ITEM 1. BUSINESS
GENERAL
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 information 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, in which the Company’s wholly-owned subsidiary Pageflex, Inc.
(“Pageflex”) develops, markets and supports on-demand document composition
solutions that automatically produce customized one-to-one marketing collateral
such as data sheets and brochures directly from XML text and graphics data
stored in Web servers and/or databases.
Bitstream
was founded in 1981 as the first digital typeface supplier to computer hardware
and software developers. 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, applications, network servers, computer printers, set-top boxes,
personal digital assistants (PDAs), and other embedded systems and information
appliances. More recently, the Company
has focused its product development and marketing efforts on technology
solutions that address the font-related browsing issues of small, embedded
systems and information appliances, and Linux operating systems and
applications. These include the development of extremely compact fonts for
large Asian language character sets, including Traditional Chinese, Simplified
Chinese, Japanese, and Korean. The
Company’s library of typeface products are also used by original equipment
manufacturers (“OEMs”), independent software vendors (“ISVs”), and end users
around the world in the creation of electronic documents. The Company’s ThunderHawk™ Web browser for
handheld devices gives users complete wireless access to real Web pages that
maintain full text legibility.
In January
1999, the Company established Pageflex as a wholly owned subsidiary for the
purpose of developing, marketing and supporting on-demand marketing and
composition solutions based on its NuDoc XML-based composition engine and
related technology. Pageflex has
developed MpowerÔ, an enterprise
solution that allows companies to dynamically create customized business
documents, and PersonaÔ, a variable data
desktop publishing application designed to produce personalized documents. Both products are based on the NuDoc™
XML-based composition engine, which uses flexible design templates
incorporating “spring-loaded” text and image containers that dynamically adjust
page layouts based on the sizes and shapes of the variable text and images that
flow into them. Text and image
containers resize and reposition to automatically maintain the design integrity
of each document. Built on open
standards, Pageflex products import data from any ODBC-compliant database and
use XML as the data format between databases and page composition.
In
December 1999, MyFonts.com 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 one of the
largest collections 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 a wide variety of font foundries and designers,
MyFonts.com aims to be the single choice for finding and purchasing fonts on
the Web.
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 Systems
Incorporated (“Adobe”) and Agfa Monotype Corporation (“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.
TYPE & TECHNOLOGY
INDUSTRY BACKGROUND
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’s PostScript Type 1 format (“Type 1”), 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 1 and is
integrated into the Windows and Macintosh operating systems.
The
increased use of distributed client/server network architectures in the 1990s
resulted in complex computing environments composed 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 specific font software and hardware drivers
to display or print the document as the author intended. If a user’s system did not have a particular
font used by the author or attempted 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 lacked the font fidelity and appearance intended by the
creator. For example, if an output
device prints a document with a font substituted in place 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 Japanese,
Chinese, Korean, 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 use
enabling technologies that reduce file size, minimize bandwidth consumption,
and operate reliably across heterogeneous computing environments. The evolution of real time operating systems,
cellular telephone operating systems, wireless Internet devices, personal
digital assistants, set-top boxes, embedded systems in general, and information
appliances will require the transition from text being displayed on these
devices as bitmaps, as is currently done today, to text that can be scaled to
fit the content being viewed on the device.
Clear text that is easy to read on any device, at any size, and at any
resolution is immeasurably important.
THE BITSTREAM SOLUTION
Since
its founding over 20 years ago, Bitstream has played a leading role in the
development of industry-standard font products and enabling technologies (e.g.,
font rendering and 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 compaction 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, information
appliances, corporate intranets, embedded systems, set-top boxes, high
definition televisions, multi-function devices (e.g. combined
printer/fax/copiers), and handheld and wireless devices. Bitstream is currently developing, adapting
and marketing its enabling technologies and font 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 1, 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.
PRODUCTS AND
TECHNOLOGIES
The
Company’s products can be separated into two major groups: (1) technology
products, and (2) typeface products.
Each of the product groups is described in greater detail below.
(1) Technology
Products
Technology products consist of the following: (a) Font
Fusion™, 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 information appliances to render high-quality characters
in any format, at any resolution, on any device; (b) btXÔ,
font engine software that allows Linux developers to render high-quality
characters in industry-standard and highly compact formats; (c) TrueDocÒ,
portable font technology that provides for the efficient distribution of text,
with fidelity, in a highly compact format; (d) TrueDoc Imaging System (TDIS),
formerly Bitstream’s 4-in-1 TrueDoc Imaging System, font engine software for
developers of operating systems, servers, applications, and printer
controllers where a
complete font solution is needed to provide scaleable resident fonts and
support for downloaded, industry-standard fonts; and (e) ThunderHawkÔ,
a Web browsing technology for handheld devices, wireless devices, personal
digital assistants, and other embedded systems. Each of these products is described in greater detail below:
(a) Font Fusion
Font Fusion is Bitstream’s latest, most advanced font
engine. The Font Fusion software developers’ kits (SDKs) 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 information 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 is designed for color, grayscale and black-and-white
ROM-based and non-ROM-based devices in a system where the fonts may reside
locally or remotely.
(b) btX
First released in 2001, btX brings sophisticated font
capabilities to the Linux environment.
The btX SDK contains all the tools that Linux software developers need
to enhance the font capabilities of their applications. It satisfies the requirements of software
developers who need to provide capabilities such as the ability to use fonts in
highly compact formats, the ability to display specialty fonts, the ability to
display industry-standard fonts, and the ability of end users to install off-the-shelf, commercially-available
fonts. On the front end, btX uses the X
font server protocol for X11 Windows, Release 6 (X11R6). On the back end, btX
relies on Bitstream’s Font Fusion. With btX, developers can render hinted,
anti-aliased, and kerned characters. btX renders not only high-quality
characters in industry-standard TrueType and Type 1 formats, but also
high-quality text in compact PFR (portable font resource, an industry-standard
format), T2K, and stroke-based Asian font formats. Bitstream btX supports
Unicode encoding and can render international fonts.
(c) 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 creating and viewing products to achieve reliable,
compact, and efficient recording, transporting, viewing, and printing of
typographic information, whether or not 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 1, 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 character shapes stored in the PFR and
displays the text in a manner that maintains the integrity of the original
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.
(d) TDIS
The modular architecture of the Company’s “5-in-1”
enabling technology, TDIS, provides software hooks to allow OEMs and ISVs to
incorporate font scaling technologies into their products. The font scaling technologies included in
TDIS are two industry standard font formats (TrueType and Type 1), the resident
fonts used in Hewlett-Packard Company LaserJet laser printers, and a Bitstream
TrueDoc-based font rasterizer that processes Bitstream-supplied resident font
sets. In addition, this 5-in-1
architecture includes software that routes incoming font data to the
appropriate processor and prepares the final rasterized characters for imaging
by an output device or computer screen.
(e) ThunderHawk
Scheduled for release in April 2002, ThunderHawk is
Bitstream’s first Web browser for handheld devices, which gives users complete
wireless access to real Web pages while maintaining full text legibility and
image integrity. Bitstream has filed 13 preliminary patent applications for
this wireless Internet technology.
ThunderHawk relies on a server
infrastructure combined with a small piece of thin-client code on the handheld
device. The server infrastructure transmits Web content in a more compact
format to the device, making fast and full-featured wireless Web browsing
possible. In addition, ThunderHawk gives customers the same browsing experience
on a handheld device as they are used to on the desktop. This includes viewing
the full text and images of any Web page without excessive scrolling. By not
relying on WAP or cHTML, ThunderHawk does not require Web content providers to
repurpose their content or build separate Web sites - one for the desktop, and
one for the wireless world. Instead, ThunderHawk enables end users to see a Web
page just as it appears on the desktop.
(2) Typeface Products
Bitstream has developed a
library of over 900 digital typefaces deliverable in industry-standard font
formats (such as TrueType and Type 1). Most of these typefaces are for use with
English or other Western European language-based computer systems. A large number of typefaces are necessary to
support OEMs and ISVs focused on the graphic arts market, who are accustomed to
having a wide variety of typeface designs from which to choose. The remainder of the Company’s typeface
designs are non-Western language typefaces such as Japanese, Greek, Cyrillic,
Chinese, Korean, Russian, Hebrew and Arabic. Bitstream is committed to
increasing the number and variety of typeface designs it offers to its
customers.
In August 2000, Bitstream
announced the New Font Collection (NFC) program to add fonts to the library and
seek out designs from “new school” and established designers alike. The NFC
program releases new fonts on a quarterly basis. In 2001, Bitstream released
sixteen new NFC fonts from nine designers. In February 2002, Bitstream released
nine new NFC fonts, including seven Bitstream exclusives, from international,
award-winning designers. In addition, in January 2002, Bitstream released four
Hebrew typefaces and thirty-five WGL4 (Windows Glyph Language 4) fonts. Each WGL4 font includes 652 characters and
includes characters that Western, Central, and Eastern European writing systems
rely on. It also includes Baltic, Cyrillic, Greek, and Turkish characters.
In addition to typefaces,
the Company also offers custom design services. 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 design 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 typeface 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 largely
can 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 helping the Company rapidly adapt its products
to the specific requirements of its customers.
In 2001, Bitstream
discontinued its Font Navigator for Windows product for end users, and
partnered with DiamondSoft, in which Bitstream holds a minority interest, to
resell Font Reserve for Windows and Font Reserve for the Macintosh. Also in
2001, Bitstream discontinued its WebFont Wizard, WebFont Maker, and WebFont
Player product line.
SALES & MARKETING
The type and technology
sales organization, as of March 15, 2002, consisted of three people focused on
OEM and ISV sales, and one person 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.
In April 2001, Bitstream
launched a new online store for finding, trying, and buying fonts online.
MyFonts.com, a wholly-owned subsidiary of Bitstream, has provided the back-end
programming necessary for graphic design professionals and casual users alike
to try and buy fonts, including a streamlined search engine for finding fonts;
a variety of search criteria, including such font categories as “Decorative and
Display” and “Weddings and Invitations”; unique ways to try before you buy,
including test drives and character maps; order histories, allowing customers
to review fonts they have already purchased and re-download them; secure log-in and credit card encryption;
comprehensive help for finding, buying, downloading, unpacking, and installing
fonts; and technical support. All of
the fonts in the Bitstream Typeface Library are available for online purchase.
Bitstream fonts have always been available for online purchase, but end users
had to know the name of the font they desired. The new online store allows end
users to find, try, and buy fonts without this restriction.
Marketing activities are
carried out by a cross-functional team of four people drawn from all Bitstream
divisions 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 Web site, http//www.bitstream.com. The principal objective of the Company’s
marketing strategy is to continue to expand the sale of the Company’s type
technologies to OEMs and ISVs, who integrate the Company’s software into their
own products, and to end users. OEM and
ISV relationships range from the licensing of a small group of typefaces to
agreements whereby an entire range of font 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 embedded systems, wireless and handheld devices,
information appliances, set-top boxes, interactive television, corporate
intranets and portable document software, the Company intends to evaluate other
marketing approaches.
