** **

**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark one)**

** **
| **ý**                                        | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                              |                                                                                          |
| **For  the quarterly period ended June 30, 2002** |
|                                              |
| **or**                                            |
|                                              |
| **o**                                             | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                              |                                                                                          |

**For thetransition period from              to                    .**

 

**COMMISSION FILE NUMBER: 0-21541**

 

**BITSTREAM INC.**

(Exact name of registrantas specified in its charter)

 

| **Delaware**                                                     |   | **04-2744890**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or  organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |                                  |
| **215 First Street****Cambridge,  Massachusetts**                |   | **02142**                             |
| (Address of principal  executive offices)                        |   | (Zip Code)                            |

 

**(617)497-6222**

(Registrant’s telephonenumber, including area code)

 

**NotApplicable**

(Former name, formeraddress and former fiscal year, if changed since last report)

 

Indicateby check mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý No o

 

On August 9, 2002 there were 8,475,125 shares of ClassA Common Stock, par value $0.01 per share, of which 125,809 were designated astreasury shares, and no shares of Class B Common Stock, par value $0.01 pershare, outstanding.

 

 

**BITSTREAM INC. AND SUBSIDIARIES**

 

**INDEX**

 
|                                                                                                 |   |
|------------------------------------------------------------------------------------------------------|--------|
| **PART I. FINANCIAL INFORMATION**                                                                    |   |
|                                                                                                 |   |
| ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS                                                            |   |
|                                                                                                 |   |
| CONSOLIDATED BALANCE  SHEETS AS OF JUNE 30, 2002 AND DECEMBER 31, 2001                               |   |
|                                                                                                 |   |
| CONSOLIDATED  STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND  2001    |   |
|                                                                                                 |   |
| CONSOLIDATED STATEMENTS  OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001               |   |
|                                                                                                 |   |
| NOTES  TO CONSOLIDATED FINANCIAL STATEMENTS                                                          |   |
|                                                                                                 |   |
| ITEM  2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS |   |
|                                                                                                 |   |
| ITEM  3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                  |   |
|                                                                                                 |   |
| PART II. OTHER INFORMATION                                                                           |   |
|                                                                                                 |   |
| **PART  II. OTHER INFORMATION**                                                                      |   |
|                                                                                                 |   |
| ITEM  1. LEGAL PROCEEDINGS                                                                           |   |
|                                                                                                 |   |
| ITEM  2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                                   |   |
|                                                                                                 |   |
| ITEM  3. DEFAULTS UPON SENIOR SECURITIES                                                             |   |
|                                                                                                 |   |
| ITEM  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                         |   |
|                                                                                                 |   |
| ITEM  5. OTHER INFORMATION                                                                           |   |
|                                                                                                 |   |
| ITEM  6. EXHIBITS AND REPORTS ON FORM 8-K                                                            |   |
|                                                                                                 |   |
| SIGNATURES                                                                                           |   |

 

 

1

----

 

**BITSTREAM INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(IN THOUSANDS, EXCEPT PER-SHAREAMOUNTS)**

 

