UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2002 |
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or |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to .
COMMISSION FILE NUMBER: 0-21541
BITSTREAM INC.
(Exact name of registrant as specified in its charter)
Delaware |
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04-2744890 |
(State or other
jurisdiction of incorporation or |
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(I.R.S. Employer Identification No.) |
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215 First Street |
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02142 |
(Address of principal executive offices) |
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(Zip Code) |
(617) 497-6222
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
On August 9, 2002 there were 8,475,125 shares of Class A Common Stock, par value $0.01 per share, of which 125,809 were designated as treasury shares, and no shares of Class B Common Stock, par value $0.01 per share, outstanding.
BITSTREAM INC. AND SUBSIDIARIES
INDEX
1
BITSTREAM INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
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June 30, |
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December 31, |
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2002 |
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2001 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
5,412 |
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$ |
5,716 |
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Accounts receivable, net of allowance of $34 and $53 at June 30, 2002 and December 31, 2001, respectively |
|
736 |
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679 |
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Prepaid expenses and other current assets |
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136 |
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122 |
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Total current assets |
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6,284 |
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6,517 |
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Property and equipment, net |
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367 |
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473 |
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Other assets: |
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Restricted cash |
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300 |
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300 |
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Goodwill |
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727 |
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727 |
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Investment in DiamondSoft, Inc. |
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641 |
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599 |
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Intangible assets |
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250 |
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218 |
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Other assets |
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6 |
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5 |
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Total other assets |
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1,924 |
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1,849 |
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Total assets |
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$ |
8,575 |
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$ |
8,839 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
286 |
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$ |
93 |
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Accrued expenses |
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1,198 |
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1,126 |
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Current portion of deferred revenue |
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555 |
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610 |
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Total current liabilities |
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2,039 |
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1,829 |
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Long-term deferred revenue |
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17 |
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14 |
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Total liabilities |
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2,056 |
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1,843 |
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Stockholders equity : |
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Common stock,
$.01 par value Authorized30,500 shares |
|
84 |
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84 |
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Additional paid-in capital |
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32,386 |
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32,383 |
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Accumulated deficit |
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(25,591 |
) |
(25,111 |
) |
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Treasury stock, at cost; 126 shares as of June 30, 2002 and December 31, 2001 |
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(360 |
) |
(360 |
) |
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Total stockholders equity |
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6,519 |
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6,996 |
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Total liabilities and stockholders equity |
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$ |
8,575 |
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$ |
8,839 |
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The accompanying notes are an integral part of these consolidated financial statements.
2
BITSTREAM INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
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For the Three Months Ended June 30, |
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For the Six Months Ended June 30, |
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2002 |
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2001 |
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2002 |
|
2001 |
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Revenue: |
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Software licenses |
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$ |
1,949 |
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$ |
1,673 |
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$ |
3,785 |
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$ |
2,969 |
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Services |
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264 |
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198 |
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561 |
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530 |
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Total revenue |
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2,213 |
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1,871 |
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4,346 |
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3,499 |
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Cost of revenue: |
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Software licenses |
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496 |
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268 |
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808 |
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468 |
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Services |
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91 |
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92 |
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194 |
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176 |
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Cost of revenue |
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587 |
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360 |
|
1,002 |
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644 |
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Gross profit |
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1,626 |
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1,511 |
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3,344 |
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2,855 |
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Operating expenses: |
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Marketing and selling |
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532 |
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731 |
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1,127 |
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1,556 |
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Research and development |
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991 |
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1,265 |
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1,950 |
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2,593 |
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General and administrative |
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419 |
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421 |
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761 |
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833 |
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Total operating expenses |
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1,942 |
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2,417 |
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3,838 |
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4,982 |
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Operating loss |
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(316 |
) |
(906 |
) |
(494 |
) |
(2,127 |
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Gain (Loss) on investment in DiamondSoft, Inc. |
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43 |
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(76 |
) |
42 |
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(151 |
) |
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Interest income, net |
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19 |
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64 |
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42 |
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151 |
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Loss before provision for income taxes |
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(254 |
) |
(918 |
) |
(410 |
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(2,127 |
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Provision for income taxes |
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39 |
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31 |
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70 |
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80 |
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Net loss |
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$ |
(293 |
) |
$ |
(949 |
) |
$ |
(480 |
) |
$ |
(2,207 |
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Basic and diluted net loss per share |
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$ |
(0.04 |
) |
$ |
(0.12 |
) |
$ |
(0.06 |
) |
$ |
(0.28 |
) |
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Basic and diluted weighted average shares outstanding |
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8,313 |
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8,030 |
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8,309 |
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7,990 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
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For the Six Months Ended June 30, |
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2002 |
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2001 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net loss |
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$ |
(480 |
) |
$ |
(2,207 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation |
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168 |
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189 |
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Amortization |
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35 |
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258 |
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Stock based compensation |
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(18 |
) |
5 |
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(Gain) Loss on investment in DiamondSoft, Inc. |
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(42 |
) |
151 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(57 |
) |
1,112 |
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Prepaid expenses and other assets |
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(15 |
) |
57 |
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Accounts payable |
|
193 |
|
88 |
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Accrued expenses |
|
72 |
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(196 |
) |
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Deferred revenue |
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(52 |
) |
277 |
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Net cash used in operating activities |
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(196 |
) |
(266 |
) |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of property and equipment, net |
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(62 |
) |
(97 |
) |
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Additions to Intangible assets |
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(67 |
) |
(130 |
) |
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Investment in DiamondSoft, Inc. |
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(250 |
) |
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Net cash used in investing activities |
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(129 |
) |
(477 |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from the exercise of stock options/warrants |
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21 |
|
148 |
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Net cash provided by financing activities |
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21 |
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148 |
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Net Decrease in Cash and Cash Equivalents |
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(304 |
) |
(595 |
) |
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Cash and Cash Equivalents, beginning of period |
|
5,716 |
|
7,149 |
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Cash and Cash Equivalents, end of period |
|
$ |
5,412 |
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$ |
6,554 |
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|
|
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
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Cash paid for interest |
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$ |
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$ |
2 |
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Cash paid for income taxes |
|
$ |
17 |
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$ |
126 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(1) Significant Accounting Policies
Bitstream Inc. (Bitstream) and subsidiaries (together the Company), headquartered in Cambridge, Massachusetts, is composed of three separate and distinct businesses: (1) type and technology (Type) 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 (MyFonts), a showcase of the worlds fonts in one easy-to-use e-commerce web site operated by Bitstreams wholly-owned subsidiary, MyFonts.com, Inc. which Bitstream established in December 1999; and (3) Pageflex, in which the Companys wholly-owned subsidiary Pageflex, Inc., 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.