CUSTOMERS
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
revenue for any of the years ended December 31, 2001, 2000 or 1999. No single type and technology segment
customer accounted for 10% or more of the segment’s revenue for the years ended
December 31, 2001 or 2000. However,
during the year ended December 31, 1999 one type and technology ISV customer
accounted for 11% of this segment’s revenue.
From time to time, product sales to large customers during a single
fiscal quarter may constitute more than 10% of Company revenue for such
quarter. The Company has broadened and
intends to continue to broaden, its customer base through expanded product
offerings and increased marketing efforts. Revenue by geographic area is
included in Footnote 10 in the Notes to the financial statements enclosed
herewith.
RESEARCH
AND DEVELOPMENT
Bitstream is committed to
developing innovative software to enhance text imaging for wireless devices,
operating systems, software applications, information appliances, Web
applications, low-resolution screen devices, multimedia servers,
high-definition television screens (HDTVs), set-top boxes, 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,
multilingual fonts, font portability, font compaction, and font processing
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 utilizes advanced
software development techniques.
As of March 15, 2002, the
Company employed 15 individuals who engage in type and technology research and
development activities. Of these, seven
focus on font product development, two on developing enabling technology, four
on TrueDoc, Font Fusion, btX, and ThunderHawk, and two on all of these areas.
COMPETITION
The Company’s typeface
and technology 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 affected 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 the Company’s sales of typefaces
generally comes from a number of comparably sized or smaller companies offering
their own typeface libraries and custom typeface services. Competition with the Company’s enabling
technologies principally comes from Agfa with its iType and Universal Font
Scaling Technology (“UFST”). UFST has a similar architecture to the Company’s
TDIS enabling technology product.
The competition for Font Fusion and the TrueDoc
Imaging System consists primarily of software from Agfa, which includes a font
compression technology known as MicroType Express. Other competition for Font
Fusion comes from software from Slangsoft, which includes intelligent text
input and display known as iTID.
Competition for btX comes from FreeType, an open source collaborative
organization that provides its Linux font rendering code for free.
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
INDUSTRY BACKGROUND
Traditionally, individual
digital fonts and font packages consisting of a variety of fonts have been sold
through many different channels including: (1) catalog sales; (2) sales through
resellers who typically handle fonts from multiple foundries together with
other graphic arts supplies; and (3) CD ROMs containing many fonts which can be
unlocked by means of a purchased key code.
While these approaches to
selling fonts are generally satisfactory for professionals, they represent a
very large barrier for the non-professional, casual user who is simply looking
for a particular font. For example, if
someone sees a font used in a magazine, traditional sales channels offer 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 through numerous
channels. 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 and established MyFonts.com
in 1999 to capitalize on this market.
THE MYFONTS.COM SOLUTION
In 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 a given project. For example,
if a consumer needs fonts for a wedding invitation, he or she may type the word
“wedding” to find a variety of fonts from a large number of competing vendors
who would be suitable for a wedding invitation. In addition, novel capabilities allowing the user to ask to see
fonts similar to a particular font are also included on the site.
The most powerful search
technology included on the MyFonts.com site allows any user to upload an image
scanned from a magazine or newspaper, and get a list of the closest fonts
matching the scanned image. This technology,
called WhatTheFontÔ, is believed to be
one of the keys to making MyFonts.com easy and accessible to casual users. During 2000, Bitstream 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 and complete source for fonts from all font
vendors and designers. 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 its
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. In many cases, however, MyFonts.com earns referral fees when
such purchases are made.
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 20% 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 the date of this filing, no participants have elected to
participate at this level.
Since launching the e-commerce portion of its Web site
in April 2000, the Company has monitored sales and feedback from its users and
used this information to make ongoing improvements to the Web site. As a result, the Company believes that the
current Web site presents substantially fewer obstacles to finding and buying
fonts than any other Web site offering fonts for sale.
PRODUCTS AND TECHNOLOGIES
In early 2000, 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 one of the largest collections 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.
As of the date of
this filing, over 70 foundries, both large and small, participate as partners
with MyFonts.com to offer their fonts for sale. This represents an aggregate
collection of over 15,000 fonts.
Some of the key features of MyFonts.com include: (1)
MyFonts Valet™ which enables users to browse and locate fonts using keywords a
novice or expert can understand; (2) WhatTheFont™ which allows users to scan
images of typefaces and upload them to MyFonts.com for identification; (3)
TypeXplorer™ which allows users to adjust typographic measurements to find
similar fonts based on user-defined criteria; (4) the ability to find fonts
similar to a particular typeface design using the “Show me more like this” feature;
(5) test driving a font in your own text; (6) exploring the world of fonts with
links to typographic resources available on the Web; and (7) the ability to
interact with type experts and fellow-users 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 font 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.
SALES
& MARKETING
Marketing activities are
carried out by a cross-functional team of four people drawn from all Bitstream
divisions located at the Company’s headquarters in Cambridge, Massachusetts.
Since its inception, marketing of MyFonts.com has been focused on recruiting
participation from font foundries, making Web users aware of MyFonts.com and
bringing them to the Web site. During
2002, the Company intends to focus marketing efforts for MyFonts.com on
increasing awareness of, and sales on, the site. Marketing activities to increase awareness on the part of
potential font buyers consists of a tradeshow presence in combination with
efforts aimed at building Web links from search engines and other Internet
sites. To complement this presence, the Company strives to further increase
awareness by encouraging editorial coverage in relevant publications, through
print and Internet advertising and also by seeking awards by submitting the
site as a candidate.
Analysis of sales results
suggests that most of MyFonts.com’s customers find the site by means of search
engine queries. The Company has worked and continues to work vigorously to
develop and improve its ranking on search engines. In addition, the Company enters into referrer agreements with
selected Internet sites that share a portion of revenue in return for referring
new customers.
One of the most promising
and innovative means of making access to MyFonts.com as easy as possible is by
building in a connection to MyFonts.com from font managers. By automating the often-troublesome font
installation process, one significant barrier to new users is removed. The first implementation of this approach
was developed jointly between the Company and Corel Corporation in the form of
an enhanced Bitstream Font Navigator released in November 2000. This technology has subsequently been
incorporated into Diamondsoft’s Font Reserve font manager. The Company plans to
work with other developers of other font managers to implement this powerful
technology more broadly.
Using the same technology
that enables font managers to handle the purchasing and addition of fonts,
MyFonts.com also provides back-end font searching and e-commerce facilities to
other Web sites including www.bitstream.com.
In 2002, the Company intends to further expand its participation in support of
additional font-related Web sites.
CUSTOMERS
MyFonts.com licenses
typefaces to end users worldwide through its e-commerce Web site. No single MyFonts.com segment customer
accounted for 10% or more of the Company’s revenue or that segment’s revenue
for the years ended December 31, 2001 or 2000.
This segment began generating revenue during 2000 and thus had no
customers during the year ended December 31, 1999.
RESEARCH
AND DEVELOPMENT
The Company is committed
to developing leading-edge technology for its MyFonts.com Web site to ensure
that the site is the primary site to purchase fonts on the Web. As of March 15, 2002, the Company employed
two individuals and two consultants who focus 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.
COMPETITION
AND OTHER RISKS
MyFonts.com believes that
it has no direct competitors who offer such a wide variety of fonts on one
easy-to-use Web site aimed at people who have never previously purchased a
font. However, 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. Even with the 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
operating MyFonts.com.
PAGEFLEX
INDUSTRY BACKGROUND
Corporate marketing
departments in the United States spend approximately $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 preparing it for the printing press involves handoffs
between two or three separate departments and/or firms, plus manual
intervention and rework. The desktop
publishing revolution has made the process of developing the individual text,
images, tables, charts, and illustrations very efficient. However, the task of page layout is, for the
most part, not automated.
In the past 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.
With today’s manual page
layout and slow, expensive prepress stages, it is impossible to personalize
printed pages the way one 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 from its
own database and each database must be independently updated.
Companies are realizing
the increased customer loyalty and profits that result from treating customers
as individuals. Companies also are
realizing that it is important to identify their most valuable customers and
lavish attention on them in a personalized manner. 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.
Customer relationship management (“CRM”) software, working as a front-end to
Pageflex’s software 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. 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 concept.
Pageflex software,
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:
• The number of
revisions of the document in a year,
• The number of
basic document templates,
• The number of
product/service variations of content that need to go through the template,
• The number of
distributors of the product in each tier who each want the document customized,
• The number of
languages needed for each country, and
• The combinations
of variations from one-to-one marketing.
Pageflex also has
actively pursued the Web-to-print market since the release of Mpower™ 2.0 in
early 2000. Much of Pageflex’s current customer base uses Mpower in a
transactional mode as part of an e-commerce solution. These customers provide
customized marketing materials on-demand to corporations. Marketing managers,
sales people, and franchise owners are just some of the types of users who
choose marketing templates online, select images, type custom content into a
Web form, review a PDF proof generated by Mpower and displayed in their Web
browser, and then order the digital or offset printing of a customized
marketing document. Web-to-print custom publishing systems streamline
production processes, save money since marketing collateral can be designed
once and then repurposed numerous times, and enable those who need marketing
collateral to received printed documents in a matter of days instead of weeks.
Fortune 1000 marketing departments are the target market for these Web-to-print
services.
THE PAGEFLEX SOLUTION
The Company develops
leading-edge technologies that it believes will revolutionize the publishing
world and cause major corporations to rethink their marketing strategies. They
are as follows:
• Mpower
is an enterprise solution that allows companies to dynamically create
customized business documents. Driven
by customer profile information entered into a Web form or database, Mpower
selects custom text and graphics elements and assembles them into sophisticated
business documents using flexible design templates. Mpower creates GIF, JPEG, and PDF document previews
and generates PostScript,
PDF, and Personalized Print Markup Language (“PPML”) output. Mpower also includes output drivers for
select vendor-specific formats.
• Persona™
is a desktop application designed to produce personalized documents. It is an easy to use product for getting
started in variable printing, while offering powerful features not found in
existing variable data solutions.
Persona projects easily migrate to Mpower. Persona includes drivers for PPML and PostScript output. Select vendor-specific drivers are available
separately.
• .EDIT™
is an innovative new technology currently in development at Pageflex, which
enables non-designers to create typographically-rich, layout-rich print
documents from within a Web browser.
Pageflex has developed this technology in response to Web-to-print
service providers that need the ability to offer more creative freedom to their
customers than typical template-driven custom publishing workflows allow, but
without incurring extra labor and longer production cycles. Within an automated
publishing workflow, .EDIT makes a print document available for remote hands-on
editing, styling, and content positioning changes. This rich desktop publishing
feature set is presented in an easy-to-use interface right within the
customer’s Web browser.