** **
|                                                                                                                                            |   | **June 30,** |   | **December  31,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|--------|-------------------|--------|
|                                                                                                                                            |   | **2002**     |   | **2001**          |   |
| **ASSETS**                                                                                                                                      |   |         |   |              |   |
| Current assets:                                                                                                                                 |   |         |   |              |   |
| Cash  and cash equivalents                                                                                                                      |   | $            | 5,412  |              | $      | 5,716 |   |
| Accounts  receivable, net of allowance of $34 and $53 at June 30, 2002 and December 31,  2001, respectively                                     |   | 736          |   | 679               |   |
| Prepaid expenses  and other current assets                                                                                                      |   | 136          |   | 122               |   |
| Total current  assets                                                                                                                           |   | 6,284        |   | 6,517             |   |
|                                                                                                                                            |   |         |   |              |   |
| Property and equipment, net                                                                                                                     |   | 367          |   | 473               |   |
| Other assets:                                                                                                                                   |   |         |   |              |   |
| Restricted cash                                                                                                                                 |   | 300          |   | 300               |   |
| Goodwill                                                                                                                                        |   | 727          |   | 727               |   |
| Investment in  DiamondSoft, Inc.                                                                                                                |   | 641          |   | 599               |   |
| Intangible  assets                                                                                                                              |   | 250          |   | 218               |   |
| Other assets                                                                                                                                    |   | 6            |   | 5                 |   |
| Total other  assets                                                                                                                             |   | 1,924        |   | 1,849             |   |
|                                                                                                                                            |   |         |   |              |   |
| Total assets                                                                                                                                    |   | $            | 8,575  |              | $      | 8,839 |   |
|                                                                                                                                            |   |         |   |              |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                  |   |         |   |              |   |
| Current liabilities:                                                                                                                            |   |         |   |              |   |
| Accounts payable                                                                                                                                |   | $            | 286    |              | $      | 93 |   |
| Accrued expenses                                                                                                                                |   | 1,198        |   | 1,126             |   |
| Current portion  of deferred revenue                                                                                                            |   | 555          |   | 610               |   |
| Total current  liabilities                                                                                                                      |   | 2,039        |   | 1,829             |   |
|                                                                                                                                            |   |         |   |              |   |
| Long-term deferred revenue                                                                                                                      |   | 17           |   | 14                |   |
| Total  liabilities                                                                                                                              |   | 2,056        |   | 1,843             |   |
|                                                                                                                                            |   |         |   |              |   |
| Stockholders’ equity :                                                                                                                     |   |         |   |              |   |
| Common stock,  $.01 par value Authorized–30,500 shares   Issued and outstanding–8,440 at June 30, 2002 and 8,428 at December 31, 2001 |   | 84           |   | 84                |   |
| Additional  paid-in capital                                                                                                                     |   | 32,386       |   | 32,383            |   |
| Accumulated  deficit                                                                                                                            |   | (25,591      | )      | (25,111           | )      |
| Treasury stock,  at cost; 126  shares as of  June 30, 2002 and December 31, 2001                                                      |   | (360         | )      | (360              | )      |
| Total  stockholders’ equity                                                                                                                |   | 6,519        |   | 6,996             |   |
|                                                                                                                                            |   |         |   |              |   |
| Total  liabilities and stockholders’ equity                                                                                                |   | $            | 8,575  |              | $      | 8,839 |   |

 

**Theaccompanying notes are an integral part of these consolidated financialstatements.**

 

2

----

 

**BITSTREAM INC. AND SUBSIDIARIES**

# **CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)**

 

