRATIVE ("G&A"):
THREE MONTHS ENDED MARCH 31,
Change
2001 2000 Dollars Percent
----------- ----------- ----------------- -------------
General and administrative $ 412 $ 599 $ (187) (31.2)%
====== ====== ======= ======
Percentage of total revenue 25.3% 27.5%
G&A costs associated with the type and technology segments decreased $75 or
23.4% from $320 for the three months ended March 31, 2000 to $245 for the three
months ended March 31, 2001. G&A costs associated with the Pageflex segment
decreased by $127 or 45.7% from $278 for the three months ended March 31, 2000
to $151 for the three months ended March 31, 2001. G&A costs associated with the
MyFonts.com segment increased $15 from $1 for the three months ended March 31,
2000 to $16 for the three months ended March 31, 2001. The decreases in both the
type and technology and Pageflex segments were due to decreases in bad debt
reserves of $293 during the three months ended March 31, 2001 as compared to the
three months ended March 31, 2000 partially offset by increases in certain
expenses including professional services and facilities related costs of $50 and
$30, respectively.
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.
(LOSS) INCOME ON INVESTMENT IN DIAMONDSOFT, INC.:
The Company made a $500 equity investment in DiamondSoft, Inc. in March of
1998 and made additional investments totaling $150 during the three months ended
March 31, 2001. As of March 31, 2001 the Company's ownership percentage in
DiamondSoft, Inc. is 25.6%. 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 recognizes its
share of DiamondSoft's income or loss during each quarter and recorded a loss of
$(75) and income of $8 for the three months ended March 31, 2001 and 2000,
respectively.
INTEREST INCOME, NET:
Interest income consists primarily of interest income earned on the Company's
cash equivalents.
PROVISION FOR INCOME TAXES:
The Company's income tax expense for the three months ended March 31, 2001
and March 31, 2000 was $49 and $20, respectively. All of these income taxes
represent foreign income taxes.
14
PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (IN THOUSANDS)
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 March 31, 2001, the Company had net working
capital of $6,232 versus $7,371 at December 31, 2000.
The Company's operating activities used cash of approximately $70 during
the three months ended March 31, 2001 as compared to $150 during the three
months ended March 31, 2000. The cash used during the three months ended March
31, 2001 was primarily due to losses in all three business segments offset by
the collection of $830 in receivables during the quarter. The cash used during
the three months ended March 31, 2000 was primarily due to the net losses from
the Pageflex and MyFonts.com businesses, partially offset by the income from the
type and technology business and the collection of $479 in receivables during
that quarter. The net loss adjusted for non-cash expenses resulted in a use of
$964 and $724 in cash during the three months ended March 31, 2001 and March 31,
2000, respectively.
During the year ended December 31, 2000 the Company deposited $300 into a
money market account at Wells Fargo Bank, to secure a $300 line of credit
granted by the bank to DiamondSoft. This cash is presented on the Company's
consolidated balance sheet as restricted cash.
The Company's investing activities used cash of approximately $259 during
the three months ended March 31, 2001 as compared to using $88 during the three
months ended March 31, 2000. Investing for the three months ended March 31, 2001
primarily consisted of the purchase of property and equipment of $62 and an
additional investment in DiamondSoft, Inc. of $150. For the three months ended
March 31, 2000 investing activities consisted primarily of the purchase of
property and equipment of $113.
The Company's financing activities provided cash of $104 and $404 during
the three months ended March 31, 2001 and 2000, respectively, from the exercise
of stock options.
The Company believes its current cash and cash equivalent balances will be
sufficient to meet the Company's operating and capital requirements for at least
the next 12 months. There can be no assurance, however, that the Company will
not require additional financing in the future. If the Company were required to
obtain additional financing in the future, there can be no assurance that
sources of capital will be available on terms favorable to the Company, if at
all. As of March 31, 2001 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 shares of its Class A Common Stock. Net proceeds from the IPO were
approximately $12,200, of which approximately $1,500 was used to repay
outstanding indebtedness.