Variable data printing
(“VDP”) 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. Pageflex combines VDP capabilities with print-on-demand
marketing, the ability to print flexible run lengths “just in time” for
delivery, to create a complete on-demand marketing solution. Companies 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.
As acceptance for
one-to-one marketing and targeted audiences grows, the Company believes that
its software products will become widely-used, necessary tools in the
publishing industry. Pageflex has the
potential to become a de facto standard in VDP. As this revolution in the way we view publishing evolves,
Pageflex continues to develop its products’ print on demand capabilities in the
marketplace.
Pageflex’s products and
technologies have been designed to support existing technological standards.
Pageflex is a founding 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 its Board
of Directors, which includes Adobe, CreoScitex, Electronics for Imaging (EFI), Hewlett-Packard, and Xerox. 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.
The
PPI has completed and released the PPML standard. This standard harmonizes the ten vendor-specific proprietary
protocols currently used to drive digital presses at high speed. All can be driven by PostScript, but only at
low performance. To drive the Indigo
press at the high rated speed, for example, 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 PPML standard
is designed to eliminate these competing alternatives. Many variable data providers initially
developed applications that could drive only one specific proprietary
format. Pageflex’s software is unique
in that since its inception it has sought to drive all brands of digital
printers. Pageflex’s neutral position
has enabled it to play a central role within the PPI working group. Currently most of the major digital press
companies are adopting PPML as a preferred format. Once PPML is implemented across the industry, front-end software
(like Pageflex’s Mpower) will be able to send the same PPML file to any
vendor’s output device.
Pageflex also is actively
involved in the Extensible
Stylesheet Language (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 and serves along with
representatives from Adobe, Sun, IBM, Microsoft, and about 20 other prominent firms. Dr. Caruso worked with Adobe to co-edit the
print-oriented formatting part of the standard. In October 2001 the
World Wide Web Consortium released XSL 1.0 as a W3C Recommendation.
The XSL standard is of
great strategic importance to Pageflex.
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. This will make Pageflex solutions 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.
PRODUCTS AND TECHNOLOGIES
The Company’s Pageflex products consist of: (1)
Mpower, a solution that allows companies to dynamically create internet-driven customized
documents that are targeted at a particular market segment or an individual
reader; and (2) Persona, a desktop application designed to produce
sophisticated, personalized documents in PDF or PostScript. Both of these products are based upon the
NuDoc XML-based document composition engine.
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.
Mpower can assemble complex projects dynamically and deliver them instantly in
print, PDF, or via the Web. Mpower can
create a variety of customized documents with highly designed layouts, such as
brochures, proposals, and direct mail pieces.
Mpower uses
customer profile information about a recipient to control the selection of
digital content, such as logos, imagery, illustrations and text for a
document. The customer profile
information is stored in a database or collected from a Web form. Typically a call center, the salespeople, or
the recipients themselves complete these Web forms. Mpower then uses intelligent, flexible templates to automatically
assemble this personalized content into final documents for output.
Mpower is based on the
principle of separating a document’s content from its form. Content refers to raw information-text,
images, and 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. (Document designs originally developed in Quark Xpress, Adobe InDesign,
Microsoft Word, or other applications can be imported into Mpower through the use of Pageflex plug-ins that
enable third-party applications to export to Pageflex’s XML data format.) These flexible templates are then
populated with images, text, and other content, customizing the page based on
variable content (variables) that are created as part of a template. These variables are attached to customer
information stored in a database or collected from a web form, as well as
meta tags used by a content management system. Pageflex uses these tags
to deduce which images, text, or graphics should be selected for the customized
document it is assembling.
By separating content and
form and enabling them to be easily and intelligently recombined, Mpower lets
users 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.
Mpower is an application
layered on top of the Company’s NuDoc composition engine. The Mpower application layer development
began six years ago. Approximately 30
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 advertising makeup application called Archetype Designer that had been under
development since 1985. Since 1990,
approximately 60 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 150 staff-years.
In October 2001, Pageflex
released Version 3.0 of Mpower. The new features reflect Pageflex’s ongoing
commitment to providing a rich set of composition tools for variable
publishing, and leading the evolution of the variable data market into the
Web-to-print services arena. Mpower 3.0 also includes a number of usability and
performance enhancements. Mpower 3.0
utilizes Adobe’s® Portable Document Format Library for native output of PDF files
and enabling users to place PDF files as static or variable objects within
documents. Pageflex Mpower no longer requires a post-processing step to
generate PDF files, which is still common for many applications today. Mpower
3.0 users benefit from increased speed in PDF output for print and Web
previews, as well as the confidence that the PDF output is fully compliant to
Adobe PDF specifications. By incorporating Adobe’s PDF Library, the Company
believes that Pageflex continues to offer customers the most advanced
capabilities in the variable print industry.
Mpower 3.0 also includes
a variety of additional new features, usability improvements, and performance
enhancements including:
• the ability to preview transactional
jobs before they are incorporated into a Web site;
• advanced user-defined copyfitting
rules,
• spot color and tint support,
• generic CMYK color matching of
previews and bitmaps;
• XML-based project files, and
• enhanced output drivers
The Company believes that
Mpower 3.0 defines the state-of the art for Web-to-print custom publishing
software. By incorporating advanced copyfitting capabilities, the ability to
place PDF objects, and enhanced color support, Mpower 3.0 also should appeal to
marketing and advertising users who are developing one-to-one marketing
campaigns.
Persona
Persona, a variable
content publishing application, allows users to create sophisticated,
personalized documents in PDF, PostScript, or PPML. Persona is an easy-to-use desktop application for Windows,
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 which 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.
Other key features of
Persona include:
• Support
for if/then/else variable content selection rules
• Support
for keyword queries of variable content with Pageflex Librarian
• Previewing
for each individualized record
• PPML
and object-based PostScript output
• Quark
and PageMaker documents can be ported via Adobe InDesign using Pageflex’s
DesignOut plug-in
• Optional
output for CreoScitex VPS, Indigo JLYT, and Agfa IntelliCache
Pageflex released Persona
1.5 in January 2002. This release concentrated on output drivers and included a
new PPML driver and enhancements to the existing VPS driver.
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 object classes
provide an application programming interface (API) that supports the importing,
editing, displaying, 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.
SALES
& MARKETING
The Pageflex sales and
marketing organization, as of March 15, 2002, consisted of four people focused
on maintaining and expanding its reseller and OEM relationships 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 also seeks to enhance its relationships with existing and potential
customers through its three 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 cross-functional team of four people drawn from all Bitstream
divisions 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 as part of booths sponsored by its strategic
partners, including Electronics For Imaging, Xerox, HP, Indigo, Adobe and
CreoScitex, and through its Web site,
www.pageflexinc.com. The
principal objective of Pageflex’s marketing strategy is to continue to expand
awareness of its on-demand marketing software products to Web-to-print
providers, digital service and print providers, corporate direct marketing
departments, design firms, advertising agencies, digital service and print
providers, direct mail houses, corporations and end users. As new opportunities arise the Company
intends to evaluate other marketing approaches.
CUSTOMERS
The Company licenses its
Pageflex products directly to Web-to-print providers, print service providers,
major corporations and end users, and indirectly through resellers and
strategic partners. No single customer
of the Pageflex business segment accounted for 10% or more of the total Company
revenue for the year ended December 31, 2001, nor did any single Pageflex
customer account for 10% or more of that segment’s revenue during the
year. For the year ended December 31, 2000
this segment generated license fees and royalty revenue under a long-term
contract with Atex Media Solutions, Inc. (“Atex”) of $874,000, accounting for
10% of the Company’s revenue for the year ended December 31, 2000 and 32% of
the Pageflex segment’s revenue for the same period. During the year ended December 31, 2000 the Pageflex segment had
revenues from two additional customers, which accounted for less than 10% each
in total Company revenues but 16%, and 12%, respectively, of that segment’s
revenue during the year. The customer
that accounted for 16% of the Pageflex segment’s revenues during the year ended
December 31, 2000 was Xerox, who signed a development and distribution
agreement with the Company during the fourth quarter of 2000. The Pageflex segment had revenues from three
customers during the year ended December 31, 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. The Company intends to continue to
broaden its customer base through increased marketing efforts, by developing
its latest strategic partnerships with Electronics for Imaging and Xerox
Corporation, by developing relationships with additional resellers and partners
in 2002, and by introducing new product offerings. Revenue by geographic area
is included in Footnote 10 in the Notes to the financial statements enclosed
herewith.
RESEARCH
AND DEVELOPMENT
Pageflex is committed to
advancing the Company’s on-demand marketing products and technologies. As of March 15, 2002, the Company employed
ten individuals who engage in research and development activities for its
Pageflex business. During 2001,
Pageflex’s research and development activities resulted in two new major product
offerings and several ancillary plug-ins (e.g. for importing documents from
other layout programs and for producing charts dynamically). These items were
all situated at select customer sites for beta testing during 2001 and early
2002. The Company expects to release each of these offerings during 2002. The
two major new product offerings are:
Park Street (code name) -
This Windows 2000
enterprise server technology has been developed to address the document
customization and scalability demands of the Web-to-Print market. Park Street
provides concurrent processing of custom document previews and output, queuing
and load balancing across multiple job processing engines, and Web-based job
status tracking. Existing Mpower users
will be able to migrate to Park Street when their server load reaches thousands
of jobs an hour and/or consistent instances of concurrent processing
requests. Park Street is compatible with Pageflex Mpower projects.
.EDIT - The first Web browser-based design and
editing technology that allows non-designers to create typographically-rich,
layout-rich documents with nothing more than a browser and an Internet
connection. With .EDIT, companies can
provide employees, dealers, and customers the ability to edit every aspect of
highly-designed documents within a Web browser. Alternatively, marketing
departments can control the look and feel of corporate documents, while
permitting restricted modification of both content and style. A .EDIT solution uses Java applets and
JavaScript within client browsers, as well as a .EDIT server running Pageflex’s
NuDoc composition engine. Users can edit documents using Internet Explorer or
Netscape on Macintosh or Windows computers.
The .EDIT offering will complement Pageflex’s existing
dynamic publishing technologies.
COMPETITION
Pageflex believes its
products compete favorably based on a rich feature set, ease of use, stability
and scalability. In addition, the
Persona application is a desktop tool that offers an easy upgrade path to the server-based
solution, Mpower. The Company believes
that Park Street and EDIT will solidify Pageflex’s position as the
industry-leading one-to-one marketing communications solution in the
Web-to-print market space.
Pageflex Persona competes with variable data tools created
by the various digital press vendors.