 
|                                                   |   | **For the  Three Months Ended June 30,** |   | **For the  Six Months Ended June 30,** |   |
|--------------------------------------------------------|--------|------------------------------------------|--------|----------------------------------------|--------|
|                                                   |   | **2002**                                 |   | **2001**                               |   | **2002** |   | **2001** |   |
| Revenue:                                               |   |                                     |   |                                   |   |   |   |   |   |
| Software  licenses                                     |   | $                                        | 1,949  |                                   | $      | 1,673 |   | $ | 3,785 |   | $ | 2,969 |   |
| Services                                               |   | 264                                      |   | 198                                    |   | 561 |   | 530 |   |
| Total revenue                                          |   | 2,213                                    |   | 1,871                                  |   | 4,346 |   | 3,499 |   |
|                                                   |   |                                     |   |                                   |   |   |   |   |   |
| Cost of revenue:                                       |   |                                     |   |                                   |   |   |   |   |   |
| Software  licenses                                     |   | 496                                      |   | 268                                    |   | 808 |   | 468 |   |
| Services                                               |   | 91                                       |   | 92                                     |   | 194 |   | 176 |   |
| Cost of revenue                                        |   | 587                                      |   | 360                                    |   | 1,002 |   | 644 |   |
|                                                   |   |                                     |   |                                   |   |   |   |   |   |
| Gross profit                                           |   | 1,626                                    |   | 1,511                                  |   | 3,344 |   | 2,855 |   |
| Operating  expenses:                                   |   |                                     |   |                                   |   |   |   |   |   |
| Marketing and  selling                                 |   | 532                                      |   | 731                                    |   | 1,127 |   | 1,556 |   |
| Research and  development                              |   | 991                                      |   | 1,265                                  |   | 1,950 |   | 2,593 |   |
| General and  administrative                            |   | 419                                      |   | 421                                    |   | 761 |   | 833 |   |
|                                                   |   |                                     |   |                                   |   |   |   |   |   |
| Total operating  expenses                              |   | 1,942                                    |   | 2,417                                  |   | 3,838 |   | 4,982 |   |
|                                                   |   |                                     |   |                                   |   |   |   |   |   |
| Operating loss                                         |   | (316                                     | )      | (906                                   | )      | (494 | ) | (2,127 | ) |
|                                                   |   |                                     |   |                                   |   |   |   |   |   |
| Gain (Loss) on  investment in DiamondSoft, Inc.        |   | 43                                       |   | (76                                    | )      | 42 |   | (151 | ) |
| Interest income,  net                                  |   | 19                                       |   | 64                                     |   | 42 |   | 151 |   |
|                                                   |   |                                     |   |                                   |   |   |   |   |   |
| Loss before  provision for income taxes                |   | (254                                     | )      | (918                                   | )      | (410 | ) | (2,127 | ) |
|                                                   |   |                                     |   |                                   |   |   |   |   |   |
| Provision for  income taxes                            |   | 39                                       |   | 31                                     |   | 70 |   | 80 |   |
| Net loss                                               |   | $                                        | (293   | )                                      | $      | (949 | ) | $ | (480 | ) | $ | (2,207 | ) |
|                                                   |   |                                     |   |                                   |   |   |   |   |   |
| Basic and diluted net loss per share                   |   | $                                        | (0.04  | )                                      | $      | (0.12 | ) | $ | (0.06 | ) | $ | (0.28 | ) |
|                                                   |   |                                     |   |                                   |   |   |   |   |   |
| Basic and diluted weighted average shares  outstanding |   | 8,313                                    |   | 8,030                                  |   | 8,309 |   | 7,990 |   |

 

**The accompanying notes are an integral part of theseconsolidated financial statements.**

 

 

3

----

 