(a) Basis of Presentation
The consolidated financial statements of the Company presented herein, without audit, have been prepared pursuant to the rules of the Securities and Exchange Commission (the SEC) for quarterly reports on Form 10-Q and do not include all of the information and footnote disclosures required by generally accepted accounting principles. The balance sheet information at December 31, 2001 has been derived from the Companys audited consolidated financial statements. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the period ended December 31, 2001 included in the Companys Annual Report on Form 10-K, which was filed by the Company with the SEC on March 29, 2002.
The balance sheet as of June 30, 2002, the statements of operations for the three and six months ended June 30, 2002 and 2001, the statements of cash flows for the six months ended June 30, 2002 and 2001, and the notes to each are unaudited, but in the opinion of management include all adjustments necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows of the Company and its subsidiaries for these interim periods.
The results of operations for the three and six months ended June 30, 2002 may not necessarily be indicative of the results to be expected for the year ending December 31, 2002.
(b) Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Property and equipment consists of the following (in thousands):
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June 30, |
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December 31, |
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2002 |
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2001 |
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|
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Equipment and computer software |
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$ |
2,475 |
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$ |
2,413 |
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Purchased software |
|
351 |
|
351 |
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Furniture and fixtures |
|
372 |
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372 |
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Leasehold improvements |
|
659 |
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659 |
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3,857 |
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3,795 |
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|
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Less Accumulated depreciation and amortization |
|
3,490 |
|
3,322 |
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Property and equipment, net |
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$ |
367 |
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$ |
473 |
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5
(c) Off-Balance Sheet Risk and Concentration of Credit Risk
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 Companys accounts receivable. At June 30, 2002, two customers accounted for 20% and 16% of the Companys accounts receivable. The Company does not have any off-balance sheet risks as of June 30, 2002. At December 31, 2001, two customers accounted for 18% and 17% of the Companys accounts receivable.
For the three months and six months ended June 30, 2002 and 2001, no single customer accounted for 10% or more of the Companys consolidated revenue. Furthermore, for the three months ended June 30, 2002, two customers of the Companys Type segment accounted for 13% and 10% of the revenue for that segment, three customers of the Pageflex segment accounted for 18%, 11% and 10% of the revenue for that segment and no customers accounted for 10% or more of the MyFonts segments revenue. For the three months ended June 30, 2001, one customer of the Companys Type segment accounted for 10% of the revenue for that segment, one customer of the Pageflex segment accounted for 19% of the revenue for that segment, and no customers accounted for 10% or more of the MyFonts segment. For the six months ended June 30, 2002, one customer of the Companys Type segment accounted for 10% of the revenue for that segment, one customer of the Pageflex segment accounted for 11% of the revenue for that segment and no customers accounted for 10% or more of the MyFonts segments revenue. For the six months ended June 30, 2001, three customers of the Pageflex segment accounted for 11%, 11% and 10% of the revenue for that segment, and no customers accounted for 10% or more of the Type or MyFonts segments.
(d) Goodwill and other intangible assets (in thousands, except per share amounts)
Goodwill is stated at cost, less accumulated amortization, and consists of the following:
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June 30, |
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December 31, |
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2002 |
|
2001 |
|
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|
|
|
|
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Acquisition of Mainstream Software Solutions Ltd.. |
|
$ |
|
|
$ |
450 |
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Acquisition of Type Solutions, Inc. |
|
595 |
|
595 |
|
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Acquisition of Alaras Corporation. |
|
1,300 |
|
1,300 |
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|
|
1,895 |
|
2,345 |
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LessAccumulated amortization |
|
1,168 |
|
1,618 |
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|
|
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Goodwill, Net |
|
727 |
|
727 |
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Embedded goodwill from equity investment in DiamondSoft, Inc. (Note 3) |
|
557 |
|
557 |
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|
|
|
|
|
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Total Goodwill |
|
$ |
1,284 |
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$ |
1,284 |
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6
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. The Company adopted SFAS No. 142, effective January 1, 2002, which establishes new accounting and reporting requirements for goodwill and other intangible assets. Under SFAS No. 142, goodwill and indefinite-lived intangible assets are no longer amortized, but are required to be reviewed annually for impairment, or more frequently if impairment indicators arise. Separable intangible assets that have finite lives will continue to be amortized over their useful lives. In addition, under the new pronouncement, the Company is required to establish reporting units and allocate goodwill to each of these reporting units. The Company has established the following reporting units: Type, MyFonts, and Pageflex.
The Company ceased all goodwill amortization effective January 1, 2002. In addition, the Company tested recorded goodwill attributable to each reporting unit for impairment. Management completed the initial impairment testing as of January 1, 2002 and determined that the fair value of its reporting units were greater than the carrying values for those units. The Company has recorded goodwill embedded in its equity investment in DiamondSoft, Inc. of $557 as of June 30, 2002 and December 31, 2001, which is not attributable to a reporting unit.
The carrying amounts of goodwill attributable to each reporting unit are as follows:
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June 30, |
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December 31, |
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|
|
2002 |
|
2001 |
|
||
|
|
|
|
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Type |
|
$ |
228 |
|
$ |
228 |
|
MyFonts |
|
|
|
|
|
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Pageflex |
|
499 |
|
499 |
|
||
|
|
$ |
727 |
|
$ |
727 |
|
Had the Company applied the non-amortization provisions of SFAS No. 142 as of January 1, 2001, results of operations for the three months and six months ended June 30, 2002 and 2001, would have been as follows (in thousands, except per share amounts):
|
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Three
Months Ended |
|
Six Months
Ended |
|
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|
|
||||||||||
|
|
2002 |
|
2001 |
|
2002 |
|
2001 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Reported net loss |
|
$ |
(293 |
) |
$ |
(949 |
) |
$ |
(480 |
) |
$ |
(2,207 |
) |
Add: |
|
|
|
|
|
|
|
|
|
||||
Goodwill amortization, net of tax |
|
|
|
145 |
|
|
|
287 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Adjusted net loss |
|
$ |
(293 |
) |
$ |
(804 |
) |
$ |
(480 |
) |
$ |
(1,920 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Basic and diluted loss per share as reported |
|
$ |
(0.04 |
) |
$ |
(0.12 |
) |
$ |
(0.06 |
) |
$ |
(0.28 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Basic and diluted pro forma loss per share |
|
$ |
(0.04 |
) |
$ |
(0.10 |
) |
$ |
(0.06 |
) |
$ |
(0.24 |
) |
7
In connection with its adoption of SFAS 142, the Company reassessed the useful lives and the classification of its identifiable intangible assets and determined that they continue to be appropriate. The components of the Companys amortized intangible assets follow:
|
|
June 30, 2002 |
|
December 31, 2001 |
|
||||||||
|
|
Gross Carrying Amount |
|
Accumulated Amortization |
|
Gross Carrying Amount |
|
Accumulated Amortization |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Marketing-related |
|
$ |
70 |
|
$ |
(34 |
) |
$ |
70 |
|
$ |
(27 |
) |
Technology-based |
|
356 |
|
(142 |
) |
289 |
|
(114 |
) |
||||
Total |
|
$ |
426 |
|
$ |
(176 |
) |
$ |
359 |
|
$ |
(141 |
) |
Amortization expense for intangible assets for the three months and six months ended June 30, 2002 was $17 and $34, respectively. Amortization expense for finite-lived intangibles for the year ended December 31, 2001 was $59. Estimated amortization for the remainder of 2002 and the five succeeding years follows:
|
|
Estimated Amortization Expense |
|
|
|
|
|
|
|
2002 (remainder) |
|
$ |
37 |
|
2003 |
|
71 |
|
|
2004 |
|
65 |
|
|
2005 |
|
48 |
|
|
2006 |
|
24 |
|
|
2007 |
|
5 |
|
|
|
|
$ |
250 |
|
(e) Recently Issued Accounting Standards
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, or normal use of the asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company does not expect SFAS No. 143 to have a material impact on its financial position or results of operations upon its adoption January 1, 2003.