This market is focused on the creation of personalized documents
requiring optimized output capabilities, most of which are vendor-specific
today. Pageflex products offer output
to several of the digital presses on the market, as well as output of
Personalized Print Markup Language (PPML).
As the PPML standard becomes more widely accepted, output to multiple
vendor presses will be possible by all page creators. Competitors include CreoScitex Darwin, Indigo Yours Truly, Barco
VIP Designer, Xeikon PersonalizerX, Banta DesignMerge, and Atlas Printshop
Mail. Pageflex believes it competes
favorably in this market due to the rich features and functionality of its
products and its strong relationships with resellers, partners, and market
influencers.
Pageflex Mpower is a server-based application targeted
at the customized print or Web-to-print segment of the on-demand publishing
market. This market is characterized by
rapid technology developments and frequent new product introductions. Participants in this market compete based on
feature set and functionality, the level of customization and integration with
other e-publishing solution
components, services and price.
Pageflex faces competition from vendors offering end-to-end solutions
and integration services that include on-demand publishing tools like
Mpower. These solutions in turn compete
with solutions created by Pageflex customers.
These competitors include Banta, DeskNet, Digital VIP and 3B2
Online. In addition, Pageflex may face
new competition from new emerging products and technologies. Pageflex believes it can compete favorably
in this market based upon the quality and features of the Mpower application
suite and the underlying NuDoc composition engine.
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 and 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 four patents by the United States Patent
and Trademark Office, three of which are directed to certain aspects or
applications of the Company’s TrueDoc technology and one of which is directed
to the Company’s DocLock technology.
Additionally, the Company has sought foreign patent rights to certain
aspects of its TrueDoc technology by filing foreign applications in several
countries, which have already resulted in two patents from each of the United
Kingdom and Canada. Furthermore,
multiple U.S. and PCT applications are pending on some of the Company’s newer
technologies. The Company is currently
in the process of registering several trademarks and preparing a variety of
patent applications relating to MyFonts.com and its Pageflex software. Bitstream®, TrueDoc®, T2K® and Cyberbit® 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 15, 2002, the
Company employed 55 persons, including 14 in sales and marketing, 27 in
research and development, and 14 in general and administrative functions. Of the Company’s 55 employees, 50 are full
time and 5 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.
EXECUTIVE OFFICERS OF THE
REGISTRANT
The Company’s executive
officers and their ages as of March 15, 2002 are as follows:
Charles Ying has been
Chief Executive Officer of the Company since May 1997 and Chairman of the Board
of Directors since April 1997. From
January 1992 to January 1996, Mr. Ying served as Chief Executive Officer of
Information International Inc., a corporation engaged in the business of
designing, manufacturing and marketing computer-based systems that automate
document production and publishing. Mr.
Ying also serves as a member of the Board of Directors of NodeWarrior Networks
Inc., an Internet Service Provider located in Los Angeles, California. Mr. Ying holds a B.S. and M.S. in Electrical
Engineering from the Massachusetts Institute of Technology.
Anna M. Chagnon has
served as President of the Company since June 2000 and as Chief Operating
Officer, Chief Financial Officer and General Counsel of the Company since
August 1998. She previously served as
Executive Vice President from August 1998 to June 2000. From July 1997 to August 1998, she served in
various positions at the Company including Vice President, Finance and
Administration, Chief Financial Officer and General Counsel, and Vice President
and General Counsel. From November of
1996 to July 1997, Ms. Chagnon was Counsel to Progress Software Corporation, a
developer and worldwide supplier of solutions to build, deploy and manage
applications across Internet, client/server and host/terminal computing
environments. From August 1994 to
November 1996 she was an attorney for the Boston law firm of Peabody &
Arnold LLP where she specialized in corporate, securities, finance and
intellectual property law. She holds a
Bachelor of Science degree, summa cum laude, from Northeastern University and a
Juris Doctor degree from Boalt Hall School of Law of the University of
California at Berkeley.
John S. Collins has been
Vice President and Chief Technology Officer since August 1998. From 1988 to August 1998, he served as Vice
President of Engineering. Mr. Collins
was the inventor or a co-inventor of a number of the patents held by the
Company relating to font imaging technology.
He is the principal inventor of the Company’s TrueDoc technology. Mr. Collins holds a B.Sc. and a Ph.D. in
Electrical Engineering from the University of London.
Sampo Kaasila has served
as Vice President, Research and Development, of the Company since November
2001. Mr. Kaasila serves as the
principal architect of the Company’s Font Fusion and ThunderHawk products. From November 1998, when Mr. Kaasila joined
Bitstream upon the acquisition of Type Solutions, Inc., to November 2001, he
served as Director of Research and Development, Type Solutions. From August 1989 to November 1998, he was a
founder and President of Type Solutions, Inc., a leading developer of font
technologies including T2K™, a font renderer which provides an object oriented
design, advanced architecture and algorithms, and a clean API resulting in
maximum reliability, performance, and easy integration. From August 1987 to August 1989, Mr. Kaasila
worked at Apple Computer, Inc. and was the lead engineer and inventor of the
True Type technology now part of every MacIntosh and Windows PC. Mr. Kaasila holds a Masters degree in
Electrical Engineering from the Royal Institute of Technology in Stockholm,
Sweden where he graduated first in his class in January 1983.
Costas Kitsos has been
Vice President of Engineering since November 1999. Mr. Kitsos serves as principal architect of the Pageflex Mpower
and Persona products, and is also the technical lead for the Company’s end user
type application products. From October
1998 to November 1999, he served as Director of Research and Development of the
Company. From November 1996 to October
1998, he was a Senior Software Engineer at the Company. Mr. Kitsos is a veteran software developer
with over ten years experience in type and publishing application
development. From May 1987 to November
1996, Mr. Kitsos headed IconWorks, which developed award winning type
applications and offered consulting services on end user programs and graphical
user interfaces. He holds a Masters
degree from the University of California, Los Angeles.
Sang Lee has been Vice
President of Sales and Marketing of Pageflex since September 2000. Mr. Lee joined Pageflex as Vice President of
Business Development in February 2000.
From January 1998 to January 2000, Mr. Lee was a Director of Strategic
Business Development of Adobe, where he was responsible for developing strategy
to drive new products into expanded business segments. From May 1997 to January 1998, Mr. Lee
served as a director of Engineering for Adobe.
From September 1994 to October 1996, Mr. Lee was President and Chief
Operating Officer of Harlequin, Incorporated, a globally distributed software
development company focused on the areas of development tools, PostScript
interpreter applications, data mining, and adaptive systems.
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. 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.
The Company also has
operating leases for small engineering and sales offices in Plaistow, New
Hampshire and Cheltenham, England, respectively.
ITEM
3.
ITEM
3. Legal Proceedings
The Company is not a
party to any material 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, 2001.
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, 2000 through December 31, 2001. Such
information reflects interdealer prices, without retail markup, markdown, or
commission, and may not represent actual transactions.
As of March 15, 2002, the
Company’s Class A Common Stock was held by approximately 100 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 years ended
December 31, 2001, 2000, and 1999, the Company issued an aggregate of 499,117,
302,333, and 494,863 shares, respectively, of Class A Common Stock in
connection with the exercise of vested options and warrants issued under the
Company’s 1994 Stock Plan, 1996 Stock Plan, 1997 Stock Plan, and 2000 Stock
Plan. During the year ended December
31, 2000, the Company also issued 51,317 shares of Class A Common Stock in
connection with the April 1997 acquisition of Archetype that had not previously
been issued. There were no unregistered
securities sold by the Company during the three years ended December 31, 2001. 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
October 25, 2001, the Company filed a Registration Statement on Form S-8 under
the Securities Act of 1933, as amended, registering up to an aggregate of 1,000,000
shares of the Company’s Class A Common Stock, par value $0.01 per share, which
may be issued upon exercise of stock options and warrants granted or which may
be granted under the Company’s 2000 Stock Plan.
ITEM 6.
ITEM 6. Selected
Consolidated Financial Data
The selected consolidated
financial data presented below as of December 31, 2001, and 2000, and for the
three years ended December 31, 2001, 2000 and 1999 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, 1999, 1998, 1997, and for the two years
ended December 31, 1998 and 1997 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, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included elsewhere in this Report, and
other financial data appearing elsewhere herein.
SELECTED CONSOLIDATED FINANCIAL DATA, (in thousands,
except per share amounts).
_____________________
(1) Calculated on the basis
described in Note 2 of Notes to the Consolidated Financial Statements.
(2) In April 1997, the
Company acquired Archetype, Inc., and recorded an in-process research and development charge of $4,930, as well as
severance and other non-recurring compensation charges totaling $1,371.
(3) In August 1998, the
Company sold substantially all of the assets relating to its MediaBank and
InterSep OPI product lines for approximately $11,430 in cash and recorded a
gain on sale of assets of approximately $10,317. The Company also recorded severance and other non-recurring
compensation charges totaling $2,647.
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, 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”) which
Bitstream established in December 1999; and (3) Pageflex, 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. Pageflex, Inc. was
established by the Company in January 1999, as a wholly owned subsidiary for
the purpose of developing on-demand marketing software.
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.
RESULTS
OF OPERATIONS
Certain prior year
account balances have been reclassified to be consistent with the current
year’s presentation.
The following
table sets forth the percentage of revenue represented by certain items
reflected in the Company’s Statements of Operations Data for the periods
presented:
YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED
DECEMBER 31, 2000 (in thousands except percent amounts)
Consolidated Revenue:
The
decrease in revenue for the year ended December 31, 2001 as compared to the
year ended December 31, 2000 was due to decreases of $849 and $625 for the type
and technology and Pageflex business segments, respectively, partially offset
by an increase of $460 for the MyFonts.com business segment. These segments are discussed in detail
below.
Type
and technology revenue:
The decrease in type and technology revenue for the year
ended December 31, 2001 versus the year ended December 31, 2000 was the result
of a decrease in end user sales, including end user sales by Bitstream’s
resellers of approximately $674, and a decrease in OEM revenue of approximately
$175. The decrease in retail revenue
was primarily caused by decreases in corporate and consumer spending during
2001 because of concerns over the economy.
These same concerns caused OEM customers to ship less units and postpone
deployment of new technologies that included our Font Fusion product. Sales increased towards the end of the year
and during the fourth quarter of 2001, the Company saw an increase in OEM
license revenue of $440 or 53.7% as compared to the fourth quarter of 2000.
Pageflex
revenue:
Pageflex revenue for the years ended December 31, 2001 and
2000 includes non-recurring engineering and license fees. Revenue for the year ended December 31,
2001, excluding these transactions, which are discussed below, increased $565
or 39% from $1,460 for the year ended December 31, 2000 to $2,025 for the year
ended December 31, 2001. This increase
was primarily the result of sales of the Company’s Mpower product and an
increase in usage fees generated by an increased customer base for the
Company’s products. Including the non-recurring engineering and license fees
revenue from services decreased $617 or 48.8%.