**BITSTREAM INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(IN THOUSANDS)**

 
|                                                                         |   | **For the  Six Months Ended  June 30,** |         |
|------------------------------------------------------------------------------|--------|----------------------------------------------|--------------|
|                                                                         |   | **2002**                                     |         | **2001** |   |
| **CASH FLOWS  FROM OPERATING ACTIVITIES:**                                   |   |                                         |         |   |   |
| Net loss                                                                     |   | $                                            | (480         | ) | $ | (2,207 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                                         |         |   |   |
| Depreciation                                                                 |   | 168                                          |         | 189 |   |
| Amortization                                                                 |   | 35                                           |         | 258 |   |
| Stock based  compensation                                                    |   | (18                                          | )            | 5 |   |
| (Gain) Loss on  investment in DiamondSoft, Inc.                              |   | (42                                          | )            | 151 |   |
| Changes in  operating assets and liabilities:                                |   |                                         |         |   |   |
| Accounts  receivable                                                         |   | (57                                          | )            | 1,112 |   |
| Prepaid expenses  and other assets                                           |   | (15                                          | )            | 57 |   |
| Accounts payable                                                             |   | 193                                          |         | 88 |   |
| Accrued expenses                                                             |   | 72                                           |         | (196 | ) |
| Deferred revenue                                                             |   | (52                                          | )            | 277 |   |
| Net cash used in  operating activities                                       |   | (196                                         | )            | (266 | ) |
|                                                                         |   |                                         |         |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                   |   |                                         |         |   |   |
| Purchases of  property and equipment, net                                    |   | (62                                          | )            | (97 | ) |
| Additions to Intangible  assets                                              |   | (67                                          | )            | (130 | ) |
| Investment in  DiamondSoft, Inc.                                             |   | ——                                 |         | (250 | ) |
| Net cash used in  investing activities                                       |   | (129                                         | )            | (477 | ) |
|                                                                         |   |                                         |         |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                   |   |                                         |         |   |   |
| Proceeds from  the exercise of stock options/warrants                        |   | 21                                           |         | 148 |   |
| Net cash  provided by  financing activities                             |   | 21                                           |         | 148 |   |
|                                                                         |   |                                         |         |   |   |
| Net Decrease in  Cash and Cash Equivalents                                   |   | (304                                         | )            | (595 | ) |
| Cash and Cash  Equivalents, beginning of period                              |   | 5,716                                        |         | 7,149 |   |
| Cash and Cash  Equivalents, end of period                                    |   | $                                            | 5,412        |   | $ | 6,554 |   |
|                                                                         |   |                                         |         |   |   |
| **SUPPLEMENTAL DISCLOSURE OF CASH  FLOW INFORMATION:**                       |   |                                         |         |   |   |
| Cash paid for  interest                                                      |   | $                                            | —— |   | $ | 2 |   |
| Cash paid for  income taxes                                                  |   | $                                            | 17           |   | $ | 126 |   |

 

**The accompanying notes are anintegral part of these consolidated financial statements.**

 

4

----

 

**BITSTREAMINC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**JUNE 30,2002**

 

 

**(1)****               ****Significant Accounting Policies**

 

        Bitstream Inc.(“Bitstream”) and subsidiaries (together the “Company”), headquartered inCambridge, Massachusetts, is composed of three separate and distinctbusinesses: (1) type and technology (“Type”) in which Bitstream develops andlicenses font technology and custom font designs to manufacturers of Internetappliances, wireless devices, set-top boxes, embedded systems, printers, andpersonal digital assistants; (2) MyFonts.com (“MyFonts”), a showcase of theworld’s fonts in one easy-to-use e-commerce web site operated by Bitstream’swholly-owned subsidiary, MyFonts.com, Inc. which Bitstream established in December1999; and (3) Pageflex, in which the Company’s wholly-owned subsidiaryPageflex, Inc., develops, markets and supports on-demand document compositionsolutions which automatically produce customized one-to-one marketingcollateral such as datasheets and brochures directly from XML text and graphicsdata stored in Web servers and/or databases.

 

**(a)****         ****Basis of Presentation**

The consolidated financial statements of the Companypresented herein, without audit, have been prepared pursuant to the rules ofthe Securities and Exchange Commission (the “SEC”) for quarterly reports onForm 10-Q and do not include all of the information and footnote disclosuresrequired by generally accepted accounting principles. The balance sheetinformation at December 31, 2001 has been derived from the Company’s auditedconsolidated financial statements. These statements should be read inconjunction with the consolidated financial statements and notes thereto forthe period ended December 31, 2001 included in the Company’s Annual Report onForm 10-K, which was filed by the Company with the SEC on March 29, 2002.

 

The balance sheet as of June 30, 2002, the statementsof operations for the three and six months ended June 30, 2002 and 2001, thestatements of cash flows for the six months ended June 30, 2002 and 2001, andthe notes to each are unaudited, but in the opinion of management include alladjustments necessary for a fair presentation of the consolidated financialposition, results of operations, and cash flows of the Company and itssubsidiaries for these interim periods.

 

The results of operations for the three and six monthsended June 30, 2002 may not necessarily be indicative of the results to beexpected for the year ending December 31, 2002.