8
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which supercedes EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The provisions of this Statement are required to be adopted for exit or disposal activities that are initiated after December 31, 2002. Under this standard, a liability for a cost associated with an exit or disposal activity formerly recognized upon the entitys commitment to an exit plan are now recognized when the liability is incurred. The Company does not expect SFAS No. 146 to have a material impact on its financial position or results of operations upon its adoption January 1, 2003.
(2) Loss Per Share (in thousands)
Basic earnings or loss per share is determined by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share reflect the effect of the conversion of potentially dilutive securities, such as stock options, based on the treasury stock method. In computing diluted earnings per share, common stock equivalents are not considered in periods in which a net loss is reported, as the inclusion of the common stock equivalents would be antidilutive. As a result there is no difference between the Companys basic and diluted loss per share for the three and six month periods ended June 30, 2002 and 2001.
If the Company had reported a profit for these periods, the potential common shares would have increased the weighted average shares outstanding by 1,171 and 696 shares for the three months ended June 30, 2002 and 2001, respectively, and by 1,296 and 792 for the six months ended June 30, 2002 and 2001, respectively. In addition, there were warrants and options outstanding to purchase 940 and 556 shares for the three months and six months ended June 30, 2002, respectively, and 449 shares for the three months and six months ended June 30, 2001 that were not included in the potential common share computations because their exercise prices were greater than the market price of the Companys 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 or 25% equity investment, accounted for under the equity method, 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. During the year ended December 31, 2001 the Company made additional investments totaling $410 in DiamondSoft, Inc., resulting in an increase in Bitstreams ownership percentage to 31.7% at December 31, 2001, which remained unchanged as of June 30, 2002.
Gains (losses) for the three months and six months ended June 30, 2002, and 2001 related to the Companys investment in DiamondSoft totaled approximately $43 and $42, and $(76) and $(151), respectively, and are included in the accompanying consolidated statements of operations. The Company has recorded goodwill related to this investment equal to the difference between the amount paid for the investment and the Companys share of DiamondSofts underlying net assets at the time of each investment. Losses for the three months and six months ended June 30, 2001 included $28 and $52, respectively, in amortization. This goodwill amortization ceased in accordance with the Companys adoption of SFAS No. 142 on January 1, 2002. (See Note 1(d))
9
On June 19, 2000, the Company deposited $300 into a money market account at Wells Fargo Bank to secure a $300 line of credit granted DiamondSoft by that bank. This cash, which continued to secure the line of credit, is presented on the Companys consolidated balance sheet as restricted cash.
Accrued expenses consist of the following:
|
|
June 30, |
|
December 31, |
|
||
|
|
2002 |
|
2001 |
|
||
Accrued royalties |
|
$ |
282 |
|
$ |
226 |
|
Payroll and other compensation |
|
584 |
|
510 |
|
||
Accrued professional and consulting services |
|
120 |
|
197 |
|
||
Other |
|
212 |
|
193 |
|
||
Total |
|
$ |
1,198 |
|
$ |
1,126 |
|
(5) Segment Reporting (in thousands):
The Company has determined it has three reportable segments: (i) its Type segment; (ii) its Pageflex segment and (iii) its MyFonts segment. The Companys reportable segments are strategic business units that sell the Companys products through distinct distribution channels. They are managed separately as each business requires different marketing strategies. The Companys approach is based on the way that management organizes the segments within the enterprise for making operating decisions and assessing performance. Revenue from the MyFonts segment includes revenue from products it purchases from the Type segment. Inter-segment revenue of $82 and $167 for the three months and six months ended June 30, 2002, respectively, and $55 and $78 for the three months and six months ended June 30, 2001, respectively, have been eliminated from MyFonts segmented revenue below, as well as from the Companys 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 table sets forth the Companys revenue and income (loss) from operations by segment:
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
||||||||
|
|
2002 |
|
2001 |
|
2002 |
|
2001 |
|
||||
Revenue (from external customers): |
|
|
|
|
|
|
|
|
|
||||
Type |
|
$ |
1,189 |
|
$ |
1,234 |
|
$ |
2,402 |
|
$ |
2,353 |
|
MyFonts |
|
331 |
|
113 |
|
593 |
|
193 |
|
||||
Pageflex |
|
693 |
|
524 |
|
1,351 |
|
953 |
|
||||
Consolidated revenue |
|
$ |
2,213 |
|
$ |
1,871 |
|
$ |
4,346 |
|
$ |
3,499 |
|
|
|
|
|
|
|
|
|
|
|
||||
Segment (loss) income from operations: |
|
|
|
|
|
|
|
|
|
||||
Type |
|
$ |
(40 |
) |
$ |
(37 |
) |
$ |
91 |
|
$ |
(184 |
) |
MyFonts |
|
(89 |
) |
(170 |
) |
(191 |
) |
(321 |
) |
||||
Pageflex |
|
(187 |
) |
(699 |
) |
(394 |
) |
(1,622 |
) |
||||
Consolidated loss from operations |
|
$ |
(316 |
) |
$ |
(906 |
) |
$ |
(494 |
) |
$ |
(2,127 |
) |
10
(6) Geographical Reporting (in thousands):
The Company attributes revenues to different geographical areas on the basis of the location of the customer. All of the Companys product sales for the three months and six months ended June 30, 2002 and 2001 were shipped from its headquarters located in the United States or its office located in Cheltenham, England. Revenues by geographic area are as follows:
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
||||||||
|
|
2002 |
|
2001 |
|
2002 |
|
2001 |
|
||||
Revenue: |
|
|
|
|
|
|
|
|
|
||||
United States |
|
$ |
1,337 |
|
$ |
1,045 |
|
$ |
2,873 |
|
$ |
1,833 |
|
Japan |
|
292 |
|
232 |
|
482 |
|
570 |
|
||||
United Kingdom |
|
133 |
|
204 |
|
200 |
|
263 |
|
||||
Canada |
|
181 |
|
144 |
|
215 |
|
202 |
|
||||
Korea |
|
98 |
|
13 |
|
218 |
|
58 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Other (Countries less than 5%) |
|
172 |
|
233 |
|
358 |
|
573 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total revenue |
|
$ |
2,213 |
|
$ |
1,871 |
|
$ |
4,346 |
|
$ |
3,499 |
|
Long-lived tangible assets by geographic area are as follows:
|
|
June 30, |
|
December
31, |
|
||
United States |
|
$ |
346 |
|
$ |
452 |
|
England |
|
21 |
|
21 |
|
||
Total |
|
$ |
367 |
|
$ |
473 |
|
11
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto.