The non-recurring fees for year ended December 31, 2001 were $85 in
exclusivity fees related to the Company’s NuDoc™ OEM relationship with Atex Media
Solutions, Inc. (“Atex”). Included in
Pageflex revenue for the year ended December 31, 2000 were non-recurring fees
of $435 in service revenue from a software development and licensing agreement
with Xerox Corporation as well as license revenue of $420 and service revenue
of $419 from Atex.
MyFonts.com
revenue:
MyFonts.com
began selling through its Web site at the end of the first quarter of 2000. The Company has excluded inter-company
sales, which MyFonts.com generated from the resale of Bitstream fonts. Total MyFonts.com revenue including revenue
from inter-company sales was $702 and $96 for the years ended December 31, 2001
and 2000, respectively.
Consolidated
Gross Profit:
The decrease in the gross profit for the year ended
December 31, 2001 as compared to the year ended December 31, 2000 is primarily
attributable to the decrease in revenue for those periods. Cost of revenue increased $34 to $1,427 for
the year ended December 31, 2001 from $1,393 for the year ended December 31,
2000. Cost of services decreased $307
primarily because of the decrease in Pageflex’s service related revenue, while
cost of license fees increased $341.
The increase in cost of license fee revenue was primarily due to the
$361 increase in royalties paid by the Myfonts.com business segment for the
year ended December 31, 2001.
Myfonts.com typically pays a royalty to third party foundries of 80% of
the revenue generated. This cost represents
a higher percentage of revenue than that realized by the type and technology
and Pageflex business segments resulting in a decrease in the gross margin
percentage for the year ended December 31, 2001 as compared to the year ended
December 31, 2000.
Cost of revenue is also 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
Marketing and Selling:
The decrease in marketing and selling expenses in
absolute dollars and as a percentage of revenue for the year ended December 31,
2001 as compared to the year ended December 31, 2000 reflects expense
reductions in the Pageflex and the type and technology business segments of
$701 or 34.1% and $100 or 6.2%, respectively, partially offset by an increase
in marketing and selling expense of $48 or 300% for the Myfonts.com business
segment. The decrease in type and
technology marketing expenses was primarily due to reductions in advertising
and commission expense. The decrease in Pageflex expenses included reductions
in employee related salary, benefits and travel expenses of $108, advertising
and marketing expenses for tradeshows, product branding, and printing of $348,
and professional fees and marketing consultant fees of $94.
Consolidated
Research and Development (“R&D”):
The increase in R&D expenses in absolute dollars
and as a percentage of revenue for the year ended December 31, 2001 as compared
to the year ended December 31, 2000 reflects increases in the type and
technology and Myfonts.com business segments of $22 or 1.3% and $310 or 78.3%,
respectively, partially offset by expense reductions of $109 or 4.1% at the
Pageflex business segment. The type and
technology segment increase reflects reductions in engineering costs incurred
on customer specific projects, which are charged to cost of revenue of $103, partially
offset by a decrease in the outsourcing of engineering projects of
approximately $80. The decrease in
R&D expense for Pageflex was primarily due to further decreases in the
outsourcing of engineering projects and the absorption of those projects by
current staff. The increase in R&D
expenses for the MyFonts.com segment is attributable to increases in internal
engineering costs and the outsourcing of engineering costs for continued
development of the MyFonts.com Web site.
Consolidated
General and Administrative (“G&A”):
The decrease in G&A expenses in dollars and as a
percentage of revenues for the year ended December 31, 2001 versus the year
ended December 31, 2000 is primarily due to decreases in bad debt reserves of
$809. Bad debt expense for the type and technology segment decreased $320 from
$323 to $3. Bad debt expense for the Pageflex
segment decreased $489 from $260 for the year ended December 31, 2000 to a net
recovery of $(229) for the year ended December 31, 2001. The decrease in bad debt expense was
partially offset by increases in professional service fees and facilities costs
of $154 and $104, 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.
Income
(loss) on investment in DiamondSoft, Inc.:
In March 1998 the Company made a $500 equity
investment in DiamondSoft, Inc. (“DiamondSoft”) representing a 25% ownership
interest. During the year ended
December 31, 2001 the Company made additional investments totaling $410 in
DiamondSoft, resulting in an increase in Bitstream’s ownership percentage to
31.7% at December 31, 2001. DiamondSoft
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 loss was $(260) for the year ended December 31, 2001 versus
$(13) for the year ended December 31, 2000.
Interest
income, net:
Interest income consists primarily of income earned on cash and money
market instruments.
Provision
for income taxes:
The Company recorded a tax provision of $167 for the
year ended December 31, 2001, which includes $13 in various state minimum taxes
and $154 in foreign income taxes. The
Company recorded a tax provision of $245 for the year ended December 31, 2000,
which included $23 in various state minimum taxes and $222 in foreign income
taxes.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1999 (in thousands, except percent amounts)
Consolidated Revenue:
The
increase in revenue for the year ended December 31, 2000 as compared to the
year ended December 31, 1999 was due to increases of $10, $50, and $1 from the
type and technology, MyFonts.com, and Pageflex business segments, respectively.
These segments are discussed in more detail below.
Type
and technology revenue:
The increase in type and technology license revenue for the
year ended December 31, 2000 versus the year ended December 31, 1999 was the
result of an increase in OEM revenue of $438 or 11% partially offset by
decreases in end user revenues of $40.
The increase in OEM revenues is primarily attributable to an increase in
technology license revenue, including license revenue for Font Fusion. The decrease in end user revenues was
primarily caused by a decrease in sales from the Company’s US office of $102
partially offset by an increase in revenues from the UK office of $62. Service revenue decreased for the year ended
December 31, 2000 as compared to the year ended December 31, 1999 due to
significant non-recurring service revenues generated from designing the “Euro”
currency typeface into specific customer fonts during 1999.
Pageflex
revenue:
Software
license revenues for the Pageflex segment include revenue from several large
contracts during both 2000 and 1999.
Revenue for 2000, excluding these transactions, which are discussed
below, increased $335 or 31% from $1,090 during the year ended December 31,
1999 to $1,425 for the year ended December 31, 2000. The year ended December 31, 2000 included $435 in service revenue
from a software development and licensing agreement with Xerox Corporation as
well as license revenue of $420 and service revenue of $419 from an existing
long-term contract with Atex Media Solutions, Inc. (“Atex”). Revenues for the year ended December 31,
1999 included $688 of license fees and $356 in service revenue from Atex and
$600 from a one-time license agreement with Inso Providence Corporation.
MyFonts.com
revenue:
MyFonts.com
began selling through its web site at the end of the first quarter of 2000 and
has experiences double-digit monthly growth since its inception. The Company has excluded inter-company sales
from the MyFonts.com revenue it generated from the resale of Bitstream
fonts. Total MyFonts.com revenue
including revenue from the resale of Bitstream fonts was $96.
Consolidated
Gross Profit:
The increase in the gross profit for the year ended
December 31, 2000 as compared to the year ended December 31, 1999 is primarily
attributable to the decrease in cost of sales related to the engineering of
customer specific outlines for the addition of the Euro symbol during
1999. Custom engineering revenues have
a much higher cost of sales than license revenues. Cost of revenue is also 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
Marketing and Selling:
The decrease in marketing and selling expenses in
dollars and as a percentage of revenues for the year ended December 31, 2000 as
compared to the year ended December 31, 1999 reflects expense reductions in the
Pageflex and the type and technology business segments. The Company reduced Pageflex business
expenses through a reduction of public relations firm consulting expenses by
$75, print and production of new product collateral and advertising expenses by
$75, trade show related expenses by $50, and other marketing program expenses
by $220. The type and technology
business segment reduction includes print and production of new product
collateral and advertising, and other marketing program expenses of $40 and
$56, respectively. The Company’s 1999
expenses reflected an increase in spending on new branding, Company logos,
packaging and marketing not required during 2000.
Consolidated
Research and Development (“R&D”):
R&D expenses decreased both in absolute dollars
and as a percentage of revenues.
R&D expenses for the type and technology segment increased $49 or
2.9% from $1,706 for the year ended December 31, 1999 to $1,755 for the year
ended December 31, 2000. This increase
reflects a reduction in engineering costs incurred on customer specific outline
projects, which are charged to cost of revenues. R&D expenses for the Pageflex segment decreased $243 or 8.0%
from $3,039 for the year ended December 31, 1999 to $2,796 for the year ended
December 31, 2000. This decrease was
primarily due the completion of engineering projects during 1999, which
required outside expertise to assist in the completion of the Japanese Mpower
release and other projects that were absorbed by current staff. R&D expenses for the MyFonts.com segment
increased $103 or 35.3% from $292 for the year ended December 31, 1999 to $395
for the year ended December 31,2000.
This increase is attributable to the hiring of two software engineers in
the third quarter of 1999.
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, 2000 versus the year
ended December 31, 1999 is primarily due to increases in bad debt reserves. Bad
debt expense for the type and technology segment increased $522 from a net
$(199) recovery during 1999 to a net expense of $323 during 2000. Bad debt expense for the Pageflex segment
increased $217 from $43 during the year ended December 31, 1999 to $260 during
the year ended December 31, 2000.
During 1999 the Company collected approximately $200 in accounts
receivable that had been reserved in prior years. During 2000, the Company increased reserves by $100 for a
customer who filed for bankruptcy and $181 for a disputed accounts receivable
balance from another customer.
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.
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
$(13) for the year ended December 31, 2000 versus $18 for the year ended
December 31, 1999.
Interest
income, net:
Other income consists primarily of interest income
earned on cash and money market instruments.
Provision
for income taxes:
The Company recorded a tax provision of $245 for the
year ended December 31, 2000, which included $23 in various state minimum taxes
and $222 in foreign income taxes. The
Company recorded a tax provision of $990 for the year ended December 31, 1999,
of which $868 was a valuation reserve for the deferred tax assets recorded
during 1995 and 1996, and $126 was foreign income taxes.
LIQUIDITY AND CAPITAL RESOURCES (in thousands, except share amounts)
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, 2001, the Company had net
working capital of $4,688 versus $7,371 at December 31, 2000.
The Company’s operating activities used cash of
approximately $1,069 during the year ended December 31, 2001 as compared to
using cash totaling $1,631 during the year ended December 31, 2000. The cash used during the years ended
December 31, 2001 and 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. This net loss adjusted for non-cash expenses
resulted in a use of $2,294 and $2,102 in cash during the years ended December
31, 2001 and December 31, 2000, respectively.