 

**(b) Property and Equipment**

Property and equipmentare stated at cost, less accumulated depreciation and amortization. Propertyand equipment consists of the following (in thousands):

 
|                                                   |   | **June 30,** |   | **December  31,** |   |
|--------------------------------------------------------|--------|--------------|--------|-------------------|--------|
|                                                   |   | **2002**     |   | **2001**          |   |
|                                                   |   |         |   |              |   |
| Equipment and  computer software                       |   | $            | 2,475  |              | $      | 2,413 |   |
| Purchased  software                                    |   | 351          |   | 351               |   |
| Furniture and  fixtures                                |   | 372          |   | 372               |   |
| Leasehold  improvements                                |   | 659          |   | 659               |   |
|                                                   |   | 3,857        |   | 3,795             |   |
|                                                   |   |         |   |              |   |
| Less –  Accumulated depreciation and amortization |   | 3,490        |   | 3,322             |   |
| Property and equipment, net                            |   | $            | 367    |              | $      | 473 |   |

 

5

----

 

**(c) Off-Balance Sheet Risk and Concentration of Credit Risk**

 

Financial instrumentsthat potentially expose the Company to concentrations of credit risk consistprimarily of cash and cash equivalents and trade accounts receivable.  The Company places a majority of its cashinvestments in one highly-rated financial institution.  The Company has not experienced significantlosses related to receivables from any individual customers or groups ofcustomers in any specific industry or by geographic area.  Due to these factors, no additional creditrisk beyond amounts provided for collection losses is believed by management tobe inherent in the Company’s accounts receivable.  At June 30, 2002, two customers accounted for 20% and 16% of theCompany’s accounts receivable.   TheCompany does not have any off-balance sheet risks as of June 30, 2002.  At December 31, 2001, two customers accountedfor 18% and 17% of the Company’s accounts receivable.

 

 For the three months and six months endedJune 30, 2002 and 2001, no single customer accounted for 10% or more of theCompany’s consolidated revenue. Furthermore, for the three months ended June 30, 2002, two customers ofthe Company’s Type segment accounted for 13% and 10% of the revenue for thatsegment, 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 ofthe MyFonts segment’s revenue.  For thethree months ended June 30, 2001, one customer of the Company’s Type segmentaccounted for 10% of the revenue for that segment, one customer of the Pageflexsegment accounted for 19% of the revenue for that segment, and no customersaccounted for 10% or more of the MyFonts segment.  For the six months ended June 30, 2002, one customer of theCompany’s Type segment accounted for 10% of the revenue for that segment, onecustomer of the Pageflex segment accounted for 11% of the revenue for thatsegment and no customers accounted for 10% or more of the MyFonts segment’srevenue.  For the six months ended June30, 2001, three customers of the Pageflex segment accounted for 11%, 11% and10% of the revenue for that segment, and no customers accounted for 10% or moreof the Type or MyFonts segments.

 

 

**(d) Goodwill and other intangibleassets (in thousands, except per share amounts)**

 

Goodwill is stated atcost, less accumulated amortization, and consists of the following:

 
|                                                                    |   | **June 30,** |   | **December  31,** |   |
|-------------------------------------------------------------------------|--------|--------------|--------|-------------------|--------|
|                                                                    |   | **2002**     |   | **2001**          |   |
|                                                                    |   |         |   |              |   |
| Acquisition of  Mainstream Software Solutions Ltd..                     |   | $            | – |              | $      | 450 |   |
| Acquisition of  Type Solutions, Inc.                                    |   | 595          |   | 595               |   |
| Acquisition of  Alaras Corporation.                                     |   | 1,300        |   | 1,300             |   |
|                                                                    |   | 1,895        |   | 2,345             |   |
| Less–Accumulated  amortization                                     |   | 1,168        |   | 1,618             |   |
|                                                                    |   |         |   |              |   |
| Goodwill, Net                                                           |   | 727          |   | 727               |   |
| Embedded goodwill  from equity investment in DiamondSoft, Inc. (Note 3) |   | 557          |   | 557               |   |
|                                                                    |   |         |   |              |   |
| Total Goodwill                                                          |   | $            | 1,284  |              | $      | 1,284 |   |