OVERVIEW
Bitstream Inc. (Bitstream or the Company), headquartered in Cambridge, Massachusetts, is composed of three separate and distinct businesses: (1) type and technology (Type), 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 (MyFonts), a showcase of the worlds fonts in one easy-to-use e-commerce web site operated by Bitstreams wholly-owned subsidiary, MyFonts.com, Inc. which Bitstream established in December 1999; and (3) Pageflex, in which the Companys 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 Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Investors are cautioned that forward-looking statements are inherently uncertain. Actual performance and results of operations may differ materially from those projected or suggested in the forward-looking statements due to certain risks and uncertainties, including, without limitation, market acceptance of the Companys 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 Companys filings with the Securities and Exchange Commission, including those risks and uncertainties discussed in the Companys final Prospectus, dated October 30, 1996, included as part of the Companys Registration Statement on Form S-1 (333-11519), in the section entitled Risk Factors. The forward-looking statements contained herein represent the Companys 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.
12
RESULTS OF OPERATIONS (in thousands, except percent amounts)
Consolidated Gross Profit:
|
|
June 30, |
|
% of |
|
June 30, |
|
% of |
|
Change |
|
|||||
|
|
2002 |
|
Revenue |
|
2001 |
|
Revenue |
|
Dollars |
|
Percent |
|
|||
THREE MONTHS ENDED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Software licenses |
|
$ |
1,949 |
|
88.1 |
% |
$ |
1,673 |
|
89.4 |
% |
$ |
276 |
|
16.5 |
% |
Services |
|
264 |
|
11.9 |
|
198 |
|
10.6 |
|
66 |
|
33.3 |
|
|||
Total revenue |
|
2,213 |
|
100.0 |
|
1,871 |
|
100.0 |
|
342 |
|
18.3 |
|
|||
Cost of Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Software licenses |
|
496 |
|
25.4 |
|
268 |
|
16.0 |
|
228 |
|
85.1 |
|
|||
Services |
|
91 |
|
34.5 |
|
92 |
|
46.5 |
|
(1 |
) |
(1.1 |
) |
|||
Total cost of revenue |
|
587 |
|
26.5 |
|
360 |
|
19.2 |
|
227 |
|
63.1 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Gross Profit |
|
$ |
1,626 |
|
73.5 |
% |
$ |
1,511 |
|
80.8 |
% |
$ |
115 |
|
7.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
SIX MONTHS ENDED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Software licenses |
|
$ |
3,785 |
|
87.1 |
% |
$ |
2,969 |
|
84.9 |
% |
$ |
816 |
|
27.5 |
% |
Services |
|
561 |
|
12.9 |
|
530 |
|
15.1 |
|
31 |
|
5.8 |
|
|||
Total revenue |
|
4,346 |
|
100.0 |
|
3,499 |
|
100.0 |
|
847 |
|
24.2 |
|
|||
Cost of Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Software licenses |
|
808 |
|
21.3 |
|
468 |
|
15.8 |
|
340 |
|
72.6 |
|
|||
Services |
|
194 |
|
34.6 |
|
176 |
|
33.2 |
|
18 |
|
10.2 |
|
|||
Total cost of revenue |
|
1,002 |
|
23.1 |
|
644 |
|
18.4 |
|
358 |
|
55.6 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Gross Profit |
|
$ |
3,344 |
|
76.9 |
% |
$ |
2,855 |
|
81.6 |
% |
$ |
489 |
|
17.1 |
% |
The increase in revenue for the three months ended June 30, 2002 as compared to the three months ended June 30, 2001 was attributable to increased revenue in the Companys Pageflex and MyFonts segments of $169 and $218, respectively, partially offset by a decrease in Type revenue of $45. Revenue for the six months ended June 30, 2002 increased for all three of the Companys business segments as compared to the six months ended June 30, 2001. The increase in cost of revenue for the three months and six months ended June 30, 2002 as compared to the three months and six months ended June 30, 2001 was primarily due to increased royalty expense for the Companys MyFonts segment resulting from increased sales. Cost of revenue for the Company includes fees paid to third parties for the development or license of rights to technology and/or unique typeface designs, costs incurred in the fulfillment of custom orders, and costs associated with the duplication, packaging and shipping of product. Gross profit generated by each segment is discussed in more detail below.