During the year ended December 31, 2001, the Company generated cash by
collecting accounts receivable and decreasing outstanding receivables by $1,364
and receiving $139 more in cash than it recognized in deferred revenue. The
Company also used $168 and $161 in cash to pay down accounts payable and
accrued expenses, respectively. During
the year ended December 31, 2000 the Company used $90 in cash to pay down
accounts payable, generated $148 in cash by collecting accounts receivable,
generated $99 in cash by decreasing various prepaid expenses, and generated
$282 in cash by increasing accrued expenses and deferred revenue.
The Company’s investing activities used cash of
approximately $763 during the year ended December 31, 2001 as compared to using
$626 during the year ended December 31, 2000.
Purchases of property and equipment used $210 and $322 in cash for the
years ended December 31, 2001 and 2000, respectively. During the year ended December 31, 2001 the Company increased its
investment in DiamondSoft, Inc. by $410.
During the year ended
December 31, 2000 the Company deposited $300 into a money market account at
Wells Fargo Bank, which is securing a $300 line of credit granted by the bank
to DiamondSoft. This $300 is presented
on the Company’s consolidated balance sheet as restricted cash. See footnote 3 in the Footnotes to the
Company’s Consolidated Financial Statements included herewith, for more
information.
The Company’s financing activities provided cash of
$399 during the year ended December 31, 2001 as compared to $369 during the
year ended December 31, 2000. The cash
provided during both of these years primarily resulted from the exercise of
stock options.
The Company believes its
current cash and cash equivalent balances will be sufficient to meet the
Company’s operating and capital requirements for at least the next 12
months. There can be no assurance,
however, that the Company will not require additional financing in the future. If the Company were required to obtain
additional financing in the future, there can be no assurance that sources of
capital will be available on terms favorable to the Company, if at all.
As of December 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.
As of December 31, 2001,
the Company had future minimum annual lease payments under the Company's leased
facilities of $401 and $301 for the years ended December 31, 2002 and 2003,
respectively.
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.
CRITICAL ACCOUNTING POLICIES
The Company
has identified the policies below as critical to its business
operations and the understanding of its results of operations. The impact and
any associated risks related to these policies on our business operations is
discussed throughout Management’s Discussion and Analysis of Financial
Condition and Results of Operations where such policies affect our reported and
expected financial results. For a detailed discussion on the application of
these and other accounting policies, see Note 1 in the Notes to the
Consolidated Financial Statements in Item 14 of this Annual Report on Form
10-K, beginning on page. Note that our preparation of this Annual Report on
Form 10-K requires us to make estimates and assumptions that affect the
reported amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of our financial statements, and the reported amounts
of revenue and expenses during the reporting period. There can be no assurance
that actual results will not differ from those estimates.
Revenue
Recognition
The Company recognizes revenue in accordance with
Statement of Position 97-2 (SOP 97-2), Software Revenue Recognition, as modified
by SOP 98-9,
Modifications of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions. The Company derives revenues from software
product licenses, professional consulting, and support and 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.
Licensing fees and royalty revenues include: (1)
payments paid by OEM and ISV customers for text imaging and page layout
technologies; (2) direct and indirect sales of software publishing applications
for the creation, enhancement, management, transport, viewing and printing of
electronic information; (3) direct sales of custom and other type products to
end users such as graphic artists, desktop publishers and corporations; and (4)
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.
Revenue under multiple-element arrangements, which may
include several different software products and services sold together, is
allocated to each element based on the residual method in accordance with SOP
98-9. The Company uses the residual
method when vendor-specific objective evidence of fair value does not exist for
one of the delivered elements of the arrangement. Under the residual method, the fair value of the undelivered
elements is deferred and subsequently recognized. The Company has established sufficient vendor-specific objective
evidence for the value of its consulting, training, and other services, based
on the price charged when these elements are sold separately. Accordingly, software license revenues are
recognized under the residual method in arrangements in which software is
licensed with consulting, training or other services.
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.
Provisions for any estimated losses on uncompleted contracts are made in
the period in which such losses become probable. The Company recognizes revenue from support and maintenance
agreements ratably over the term of the agreement.
Revenue from guaranteed minimum royalty licenses is
recognized upon delivery of the software since no further obligations of the
Company exist, 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 related to extended payment programs
is recognized when payment becomes due to the Company.
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
maintenance contract. Revenue on
certain long-term development contracts is recognized using the
percentage-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. Revenue related to extended
payment programs is recognized when payment becomes due to the Company.
Deferred revenue includes unearned software
maintenance revenue, certain prepaid royalties and advance billings under
software development contracts.
Cost of revenue from software licenses consists
primarily of royalties paid to third party developers and foundries whose
products the Company sells, and cost to distribute the product, including the
cost of the media on which it is delivered.
Cost of revenue from services consists primarily of costs associated
with consulting and custom product development services.
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, 2001, the Company had not incurred any
significant expenses related to warranty claims.
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
currently reviews its long-lived assets (which include intangible assets 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. The determination of the value of such
intangible assets requires management to make estimates and assumptions that
affect our consolidated financial statements.
In 2002, Statement of
Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible
Assets” became effective and as a result, the Company will cease to amortize
approximately $727,000 of unamortized goodwill. The Company had recorded
approximately $469,000 of amortization during 2001 and would have recorded approximately
$379,000 of amortization during 2002. The Company will also cease to amortize
recorded goodwill related to its investment in DiamondSoft, Inc., equal to its
percentage of DiamondSoft, Inc.'s net assets, which would have been
approximately $134,000 for 2002. In lieu of amortization, the Company is
required to perform an initial impairment review of our goodwill in 2002 and an
annual impairment review thereafter. The Company expects to complete our
initial review during the first quarter of 2002. The Company currently does not
expect to record an impairment charge upon completion of the initial impairment
review. However, there can be no assurance that at the time the review is
completed a material impairment charge will not be recorded.
Accounts receivable
The Company performs ongoing credit evaluations of its
customers and adjusts credit limits based upon payment history and the
customer’s current credit worthiness, as determined by the Company’s review of
their current credit information. The Company
continuously monitors collections and payments from our customers and maintains
a provision for estimated credit losses based on a percentage of accounts
receivable, our historical experience and
any specific customer collection issues that we have identified. While such credit losses have historically
been within expectations and appropriate reserves have been established, we
cannot guarantee that we will continue to experience the same credit loss rates
that we have experienced in the past.
The Company has recorded allowance for doubtful accounts of $53,000 and
$663,000 as of December 31, 2001 and 2000, respectively.
Income taxes
As part of the process of
preparing consolidated financial statements the Company is required to estimate
its income taxes in each of the jurisdictions in which it operates. This
process involves estimating actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items, such as
deferred revenue, for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included within our consolidated
balance sheet. We must then assess the likelihood that our deferred tax assets will
be recovered from future taxable income and to the extent we believe that
recovery is not likely, we must establish a valuation allowance. To the extent
we establish a valuation allowance or increase this allowance in a period, we
must include an expense within the tax provision in the statement of
operations. Significant management
judgment is required in determining our provision for income taxes, our
deferred tax assets and liabilities and any valuation allowance recorded
against our net deferred tax assets. The Company has fully reserved against its
tax asset by recording valuation allowances of $10,100,000 and $8,770,000 as of
December 31, 2001 and 2000, respectively.
The valuation allowance is due to uncertainties related to the Company’s
ability to utilize its deferred tax assets, primarily consisting of certain net
operating losses carried forward and foreign tax credits, before they expire.
The valuation allowance is based on our estimates of taxable income by
jurisdiction in which we operate and the period over which our deferred tax
assets will be recoverable. The
determination of the valuation allowance requires the Company to make
estimates, which the Company cannot guarantee will prove to be accurate.
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 has adopted SFAS No. 140, which did not 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 and thereafter. 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.
In June 2001, the FASB issued SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
These statements establish new standards for accounting for business
combinations, goodwill, and intangible assets.
SFAS No. 141 eliminates the pooling-of-interests method of accounting
for business combinations except for qualifying business combinations that were
initiated prior to July 1, 2001 and changes the criteria to recognize
intangible assets apart from goodwill.
The requirements of SFAS No. 141 are effective for any business
combination accounted for by the purchase method that is completed after June
30, 2001. SFAS No. 142 supersedes APB
Opinion No. 17, Intangible Assets (which required that goodwill and
intangible assets be amortized over a life not to exceed 40 years), and carries
forward its provisions related to internally developed intangible assets
without the FASB’s reconsideration.
Under SFAS No. 142, goodwill and indefinite-lived intangible assets are
no longer amortized but are reviewed annually for impairment, or more
frequently if impairment indicators arise.
Goodwill is required to be tested for impairment between the annual
tests if an event occurs or circumstances change that more-likely-than-not
reduce the fair value of a reporting unit below its carrying value. An indefinite-lived intangible asset is
required to be tested for impairment between the annual tests if an event occurs
or circumstances change indicating that the asset might be impaired. Separable intangible assets that have finite
lives will continue to be amortized over their useful lives, for which SFAS No.
142 does not impose a limit. Any
required goodwill impairment charges would be presented as a separate line item
within the operating section of the income statement. The Company has adopted Statement 141, which did not have a
material impact on the Company’s financial position or results of operations. The Company will adopt SFAS No. 142 on
January 1, 2002. Under SFAS No. 142,
all goodwill amortization will cease effective January 1, 2002, which otherwise
would have approximated $513,000 for the year ended. Material amounts of recorded goodwill attributable to each
reporting unit will be tested for impairment.
Amortization of goodwill during the years ended December 31, 2001 and
2000 was $583,000 and $469,000, respectively.
Management has undertaken to begin the initial impairment testing as of
January 1, 2002, and believes that the fair value of its reporting units will
be greater than the carrying values for those units and thus does not believe
an impairment charge will be recognized as a result of the initial test.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. This statement supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of and APB No. 30, Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. This statement
provides guidance on recognizing and measuring impairment for long-lived assets
excluding certain long-lived assets, such as goodwill, non-amortized intangible
assets and deferred tax assets. This statement is effective for the Company in
the first quarter of its fiscal year ending December 2002. Management is
currently evaluating the impact that this statement will have on the Company’s
financial position or results of operations.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS,
AND DERIVATIVE COMMODITY INSTRUMENTS
As of December 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 year ended December 31,
2001. 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 in and Disagreements with
Accountants on Accounting and Financial Disclosure
None.
PART III
Certain information required by Part III is omitted
from this Report in that the Company will file a definitive Proxy Statement
pursuant to Regulation 14A not later than 120 days after the end of the fiscal
year covered by this Report and certain information included therein is
incorporated herein by reference. Only
those sections of the Company’s definitive Proxy Statement for its Annual
Meeting of Stockholders to be held on May 21, 2002 that specifically address
the items set forth herein are incorporated by reference. Such incorporation does not include the
Compensation Committee Report or the Performance Graph included in the
Company’s definitive Proxy Statement for its Annual Meeting of Stockholders to
be held on May 21, 2002.