 

6

----

 

            In June 2001, the FASB issued SFAS No. 142, *Goodwill andOther Intangible Assets*. The Company adopted SFAS No. 142, effectiveJanuary 1, 2002, which establishes new accounting and reporting requirementsfor goodwill and other intangible assets. Under SFAS No. 142, goodwill and indefinite-lived intangible assets areno 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 continueto be amortized over their useful lives. In addition, under the new pronouncement, the Company is required toestablish reporting units and allocate goodwill to each of these reportingunits.  The Company has established thefollowing reporting units: Type, MyFonts, and Pageflex.

 

The Company ceased all goodwill amortization effectiveJanuary 1, 2002.  In addition, theCompany tested recorded goodwill attributable to each reporting unit forimpairment.  Management completed theinitial impairment testing as of January 1, 2002 and determined that the fairvalue of its reporting units were greater than the carrying values for thoseunits.  The Company has recordedgoodwill embedded in its equity investment in DiamondSoft, Inc. of $557 as ofJune 30, 2002 and December 31, 2001, which is not attributable to a reportingunit.

 

        The carryingamounts of goodwill attributable to each reporting unit are as follows:

 
|     |   | **June 30,** |   | **December  31,** |   |
|----------|--------|--------------|--------|-------------------|--------|
|     |   | **2002**     |   | **2001**          |   |
|     |   |         |   |              |   |
| Type     |   | $            | 228    |              | $      | 228 |   |
| MyFonts  |   | –       |   | –            |   |
| Pageflex |   | 499          |   | 499               |   |
|     |   | $            | 727    |              | $      | 727 |   |

 

        Had the Company appliedthe non-amortization provisions of SFAS No. 142 as of January 1, 2001, resultsof 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):

 
|                                          |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|-----------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                          |   |                              |   |
|                                          |   | **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 connectionwith its adoption of SFAS 142, the Company reassessed the useful lives and theclassification of its identifiable intangible assets and determined that theycontinue to be appropriate.  Thecomponents of the Company’s 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 forintangible assets for the three months and six months ended June 30, 2002 was$17 and $34, respectively.  Amortizationexpense for finite-lived intangibles for the year ended December 31, 2001 was$59.  Estimated amortization for theremainder 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, *Accountingfor Asset Retirement Obligations*. This Statement addresses financialaccounting and reporting for obligations associated with the retirement oftangible long-lived assets and the associated asset retirement costs.  This Statement applies to legal obligationsassociated with the retirement of long-lived assets that result from theacquisition, construction, development, or normal use of the asset.  SFAS No. 143 is effective for fiscal yearsbeginning after June 15, 2002.  TheCompany does not expect SFAS No. 143 to have a material impact on its financialposition or results of operations upon its adoption January 1, 2003.

 

 

8

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In June 2002, the FASB issued SFAS No. 146, *Accounting for Costs Associated with Exit or DisposalActivities*, which supercedes EITF 94-3,*Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (including Certain Costs Incurred in aRestructuring)*.  Theprovisions of this Statement are required to be adopted for exit or disposalactivities that are initiated after December 31, 2002. Under this standard, aliability for a cost associated with an exit or disposal activity formerlyrecognized upon the entity’s commitment to an exit plan are now recognized whenthe liability is incurred.  The Companydoes not expect SFAS No. 146 to have a material impact on its financialposition 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 dividingthe net loss by the weighted average number of shares of common stockoutstanding during the period. Diluted earnings per share reflect the effect ofthe conversion of potentially dilutive securities, such as stock options, basedon the treasury stock method. In computing diluted earnings per share, commonstock equivalents are not considered in periods in which a net loss isreported, as the inclusion of the common stock equivalents would beantidilutive.  As a result there is nodifference between the Company’s basic and diluted loss per share for the threeand six month periods ended June 30, 2002 and 2001.