13
Type Gross Profit:
|
|
June 30, |
|
% of Type |
|
June 30, |
|
% of Type |
|
Change |
|
|||||
|
|
2002 |
|
Revenue |
|
2001 |
|
Revenue |
|
Dollars |
|
Percent |
|
|||
THREE MONTHS ENDED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Software licenses |
|
$ |
1,103 |
|
92.8 |
% |
$ |
1,135 |
|
92.0 |
% |
$ |
(32 |
) |
(2.8% |
) |
Services |
|
86 |
|
7.2 |
|
99 |
|
8.0 |
|
(13 |
) |
(13.1 |
) |
|||
Total revenue |
|
1,189 |
|
100.0 |
|
1,234 |
|
100.0 |
|
(45 |
) |
(3.6 |
) |
|||
Percentage of total revenue |
|
53.7 |
% |
|
|
66.0 |
% |
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Cost of Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Software licenses |
|
$ |
197 |
|
17.9 |
|
$ |
114 |
|
10.0 |
|
83 |
|
72.8 |
|
|
Services |
|
36 |
|
41.9 |
|
71 |
|
71.7 |
|
(35 |
) |
(49.3 |
) |
|||
Total cost of revenue |
|
233 |
|
19.6 |
|
185 |
|
15.0 |
|
48 |
|
25.9 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Gross Profit |
|
$ |
956 |
|
80.4 |
% |
$ |
1,049 |
|
85.0 |
% |
$ |
(93 |
) |
(8.9% |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
SIX MONTHS ENDED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Software licenses |
|
$ |
2,187 |
|
91.0 |
% |
$ |
2,102 |
|
89.3 |
% |
$ |
85 |
|
4.0 |
% |
Services |
|
215 |
|
9.0 |
|
251 |
|
10.7 |
|
(36 |
) |
(14.3 |
) |
|||
Total revenue |
|
2,402 |
|
100.0 |
|
2,353 |
|
100.0 |
|
49 |
|
2.1 |
|
|||
Percentage of total revenue |
|
55.3 |
% |
|
|
67.3 |
% |
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Cost of Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Software licenses |
|
$ |
267 |
|
12.2 |
|
$ |
229 |
|
10.9 |
|
38 |
|
16.6 |
|
|
Services |
|
82 |
|
38.1 |
|
117 |
|
46.6 |
|
(35 |
) |
(29.9 |
) |
|||
Total cost of revenue |
|
349 |
|
14.5 |
|
346 |
|
14.7 |
|
3 |
|
0.9 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Gross Profit |
|
$ |
2,053 |
|
85.5 |
% |
$ |
2,007 |
|
85.3 |
% |
$ |
46 |
|
2.3 |
% |
The decrease in Type revenue for the three months ended June 30, 2002 versus the three months ended June 30, 2001 was the result of decreases in revenue from retail sales of $32 and custom design services of $13. The increase in revenue for the six months ended June 30, 2002 as compared to the six months ended June 30, 2001 was the result of an increase in OEM license revenue of $121 partially offset by decreases in retail product sales of $36 and custom design services of $36. Retail sales of the Companys Type products and custom design work have decreased over the past year because of consumer concerns over the economy and decreases in spending. Cost of revenue during the second quarter of 2002 increased primarily due to an increase in royalties due to an increase in sales of products developed by third parties. This increase was partially offset by a decrease in costs attributable to custom design services.
14
MyFonts Gross Profit:
|
|
June 30, |
|
% of MyFonts |
|
June 30, |
|
% of MyFonts |
|
Change |
|
||||||
|
|
2002 |
|
Revenue |
|
2001 |
|
Revenue |
|
Dollars |
|
Percent |
|
||||
THREE MONTHS ENDED |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Software licenses |
|
$ |
331 |
|
100.0 |
% |
$ |
113 |
|
100.0 |
% |
$ |
218 |
|
192.9 |
% |
|
Total revenue |
|
331 |
|
100.0 |
|
113 |
|
100.0 |
|
218 |
|
192.9 |
|
||||
Percentage of total revenue |
|
15.0 |
% |
|
|
6.0 |
% |
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Software licenses |
|
$ |
270 |
|
81.6 |
|
$ |
86 |
|
76.1 |
|
184 |
|
214.0 |
|
||
Total cost of revenue |
|
270 |
|
81.6 |
|
86 |
|
76.1 |
|
184 |
|
214.0 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross Profit |
|
$ |
61 |
|
18.4 |
% |
$ |
27 |
|
23.9 |
% |
$ |
34 |
|
125.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
SIX MONTHS ENDED |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Software licenses |
|
$ |
593 |
|
100.0 |
% |
$ |
193 |
|
100.0 |
% |
$ |
400 |
|
207.3 |
% |
|
Total revenue |
|
593 |
|
100.0 |
|
193 |
|
100.0 |
|
400 |
|
207.3 |
|
||||
Percentage of total revenue |
|
13.6 |
% |
|
|
5.5 |
% |
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Software licenses |
|
$ |
483 |
|
81.5 |
|
$ |
149 |
|
77.2 |
|
334 |
|
224.2 |
|
||
Total cost of revenue |
|
483 |
|
81.5 |
|
149 |
|
77.2 |
|
334 |
|
224.2 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross Profit |
|
$ |
110 |
|
18.5 |
% |
$ |
44 |
|
22.8 |
% |
$ |
66 |
|
150.0 |
% |
|
Revenue for MyFonts has increased as consumer purchases of the Companys products has increased. MyFonts has been successfully increasing the number of fonts available on its site, the number of foundries participating, and the visibility of the site through increased marketing activities. Myfonts has attracted new purchasers while also retaining existing customers who accounted for approximately 25% of orders during the first six months of 2002. Inter-company sales, which MyFonts generated from the resale of Bitstream fonts, have been excluded. Total MyFonts revenue, before the elimination of inter-company royalties resulting from the resale of Bitstream products, for the three months ended June 30, 2002 increased $245 or 145.8% to $413 from $168 for the three months ended June 30, 2001. Cost of revenue increased primarily because the sales of fonts from non-affiliated foundries increased. Royalties payable to non-affiliated foundries on sales of their fonts are approximately 80% of the revenue generated.