ITEM 10.
ITEM 10. Directors
and Executive Officers of the Registrant
The information required by this Item concerning
directors is incorporated by reference to the section entitled “Proposal No. 1
- Election of Directors - Nominees for Directors” in the Company’s definitive
Proxy Statement for its Annual Meeting of Stockholders to be held on May 21,
2002 and which will be filed with the Securities and Exchange Commission on or
before April 30, 2002. The information
concerning the executive officers of the Company required by this Item is
contained in the “Executive Officers of the Registrant” section of Item 1 hereof
and is incorporated by reference in this Part III.
There is incorporated herein by reference to the
discussion under “Principal and Management Stockholders - Section 16(a)
Beneficial Ownership Reporting Compliance” in the Company’s definitive Proxy
Statement for its Annual Meeting of Stockholders to be held on May 21, 2002 the information with respect
to any delinquent filings of reports pursuant to Section 16(a) of the
Securities Exchange Act of 1934.
ITEM 11.
ITEM 11. Executive
Compensation
Information required by this Item is incorporated herein
by reference to the information appearing in the Company’s definitive Proxy
Statement for its Annual Meeting of Stockholders to be held on May 21, 2002 under the heading “Executive Compensation.”
ITEM 12.
ITEM 12. Security
Ownership of Certain Beneficial Owners and Management
Information required by this Item is incorporated
herein by reference to the information appearing in the Company’s definitive
Proxy Statement for its Annual Meeting of Stockholders to be held on May 21,
2002 under the heading “Principal and Management Stockholders.”
ITEM 13.
ITEM 13. Certain
Relationships and Related Transactions
Information required by this Item, if any, is
incorporated herein by reference to the information appearing in the Company’s
definitive Proxy Statement for its Annual Meeting of Stockholders to be held on May 21, 2002 under the heading “Certain
Relationships and Related Transactions”.
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
NONE
(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.
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).
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.
(incorporated by reference to Exhibit 3 to the Company’s Current Report on
Form 8-K filed on November 16, 1998).
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).
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 (incorporated by reference to Exhibit 10.4.7 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 1998).
10.5
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).
10.6
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).
10.7
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).
10.8
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).
10.9
Bitstream,
Inc. 2000 Stock Plan (incorporated by reference to Exhibit 4.1 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000).
10.10
Pageflex,
Inc. 2000 Stock Plan (incorporated by reference to Exhibit 4.2 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000).
10.11
MyFonts.com,
Inc. 2000 Stock Plan (incorporated by reference to Exhibit 4.3 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000).
Subsidiaries of
Registrant
*21.1
Subsidiaries of the
Registrant
Consents
*23.1
Consent of Independent
Public Accountants
Additional Exhibits
*99.1
Letter to Commission
Pursuant to Temporary Note 3T
* 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 28th day of March,
2002.
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.
SIGNATURE
TITLE
DATE
/s/ Charles Ying
Chairman of the Board, Director and Chief
March 28, 2002
Charles Ying
Executive Officer (Principal Executive Officer)
/s/ Anna M. Chagnon
President, Chief Financial Officer, Chief
March 28, 2002
Anna M. Chagnon
Operating Officer, Treasurer and Secretary
(Principal Financial Officer)
/s/ James P. Dore
Controller (Principal Accounting Officer)
March 28, 2002
James P. Dore
/s/ Amos Kaminski
Director
March 28, 2002
Amos Kaminski
/s/ David G. Lubrano
Director
March 28, 2002
David G. Lubrano
/s/ George B. Beitzel
Director
March 28, 2002
George B. Beitzel
/s/ Michael Lang
Director
March 28, 2002
Michael Lang
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
CONSOLIDATED FINANCIAL
STATEMENTS OF BITSTREAM INC. AND SUBSIDIARIES
Report of
Independent Public Accountants
Consolidated
Balance Sheets as of December 31, 2001 and 2000
Consolidated
Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999
Consolidated
Statement of Stockholders’ Equity and Comprehensive Net Loss for the Years
Ended December 31, 2001, 2000 and 1999
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999
Notes
to Consolidated Financial Statements
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, 2001 and 2000, and the related
consolidated statements of operations, stockholders’ equity and comprehensive
net loss and cash flows for each of the three years in the period then
ended. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits
in accordance with 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
financial statements referred to above present fairly, in all material
respects, the financial position of Bitstream Inc. and subsidiaries as of December
31, 2001 and 2000, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States.
Boston, Massachusetts
February 13, 2002
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER-SHARE
AMOUNTS)
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 AND COMPREHENSIVE NET LOSS
(IN THOUSANDS)
The accompanying notes are an integral part
of these consolidated financial statements.
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
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.
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”) which
Bitstream established in December 1999; and (3) Pageflex, 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. Pageflex, Inc. was
established by the Company in January 1999, as a wholly owned subsidiary for
the purpose of developing on-demand marketing software.
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 Company has also experienced net
losses and as of December 31, 2001 has a net accumulated deficit of $25.1
million.
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); 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 intercompany transactions and
balances have been eliminated in consolidation.
(b) Revenue Recognition
The Company recognizes
revenue in accordance with Statement of Position 97-2 (SOP 97-2), Software
Revenue Recognition, as modified by SOP 98-9, Modifications of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions. The Company derives revenues from software
product licenses, professional consulting, and support and 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.
Licensing fees and
royalty revenues include: (1) payments paid by Original Equipment Manufacturers
("OEMs") and Independant Software Vendors ("ISVs")
customers for text imaging and page layout technologies; (2) direct and
indirect sales of software publishing applications for the creation,
enhancement, management, transport, viewing and printing of electronic
information; (3) direct sales of custom and other type products to end users
such as graphic artists, desktop publishers and corporations; and (4) sales of
type products to foreign customers primarily through distributors. Certain OEM and ISV customers pay royalties
only upon the sublicensing of the Compvany’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.
Revenue under
multiple-element arrangements, which may include several different software
products and services sold together, is allocated to each element based on the
residual method in accordance with SOP 98-9. The Company uses the residual
method when vendor-specific objective evidence of fair value does not exist for
one of the delivered elements of the arrangement. Under the residual method,
the fair value of the undelivered elements is deferred and subsequently
recognized. The Company has established sufficient vendor-specific objective
evidence for the value of its consulting, training, and other services, based
on the price charged when these elements are sold separately. Accordingly,
software license revenues are recognized under the residual method in
arrangements in which software is licensed with consulting, training or other
services.
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. Provisions for
any estimated losses on uncompleted contracts are made in the period in which
such losses become probable. The
Company recognizes revenue from support and maintenance agreements ratably over
the term of the agreement.
Revenue from guaranteed
minimum royalty licenses is recognized upon delivery of the software since no
further obligations of the Company exist, 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 related to extended payment programs
is recognized when payment becomes due to the Company.
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 maintenance contract. Revenue on certain long-term development contracts is recognized
using the percentage-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. Revenue related to extended payment programs
is recognized when payment becomes due to the Company.
Deferred revenue includes
unearned software maintenance revenue, certain prepaid royalties and advance
billings under software development contracts.
Costs of revenue from
software licenses consists primarily of royalties paid to third party
developers and foundries whose products the Company sells, and costs to
distribute the product, including the cost of the media on which it is
delivered. Cost of revenue from
services consists primarily of costs associated with consulting and custom
product development services.
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, 2001, 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.
(d) Stock-Based
Compensation
SFAS No. 123, Accounting
for Stock-Based Compensation, permits a company to choose either a
new fair value-based method prescribed by SFAS No. 123 or Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
which prescribes an intrinsic value-based method of accounting for its employee
stock based compensation arrangements.
The Company elected to continue to account for its employee stock-based
compensation plans utilizing the provisions of APB Opinion No. 25 and the
disclosure only option under SFAS No. 123, which requires disclosure of pro
forma information regarding net loss and net loss per share based on fair value
accounting for stock based compensation plans.
This pro forma disclosure is presented in Note 7.
(e) Cash and Cash
Equivalents
As of December 31, 2001,
cash and cash equivalents included bank deposits and 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
In June 1998, the
Financial Accounting Standards Board (“FASB”) issued SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement, as amended by SFAS No. 137 and SFAS No. 138, is
effective for fiscal years ending December 31, 2001 and thereafter. 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.
(h) Fair Value of
Financial Instruments
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, restricted cash, accounts payable and
capital leases. The estimated fair
value of these financial instruments approximates their carrying value at
December 31, 2001 and 2000 due to the short-term nature of these instruments.
(i) Foreign Currency
Translation
The Company considers the
functional currency of its foreign subsidiaries to be the U.S. dollar, and
accordingly, their financial information is translated into U.S. dollars using
exchange rates in effect at period end for monetary assets and liabilities,
historical rates for nonmonetary assets and liabilities and average exchange rates
during each reporting period for the results of operations. Gains (losses) resulting from translation of
foreign subsidiary financial statements, as well as transaction gains (losses),
are charged to operations.
(j) Postretirement
Benefits
The Company has no
obligations under SFAS No. 106, Employers’ Accounting for Postretirement Benefits
Other Than Pensions, as it does not currently offer such benefits.
(k) Off-Balance Sheet
Risk and Concentration of Credit Risk
SFAS No. 105, Disclosure
of Information about Financial Instruments with Off-Balance Sheet Risk and
Financial Instruments with Concentrations 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 highly-rated 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 December 31, 2001, two customers accounted for 18% and 17% of
the Company’s accounts receivable. The
Company does not have any off-balance sheet risks as of December 31, 2001. At December 31, 2000, one customer accounted
for 18% of the Company’s accounts receivable.
For the year ended December 31, 2001, no single customer accounted for
10% or greater of the Company’s revenues.
For the year ended December 31, 2000, one customer accounted for 10% of
the Company’s revenue. For the year
ended December 31, 1999, one customer accounted for 12% of the Company’s
revenue.
(l) 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 five years. (See Note 1
(p))
(m) 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 currently reviews its long-lived assets (which include intangible
assets 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. (See Note 1 (p))
(n) Comprehensive
Loss
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
the reporting and display of comprehensive (loss) income and its components in
a full set of general purpose financial statements. The Company’s comprehensive loss is equal to the Company’s net
loss for all periods presented.
(o) Reclassifications
Certain prior year
account balances have been reclassified to be consistent with the current
year’s presentation.
(p) Recently Issued
Accounting Standards
In September 2000, the
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 has adopted SFAS No. 140, which did not 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 and thereafter. 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.
In June 2001, the FASB
issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and
Other Intangible Assets. These statements establish new standards
for accounting for business combinations, goodwill, and intangible assets. SFAS No. 141 eliminates the
pooling-of-interests method of accounting for business combinations except for
qualifying business combinations that were initiated prior to July 1, 2001 and
changes the criteria to recognize intangible assets apart from goodwill. The requirements of SFAS No. 141 are
effective for any business combination accounted for by the purchase method
that is completed after June 30, 2001.