15
PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES. SFAS No. 140 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. Under SFAS No. 140, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. SFAS No. 140 also provides
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. SFAS No. 140 is effective for certain
transactions occurring after March 31, 2001 and certain disclosures for the year
ending December 31, 2001. The Company does not believe that SFAS No. 140 will
have a material impact on the Company's financial position or results of
operations.
On February 14, 2001, the FASB issued a limited revision of its Exposure
Draft, "Business Combinations and Intangible Assets" that establishes a new
standard for accounting for goodwill acquired in a business combination. It
would continue to require recognition of goodwill as an asset but would not
permit amortization of goodwill as currently required by APB Opinion No. 17,
INTANGIBLE ASSETS. Under this proposed statement, goodwill would be separately
tested for impairment using a fair-value-based approach when an event occurs
indicating the potential for impairment. Any required goodwill impairment
charges would be presented as a separate line item within the operating section
of the income statement. This requirement would apply to previously recorded
goodwill as well as goodwill arising from acquisitions completed after the
application of the new standard. This standard has not yet been adopted and the
Company has not evaluated whether or not it would have a material impact on the
Company's financial position or results of operations as proposed.
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 and SFAS No. 138, is effective for
fiscal years ending December 31, 2001. The Company has adopted SFAS No. 133 as
amended, which did not have a material impact on the Company's financial
position or results of operations.
16
PART 1, ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS AND DERIVATIVE
COMMODITY INSTRUMENTS.
As of March 31, 2001, the Company did not participate in any
derivative financial instruments or other financial and commodity instruments
for which fair value disclosure would be required under SFAS No. 107. All of the
Company's investments are short-term, investment-grade commercial paper, and
money market accounts that are carried on the Company's books at amortized cost,
which approximates fair market value. Accordingly, the Company has no
quantitative information concerning the market risk of participating in such
investments.
PRIMARY MARKET RISK EXPOSURES
The Company's primary market risk exposures are in the areas of interest
rate risk and foreign currency exchange rate risk. The Company's investment
portfolio of cash equivalent and short-term investments is subject to interest
rate fluctuations, but the Company believes this risk is immaterial due to the
short-term nature of these investments. The Company's exposure to currency
exchange rate fluctuations has been and is expected to continue to be modest due
to the fact that the operations of its international subsidiaries are almost
exclusively conducted in their respective local currencies. International
subsidiary operating results are translated into U.S. dollars and consolidated
for reporting purposes. The impact of currency exchange rate movements on
inter-company transactions was immaterial for the three months ended March 31,
2001. Currently the Company does not engage in foreign currency hedging
activities.
17
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Instruments defining the rights of the holders of any class of registered
securities of the Company have not been materially modified during the
three months ended March 31, 2001.
(b) Rights evidenced by any class of registered securities of the Company have
not been materially limited or qualified by the issuance or modification of
any other class of securities during the three months ended March 31, 2001.
(c) There were no unregistered securities sold by the Company during the three
months ended March 31, 2001.
(d) Use of Proceeds
As of March 31, 2001, the approximately $12,200,000 of 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: (1)
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.; (2) approximately
$6,041,000 for the acquisitions of Mainstream Software Solutions, Ltd.,
Archetype, Inc., Type Solutions, Inc., and certain assets of Alaras Corporation;
(3) 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; (4)
approximately $1,514,000 for royalty payments to others; (5) $650,000 for the
investment in DiamondSoft, Inc.; and (6) approximately $1,643,000 for the
purchase and installation of equipment. The remaining net proceeds from the IPO
are invested in short-term, interest-bearing, investment-grade securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Not applicable.
18
PART II -- OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended March
31, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BITSTREAM INC.
--------------
(Registrant)
SIGNATURE TITLE DATE
/s/ Anna M. Chagnon President, Chief Operating Officer, Chief May 11, 2001
------------------- Financial Officer and General Counsel (Principal
Anna M. Chagnon Financial Officer)
/s/ James P. Dore
----------------- Corporate Controller (Principal Accounting May 11, 2001
James P. Dore Officer)
19