15
Pageflex Gross Profit:
|
|
June 30, |
|
% of Pageflex |
|
June 30, |
|
% of Pageflex |
|
Change |
|
|||||
|
|
2002 |
|
Revenue |
|
2001 |
|
Revenue |
|
Dollars |
|
Percent |
|
|||
THREE MONTHS ENDED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Software licenses |
|
$ |
515 |
|
74.3 |
% |
$ |
425 |
|
81.1 |
% |
$ |
90 |
|
21.2 |
% |
Services |
|
178 |
|
25.7 |
|
99 |
|
18.9 |
|
79 |
|
79.8 |
|
|||
Total revenue |
|
693 |
|
100.0 |
|
524 |
|
100.0 |
|
169 |
|
32.3 |
|
|||
Percentage of total revenue |
|
31.3 |
% |
|
|
28.0 |
% |
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Cost of Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Software licenses |
|
$ |
29 |
|
5.6 |
|
$ |
68 |
|
16.0 |
|
(39 |
) |
(57.4 |
) |
|
Services |
|
55 |
|
30.9 |
|
21 |
|
21.2 |
|
34 |
|
161.9 |
|
|||
Total cost of revenue |
|
84 |
|
12.1 |
|
89 |
|
17.0 |
|
(5 |
) |
(5.6 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Gross Profit |
|
$ |
609 |
|
87.9 |
% |
$ |
435 |
|
83.0 |
% |
$ |
174 |
|
40.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
SIX MONTHS ENDED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Software licenses |
|
$ |
1,005 |
|
74.4 |
% |
$ |
674 |
|
70.7 |
% |
$ |
331 |
|
49.1 |
% |
Services |
|
346 |
|
25.6 |
|
279 |
|
29.3 |
|
67 |
|
24.0 |
|
|||
Total revenue |
|
1,351 |
|
100.0 |
|
953 |
|
100.0 |
|
398 |
|
41.8 |
|
|||
Percentage of total revenue |
|
31.1 |
% |
|
|
27.2 |
% |
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Cost of Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Software licenses |
|
$ |
58 |
|
5.8 |
|
$ |
90 |
|
13.4 |
|
(32 |
) |
(35.6 |
) |
|
Services |
|
112 |
|
32.4 |
|
59 |
|
21.1 |
|
53 |
|
89.8 |
|
|||
Total cost of revenue |
|
170 |
|
12.6 |
|
149 |
|
15.6 |
|
21 |
|
14.1 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Gross Profit |
|
$ |
1,181 |
|
87.4 |
% |
$ |
804 |
|
84.4 |
% |
$ |
377 |
|
46.9 |
% |
The increase in Pageflex license revenue for the three and six month periods ended June 30, 2002 as compared to the three and six month periods ended June 30, 2001 was primarily the result of an increase in sales of Mpower, as well as an increase in Mpower monthly subscription fees generated by an expanding customer base. The increase in service revenue is primarily due to increases in maintenance support fees attributable to the increased customer base. The decrease in cost of revenue for the three months ended June 30, 2002 as compared to the three months ended June 30, 2001 was the result of a decrease in amounts paid to third parties resulting from the payment of a one time commission of $51 in the second quarter of 2001. This decrease was partially offset by an increase in shipping and manufacturing supply costs, as well as payroll costs resulting from the reassignment of two employees to provide support and infrastructure to the Companys increased costs customer base during the first quarter of 2002. These increased costs were greater than the one time commission discussed above, causing a total cost of revenue to increase for the six months ended June 30, 2002 as compared to the six months ended June 30, 2001.
16
Marketing and Selling:
|
|
June 30, |
|
% of |
|
June 30, |
|
% of |
|
Change |
|
|||||
|
|
2002 |
|
Revenue |
|
2001 |
|
Revenue |
|
Dollars |
|
Percent |
|
|||
THREE MONTHS ENDED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Type |
|
$ |
280 |
|
23.5 |
% |
$ |
404 |
|
32.7 |
% |
$ |
(124 |
) |
(30.7 |
)% |
MyFonts |
|
12 |
|
3.6 |
|
6 |
|
5.3 |
|
6 |
|
100.0 |
|
|||
Pageflex |
|
240 |
|
34.6 |
|
321 |
|
61.3 |
|
(81 |
) |
(25.2 |
) |
|||
Consolidated marketing And selling |
|
$ |
532 |
|
24.0 |
% |
$ |
731 |
|
39.1 |
% |
$ |
(199 |
) |
(27.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
SIX MONTHS ENDED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Type |
|
$ |
612 |
|
25.5 |
% |
$ |
778 |
|
33.1 |
% |
$ |
(166 |
) |
(21.3 |
)% |
MyFonts |
|
27 |
|
4.6 |
|
15 |
|
7.8 |
|
12 |
|
80.0 |
|
|||
Pageflex |
|
488 |
|
36.1 |
|
763 |
|
80.1 |
|
(275 |
) |
(36.0 |
) |
|||
Consolidated marketing And selling |
|
$ |
1,127 |
|
25.9 |
% |
$ |
1,556 |
|
44.5 |
% |
$ |
(429 |
) |
(27.6 |
)% |
The decrease in marketing and selling expenses in absolute dollars and as a percentage of revenue for the three month and six month periods ended June 30, 2002 as compared to the three month and six month periods ended June 30, 2001 reflects expense reductions implemented by management in the fourth quarter of 2001. Type marketing and selling expenses decreased primarily due to reductions in personnel and decreases in marketing expenditures for trade shows, and print and production costs for advertising and marketing. These reductions accounted for $102 and $154 of the decreases for the three months and six months ended June 30,2002 as compared to the same periods ended June 30, 2001. Pageflex marketing and selling expenses decreased due to reductions in employee related expenses of $49 and $141 for the three months and six months ended June 30, 2002 as compared to the same periods ended June 30, 2001, and due to a reduction in consulting expenses of $22 and $36, respectively, for the three and six months ended June 30, 2002 versus the three and six months ended June 30, 2001. Also, Pageflex tradeshow and travel expenses decreased $72 for the six months ended June 30, 2002 as compared to the six months ended June 30, 2001. Myfonts marketing and selling expenses moderately increased primarily due to increased utilization of the Companys marketing staff.
17
Research and Development (R&D):
|
|
June 30, |
|
% of |
|
June 30, |
|
% of |
|
Change |
|
|||||
|
|
2002 |
|
Revenue |
|
2001 |
|
Revenue |
|
Dollars |
|
Percent |
|
|||
THREE MONTHS ENDED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Type |
|
$ |
472 |
|
39.7 |
% |
$ |
443 |
|
35.9 |
% |
$ |
29 |
|
6.5 |
% |
MyFonts |
|
113 |
|
34.1 |
|
173 |
|
153.1 |
|
(60 |
) |
(34.7 |
) |
|||
Pageflex |
|
406 |
|
58.6 |
|
649 |
|
123.9 |
|
(243 |
) |
(37.4 |
) |
|||
Consolidated research and development |
|
$ |
991 |
|
44.8 |
% |
$ |
1,265 |
|
67.6 |
% |
$ |
(274 |
) |
(21.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
SIX MONTHS ENDED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Type |
|
$ |
911 |
|
37.9 |
% |
$ |
929 |
|
39.5 |
% |
$ |
(18 |
) |
(1.9% |
) |
MyFonts |
|
225 |
|
37.9 |
|
316 |
|
163.7 |
|
(91 |
) |
(28.8 |
) |
|||
Pageflex |
|
814 |
|
60.3 |
|
1,348 |
|
141.4 |
|
(534 |
) |
(39.6 |
) |
|||
Consolidated research and development |
|
$ |
1,950 |
|
44.9 |
% |
$ |
2,593 |
|
74.1 |
% |
$ |
(643 |
) |
(24.8 |
)% |
The decrease in R&D expenses in absolute dollars and as a percentage of revenue for the three and six month periods ended June 30, 2002 as compared to the same periods ended June 30, 2001 is primarily attributable to cost reductions adopted during the fourth quarter of 2001. The increase in R&D expenses for the Type segment for the three months ended June 30, 2002 as compared to the three months ended June 30, 2001 was primarily attributable to an increase in internally allocated resources and corresponding facility charges of $45, and $10 in engineering consulting. This increase was partially offset by a $30 decrease in goodwill amortization of technology associated with the acquisition of Type Solutions, Inc. resulting from the Companys adoption of SFAS No. 142 effective January 1, 2002. See Note 1(d) in the Notes to the Consolidated Financial Statements included herewith. The decrease in Type R&D expenses for the six months ended June 30, 2002 as compared to the six months ended June 30, 2001 was primarily the result of a decrease in goodwill amortization of $60, partially offset by the increases discussed above. The MyFonts decrease was primarily the result of the decreased use of outside consultants and the absorption of that work by employees. The Pageflex decrease was primarily attributable to headcount reductions completed as part of the Companys restructuring in the fourth quarter of 2001, which resulted in savings of $129 and $280 in salaries, benefits, travel and facility costs, as well as decreases of $44 and $88 resulting from the reassignment of two employees to customer support positions which are included in cost of revenue for the three month and six month periods ended June 30, 2002, respectively. Pageflex also decreased the outsourcing of engineering projects, which resulted in savings of $22 and $83 for the three month and six month periods ended June 30, 2002 as compared to the three month and six month periods ended June 30, 2001, respectively.