SFAS No. 142 supersedes APB Opinion No. 17, Intangible Assets (which
required that goodwill and intangible assets be amortized over a life not to
exceed 40 years), and carries forward its provisions related to internally
developed intangible assets without the FASB’s reconsideration. Under SFAS No. 142, goodwill and
indefinite-lived intangible assets are no longer amortized but are reviewed
annually for impairment, or more frequently if impairment indicators
arise. Goodwill is required to be
tested for impairment between the annual tests if an event occurs or
circumstances change that more-likely-than-not reduce the fair value of a
reporting unit below its carrying value.
An indefinite-lived intangible asset is required to be tested for impairment
between the annual tests if an event occurs or circumstances change indicating
that the asset might be impaired.
Separable intangible assets that have finite lives will continue to be
amortized over their useful lives, for which SFAS No. 142 does not impose a
limit. Any required goodwill impairment
charges would be presented as a separate line item within the operating section
of the income statement. The Company
has adopted SFAS No. 141, which did not have a material impact on the Company’s
financial position or results of operations.
The Company will adopt
SFAS No. 142 on January 1, 2002. Under
SFAS No. 142, all goodwill amortization will cease effective January 1, 2002,
which otherwise would have approximated $513,000 for the year ended December
31, 2002. Material amounts of recorded
goodwill attributable to each reporting unit will be tested for
impairment. Amortization of goodwill
during the years ended December 31, 2001 and 2000 was $583,000 and $469,000,
respectively. Management has undertaken
to begin the initial impairment testing as of January 1, 2002, and believes
that the fair value of its reporting units will be greater than the carrying
values for those units and thus does not believe an impairment charge will be
recognized as a result of the initial test.
In August 2001, the FASB
issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Asset. This statement
supersedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of and
APB No. 30, Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transaction.
This statement provides guidance on recognizing and measuring impairment for
long-lived assets excluding certain long-lived assets, such as goodwill,
non-amortized intangible assets and deferred tax assets. This statement is
effective for the Company in the first quarter of its fiscal year ending
December 2002. Management does not expect the adoption of SFAS No. 144 to have
a material impact on our financial position or results of operations.
(2) Loss Per Share
(in thousands)
In accordance with SFAS
No. 128, Earnings
Per Share, basic loss per share was determined by dividing net loss
by the weighted average shares of common stock outstanding during the year.
Diluted loss per share reflect dilution from potentially dilutive securities,
primarily stock options, based on the treasury stock method. In computing
diluted loss 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 each of the three years ended December 31, 2001 are the
same as basic net loss per share as the inclusion of the potential common stock
equivalents would be antidilutive.
If the Company had been
in a profitable position, the potential common shares would have increased the
weighted average shares outstanding by 1,198, 1,819 and 855 shares for the
years ended December 31, 2001, 2000, and 1999, respectively. In addition, there were warrants and options
to purchase 112, 123 and 339 shares for the years ended December 31, 2001, 2000
and 1999, 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) Investment (in
thousands, except percentages)
On March 13, 1998, the
Company made a $500 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. During the year ended December
31, 2001 the Company made additional investments totaling $410 in DiamondSoft,
Inc., resulting in an increase in Bitstream ownership percentage to 31.7% at
December 31, 2001. Income (losses) for the years ended December 31, 2001, 2000
and 1999 related to the Company’s investment in DiamondSoft totaled
approximately $(260), $(13) and $18, respectively, and are included in the
accompanying 2001, 2000 and 1999 consolidated statements of operations.
The Company has recorded
goodwill related to this investment equal to its percentage of DiamondSoft’s
net assets, and is currently amortizing this goodwill over five years. The Company will cease to record goodwill
amortization as of January 1, 2002 under SFAS No. 142. (See Note 1(p))
On June 19, 2000, the
Company deposited $300 into a money market account at Wells Fargo Bank, which
is securing a $300 line of credit granted DiamondSoft by the bank. This $300 is presented on the Company’s consolidated
balance sheet as restricted cash.
(4) 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 bases of assets and liabilities, as measured by enacted
tax rates 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:
The following is a
summary of the components of the provision for income taxes (in thousands):
The significant items
composing the deferred tax asset are as follows (in thousands):
The following is a
summary of foreign and domestic pretax (loss) income (in thousands):
At December 31, 2001, the
Company has available federal and state net operating loss (“NOLs”)
carryforwards for income tax purposes and federal and state tax credit
carryforwards to reduce future federal income taxes, if any. Utilization of
these NOLs is subject to certain annual limitations in accordance with certain
tax laws and regulations. These net operating loss and tax credit carryforwards
are subject to review and possible adjustment by the Internal Revenue Service
and expire as follows (in thousands):
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, 2001 the
Company has fully reserved its deferred tax asset primarily due to losses in
each of the last three years.
(5) Accrued
Expenses
(6) 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 1, 2003. Rent
expense charged to operations for the years ended December 31, 2001, 2000 and
1999 was approximately $730,000, $515,000, and $587,000, 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 2000 and 1999.
The future minimum annual
lease payments as of December 31, 2001 under the Company’s leased facilities,
is as follows:
(7) Stockholders’
Equity, (number of shares in thousands)
(a) General
The Company has the
following authorized capital: 30,500 shares of Common Stock, $0.01 par value,
(30,000 of which are shares of Class A Common Stock and 500 of which are shares
of Class B Common Stock), and 6,000 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 Class B Common Shares are
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 31, 2001 and 2000 represent Class A Common Stock
(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, 2001 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 2001, 2000 and 1999, 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 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, 2001, the Company had available for issuance
stock options to purchase 135 shares of Class A Common Stock pursuant to the
1994 Plan.
On May 1, 1996, the Board
of Directors adopted the 1996 Stock Plan (the “1996 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 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 shares of Class A Common Stock have been reserved for issuance
under the 1996 Plan. As of December 31, 2001, the Company had 30 stock options
available for issuance to purchase shares of Class A Common Stock pursuant to
the 1996 Plan.
On March 10, 1997, the
Board of Directors adopted the 1997 Stock Plan (the “1997 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 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 shares of
Class A Common Stock have been reserved for issuance under the 1997 Plan. As of December 31, 2001, the Company had
available for issuance, stock options to purchase 289 shares of Class A Common
Stock pursuant to the 1997 Plan.
On February 11, 2000, the
Board of Directors adopted the 2000 Stock Plan (the “2000 Plan”) under which
the Company is authorized to grant warrants, incentive stock options and
nonqualified stock options to purchase up to 1,000 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 2000
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. As of December 31, 2001, the
Company had available for issuance, stock options to purchase 144 shares of
Class A Common Stock pursuant to the 2000 Plan.
On February 11, 2000, the
Board of Directors also adopted the Pageflex, Inc. and MyFonts.com, Inc. 2000
Stock Plans. Under these Plans, the
Company is authorized to grant warrants, incentive stock options and nonqualified stock options to purchase up
to 3,000 shares of Common Stock in each of these two subsidiaries. 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 2000 Stock Plans provide 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 subsidiary or a change in control of the subsidiary. As of
December 31, 2001, the Company had available for issuance, stock options to
purchase 1,415 and 1,277 shares of Pageflex, Inc. and MyFonts.com, Inc. Common
Stock, respectively, pursuant to the 2000 Stock Plans.
Stock option activity
under all Bitstream, Inc. stock plans for the years ended December 31, 2001,
2000 and 1999 is as follows:
During 2000, the Company
issued options to purchase 7 shares of common stock to non-employee consultants
in exchange for services. The Company
recorded these transactions at fair value, which was $12,732 for the year ended
December 31, 2000. The compensation
expense is recorded over the three year vesting period and is subject to
variable accounting treatment prior to vesting, whereby the Company remeasures
the fair value of the options at the end of each reporting period. Compensation expense related to these
options was $29,186 and $7,809 for the years ended December 31, 2001 and 2000,
respectively.
(c) Warrants,
In 1997, the Company
issued warrants under the 1994 Plan for the purchase of 150 shares of Class A
Common Stock at $0.90 - $4.94 per share, which vest in annual increments over a
three-year period, to several members of the Company’s management team and
Board of Directors and an affiliate to the Board of Directors. The Company recognized compensation expense
associated with the warrants over the three- year vesting period ending in the
year ended December 31, 2000. During
2000 and 1999, the Company recognized $9,000 and $26,000 in compensation
expense related to these warrants.
Warrant activity for the
three years ended December 31, 2001 is as follows :
(d)
Stock-Based Compensation
The Company accounts for
its employee stock plans using the intrinsic value method. The following table sets forth the pro forma
amounts of net loss and net loss per share that would have resulted if the
Company accounted for its employee stock plans under the fair value recognition
provisions of SFAS 123, “Accounting for Stock-Based Compensation”:
For purposes of computing
pro forma net loss, the Company estimates the fair value of all option or
warrant grants granted to employees as of December 31, 2001 using the Black
Scholes option pricing model prescribed by SFAS No. 123. The total value of the options granted to
employees during the years ended December 31, 2001, 2000, and 1999 was computed
as $1,483,000, $1,443,000 and $1,160,000 respectively. The pro forma compensation expense on all
options and warrants granted as of December 31, 2001 and for the years ended
December 31, 2001, 2000 and 1999 was computed as $1,188,000, $1,167,000 and
$1,343,000, respectively. The total pro
forma compensation expense to be amortized and recognized over remaining option
vesting periods during future years was computed as $2,278,000.
Assumptions used and weighted average information are as follows:
(8) 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 $144,000, $150,000 and $112,000 for the years ended December 31,
2001, 2000, and 1999, respectively.
(9) 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 December 31, 2001: (i) a type
and technology segment; (ii) an Pageflex segment and (iii) an e-commerce
initiative for selling fonts over the Internet.
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. The e-commerce segment’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 the e-commerce
segmented 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.
The following tables sets
forth the Company’s statement of operations by segment with additional
disclosures as required by SFAS No. 131 (in thousands):
The following tables set forth the Company’s supplemental balance sheet
information by segment
(10) Geographical Reporting
SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information also
requires disclosures of certain “Enterprise-wide Information” including the
information about major customers included in Note 1(k) and geographical
areas. The Company attributes revenues
to different geographical areas on the basis of the location of the customer.
All of the Company’s product sales for the years ended December 31, 2001, 2000
and 1999 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):
Long-lived tangible assets by geographic area are as
follows (in thousands):
(11) Quarterly
Financial Data, (Unaudited)
The following
tables (presented in thousands, except per share amounts) set forth quarterly
supplementary data for each of the years in the two year period ended December
31, 2001.
(12) Valuation
and qualifying accounts (in thousands)
(1) Uncollectible accounts
written off, net of recoveries.