18
General and Administrative (G&A):
|
|
June 30, |
|
% of |
|
June 30, |
|
% of |
|
Change |
|
|||||
|
|
2002 |
|
Revenue |
|
2001 |
|
Revenue |
|
Dollars |
|
Percent |
|
|||
THREE MONTHS ENDED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Type |
|
$ |
244 |
|
20.5 |
% |
$ |
239 |
|
19.4 |
% |
$ |
5 |
|
2.1 |
% |
MyFonts |
|
25 |
|
7.6 |
|
18 |
|
15.9 |
|
7 |
|
38.9 |
|
|||
Pageflex |
|
150 |
|
21.6 |
|
164 |
|
31.3 |
|
(14 |
) |
(8.5 |
) |
|||
Consolidated general and administrative |
|
$ |
419 |
|
18.9 |
% |
$ |
421 |
|
22.5 |
% |
$ |
(2 |
) |
(0.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
SIX MONTHS ENDED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Type |
|
$ |
439 |
|
18.3 |
% |
$ |
484 |
|
20.6 |
% |
$ |
(45 |
) |
(9.3 |
)% |
MyFonts |
|
49 |
|
8.3 |
|
34 |
|
17.6 |
|
15 |
|
44.1 |
|
|||
Pageflex |
|
273 |
|
20.2 |
|
315 |
|
33.1 |
|
(42 |
) |
(13.3 |
) |
|||
Consolidated general and administrative |
|
$ |
761 |
|
17.5 |
% |
$ |
833 |
|
23.8 |
% |
$ |
(72 |
) |
(8.6 |
)% |
The increase in Type G&A expenses for the three months ended June 30, 2002 as compared to the three months ended June 30, 2001 was primarily the result of a change in bad debt expense of $29, partially offset by a savings of $22 in goodwill amortization related to the acquisition of Mainstream Software Solutions, Ltd., which was fully amortized as of December 31, 2001. The decrease in Type G&A expenses for the six months ended June 30, 2002 reflects first quarter savings in goodwill amortization of $22 and reductions in the cost of professional services. Pageflex G&A for the three and six month periods ended June 30, 2002 versus the same periods ended June 30, 2001 reflects decreased employee insurance and administrative expense allocations, of approximately $62 and $123, respectively, attributable to the headcount reduction completed as part of the Companys restructuring in the fourth quarter of 2001. Pageflex also benefited from decreased goodwill amortization in connection with the Alaras acquisition of $65 and $130 for the three and six month periods ended June 30, 2002 as compared to the same periods ended June 30, 2001, respectively. This goodwill amortization ceased in accordance with the Companys adoption of SFAS No. 142 on January 1, 2002. See Note 1(d) in the Notes to the Consolidated Financial Statements included herewith for further information. These decreases in Pagefelx G&A expenses were partially offset by increases in bad debt expense of $111 and $208, respectively, attributable to net recoveries of $(111) and $(226) for the three and six month periods ended June 30, 2001, respectively.
19
Loss on Investment in DiamondSoft, Inc.:
|
|
June 30, |
|
% of |
|
June 30, |
|
% of |
|
Change |
|
|||||
|
|
2002 |
|
Revenue |
|
2001 |
|
Revenue |
|
Dollars |
|
Percent |
|
|||
THREE MONTHS ENDED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Gain (loss) on investment in DiamondSoft, Inc. |
|
$ |
43 |
|
1.9 |
% |
$ |
(76 |
) |
(4.1 |
)% |
$ |
119 |
|
156.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
SIX MONTHS ENDED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Gain (loss) on investment in DiamondSoft, Inc. |
|
$ |
42 |
|
1.0 |
% |
$ |
(151 |
) |
(4.3 |
)% |
$ |
193 |
|
127.8 |
% |
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 Bitstreams ownership percentage to 31.7% at December 31, 2001 and June 30, 2002. The gain (loss) above represents the Companys pro rata share of DiamondSofts net income (loss). (See Note 3 in the Notes to the Consolidated Financial Statements included herewith.)
Interest income, net:
|
|
June 30, |
|
% of |
|
June 30, |
|
% of |
|
Change |
|
|||||
|
|
2002 |
|
Revenue |
|
2001 |
|
Revenue |
|
Dollars |
|
Percent |
|
|||
THREE MONTHS ENDED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Interest income, net |
|
$ |
19 |
|
0.9 |
% |
$ |
64 |
|
3.4 |
% |
$ |
(45 |
) |
(70.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
SIX MONTHS ENDED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Interest income, net |
|
$ |
42 |
|
1.0 |
% |
$ |
151 |
|
4.3 |
% |
$ |
(109 |
) |
(72.2 |
)% |
Interest income consists primarily of income earned on cash and money market instruments and has decreased as the Company has used cash to fund operations and also as the interest rates have decreased.
Provision for income taxes:
|
|
June 30, |
|
% of |
|
June 30, |
|
% of |
|
Change |
|
|||||
|
|
2002 |
|
Revenue |
|
2001 |
|
Revenue |
|
Dollars |
|
Percent |
|
|||
THREE MONTHS ENDED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Income Tax Expense |
|
$ |
39 |
|
1.8 |
% |
$ |
31 |
|
1.7 |
% |
$ |
8 |
|
25.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
SIX MONTHS ENDED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Income Tax Expense |
|
$ |
70 |
|
1.6 |
% |
$ |
80 |
|
2.3 |
% |
$ |
(10 |
) |
(12.5 |
)% |
The Companys provision for income taxes for the three and six month periods ended June 30, 2002 were attributable primarily to foreign income taxes. Foreign taxes vary with Type OEM license royalties from customers in countries who have signed tax conventions with the United States including Japan, Korea, and Poland, and also with the results of operations from the Companys location in the United Kingdom.
20
LIQUIDITY AND CAPITAL RESOURCES (in thousands)
The Company has funded its operations primarily through the public sale of equity securities, cash flows from operations and cash received from the sale of the Companys MediaBank and InterSep OPI product lines to Inso Providence Corporation in August of 1998. As of June 30, 2002, the Company had net working capital of $4,245 versus $4,688 at December 31, 2001.
The Company used cash of approximately $196 and $266 to fund its operations during the six months ended June 30, 2002 and 2001, respectively. The cash was used primarily to fund the Companys net losses. The net losses after adjustment for non-cash expenses resulted in the use of $337 and $1,604 in cash during the six months ended June 30, 2002 and 2001, respectively. Changes in operating assets and liabilities resulted in cash savings of $141 and $1,338 for the six months ended June 30, 2002 and 2001, respectively. During the six months ended June 30, 2002, the primary change in operating assets and liabilities was the increase in accounts payable and accruals of approximately $265. During the six months ended June 30, 2001, the primary change in operating assets and liabilities was the collection of accounts receivable and the resulting $1,112 decrease in outstanding accounts receivable.
The Companys investing activities used cash of $129 and $477 for the six months ended June 30, 2002 and 2001, respectively. Additions of property and equipment and intangible assets used $129 and $227 in cash for the six months ended June 30, 2002 and 2001, respectively. During the six months ended June 30, 2001 the Company also increased its investment in DiamondSoft, Inc. by $250.
The Companys financing activities provided cash of $21 and $148 for the six months ended June 30, 2002 and 2001, respectively from the exercise of stock options.
The Company believes its current cash and cash equivalent balances will be sufficient to meet the Companys 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 June 30, 2002, 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 Companys business. Any such transactions consummated may use a portion of the Companys working capital or require the issuance of equity or debt. As of June 30, 2002, the Company had future minimum annual lease payments under the Companys leased facilities of $201 for the remainder of 2002 and $301 for the year ended December 31, 2003.
NASDAQ LISTING REQUIREMENTS
The Companys Common Stock currently trades on the NASDAQ National Market System. Effective November 1, 2002, the NASDAQ has changed its National Market System continued listing standard from a minimum $4,000,000 net tangible asset requirement to a minimum $10,000,000 stockholders equity requirement. Based on its financial position as of June 30, 2002, the Company would not meet the continued listing requirements for the National Market System that will apply to
21
it as of November 1, 2002. Although the Company is currently pursuing options to meet this new National Market System standard, if the Company is unable to qualify for continued listing as of November 1, 2002, the Companys Common Stock is likely to be delisted from the NASDAQ National Market System. In such event, the Company intends to apply for continued listing on the NASDAQ Small Cap Market. Delisting from the National Market System or changing to the NASDAQ Small Cap Market may materially adversely affect the ability of the Companys stockholders to sell their shares and may make it more difficult for the Company to raise additional funding through the sale of its equity securities.
PART 1, ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, or normal use of the asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company does not expect SFAS No. 143 to have a material impact on its financial position or results of operations upon its adoption January 1, 2003.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which supercedes EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The provisions of this Statement are required to be adopted for exit or disposal activities that are initiated after December 31, 2002. Under this standard, a liability for a cost associated with an exit or disposal activity formerly recognized upon the entitys commitment to an exit plan are now recognized when the liability is incurred. The Company does not expect SFAS No. 146 to have a material impact on its financial position or results of operations upon its adoption January 1, 2003.
Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments.
As of June 30, 2002, 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 Companys investments are short-term, investment-grade commercial paper, and money market accounts that are carried on the Companys 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.
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Primary Market Risk Exposures
The Companys primary market risk exposures are in the areas of interest rate risk and foreign currency exchange rate risk. The Companys 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 Companys 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 six months ended June 30, 2002. Currently the Company does not engage in foreign currency hedging activities.
PART II OTHER INFORMATION
The Company is not a party to any material litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Instruments defining the rights of the holders of any class of registered securities of the Company have not been materially modified during the three months ended June 30, 2002.
(b) Rights evidenced by any class of registered securities of the Company have not been materially limited or qualified by the issuance or modification of any other class of securities during the three months ended June 30, 2002.
(c) There were no unregistered securities sold by the Company during the three months ended June 30, 2002.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On May 21, 2002, the Annual Meeting of Stockholders of the Company was held at the Boston Marriott Cambridge, Two Cambridge Center, Corner of Broadway and Third Street, Cambridge, Massachusetts 02142.
(b) Charles Ying, George B. Beitzel, Amos Kaminski, Michael Lang and David G. Lubrano were elected at the Annual Meeting to serve as directors of the Company.
(c) The following votes were tabulated on the aforementioned proposal:
1. To elect a board of five (5) directors to serve until the next Annual Meeting of Stockholders or until their respective successors are elected and qualified.
Nominee |
|
For |
|
Withheld Authority |
|
George Beitzel |
|
6,882,301 |
|
20,523 |
|
Amos Kaminski |
|
6,882,301 |
|
20,523 |
|
Michael Lang |
|
6,894,724 |
|
8,100 |
|
David Lubrano |
|
6,883,301 |
|
19,523 |
|
Charles Ying |
|
6,894,724 |
|
8,100 |
|
(d) Not applicable.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
On April 30, 2002 the Company filed a Current Report on Form 8-K reporting a change in its independent accountants from Arthur Andersen LLP to PricewaterhouseCoopers LLP.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BITSTREAM INC. |
(Registrant) |
SIGNATURE |
|
TITLE |
|
DATE |
|
/s/ Anna M. Chagnon |
|
President, Chief Operating Officer, Chief Financial Officer and General Counsel (Principal Financial Officer) |
|
August 13, 2002 |
|
|
Anna M. Chagnon |
||||
|
|
|
|
|
|
/s/ James P. Dore |
|
Corporate Controller (Principal Accounting Officer) |
|
August 13, 2002 |
|
|
James P. Dore |
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of the Company on Form 10Q for the period ended June 30, 2002 as filed with the Securities and Exchange on the date hereof (the Report), each of the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his or her knowledge:
1. The Report complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
SIGNATURE |
|
TITLE |
|
DATE |
|
|
|
|
|
|
|
/s/ Charles Ying |
|
|
|
August 13, 2002 |
|
|
Charles Ying |
|
Chief Executive Officer |
|
|
|
|
|
|
|
|
/s/ Anna M. Chagnon |
|
|
|
August 13, 2002 |
|
|
Anna M. Chagnon |
|
President, Chief Operating Officer, Chief Financial Officer and General Counsel (Principal Financial Officer) |
|
|
25