 

        If the Company hadreported a profit for these periods, the potential common shares would haveincreased the weighted average shares outstanding by 1,171 and 696 shares forthe three months ended June 30, 2002 and 2001, respectively, and by 1,296 and792 for the six months ended June 30, 2002 and 2001, respectively.  In addition, there were warrants and optionsoutstanding to purchase 940 and 556 shares for the three months and six monthsended June 30, 2002, respectively, and 449 shares for the three months and sixmonths ended June 30, 2001 that were not included in the potential common sharecomputations because their exercise prices were greater than the market priceof the Company’s common stock.  Thesecommon stock equivalents are antidilutive even when a profit is reported in thenumerator.

 

 

**(3)****        ****Investment (in thousands, except percentages)**

 

        On March13, 1998, the Company made a $500 or 25% equity investment, accounted for underthe equity method, in DiamondSoft, Inc. (“DiamondSoft”), a Californiacorporation primarily engaged in the business of developing, marketing anddistributing software tools to a variety of professional markets. During theyear ended December 31, 2001 the Company made additional investments totaling$410 in DiamondSoft, Inc., resulting in an increase in Bitstream’s ownershippercentage to 31.7% at December 31, 2001, which remained unchanged as of June30, 2002.

 

        Gains(losses) for the three months and six months ended June 30, 2002, and 2001related to the Company’s investment in DiamondSoft totaled approximately $43and $42, and  $(76) and $(151),respectively, and are included in the accompanying consolidated statements ofoperations.  The Company has recorded goodwillrelated to this investment equal to the difference between the amount paid forthe investment and the Company’s share of DiamondSoft’s underlying net assetsat the time of each investment.  Lossesfor the three months and six months ended June 30, 2001 included $28 and $52,respectively, in amortization.  Thisgoodwill amortization ceased in accordance with the Company’s adoption of SFASNo. 142 on January 1, 2002. (See Note 1(d))

 

9

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        On June 19, 2000, theCompany deposited $300 into a money market account at Wells Fargo Bank tosecure a $300 line of credit granted DiamondSoft by that bank.  This cash, which continued to secure theline of credit, is presented on the Company’s consolidated balance sheet asrestricted cash.

 

### **(4)**                Accrued Expenses, (in thousands)

### ** **

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 threereportable segments: (i) its Type segment; (ii) its Pageflex segment and (iii)its MyFonts segment.  The Company’sreportable segments are strategic business units that sell the Company’sproducts through distinct distribution channels. They are managed separately aseach business requires different marketing strategies.  The Company’s approach is based on the waythat management organizes the segments within the enterprise for makingoperating decisions and assessing performance. Revenue from the MyFonts segment includes revenue from products itpurchases from the Type segment. Inter-segment revenue of $82 and $167 for the three months and sixmonths ended June 30, 2002, respectively, and $55 and $78 for the three monthsand six months ended June 30, 2001, respectively, have been eliminated fromMyFonts’ segmented revenue below, as well as from the Company’s consolidatedfinancial statements.  The Companyevaluates performance based on profit or loss from operations before incometaxes, not including non-recurring gains and losses.

 

The following table setsforth the Company’s 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

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**(6)****               ****  GeographicalReporting (in thousands):**

 

The Company attributes revenues to differentgeographical areas on the basis of the location of the customer. All of theCompany’s product sales for the three months and six months ended June 30, 2002and 2001 were shipped from its headquarters located in the United States or itsoffice located in Cheltenham, England. Revenues by geographic area are asfollows:

 
|                            |   | **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 asfollows:

 
|          |   | **June 30,  2002** |   | **December  31,  2001** |   |
|---------------|--------|--------------------|--------|-------------------------|--------|
| United States |   | $                  | 346    |                    | $      | 452 |   |
| England       |   | 21                 |   | 21                      |   |
| Total         |   | $                  | 367    |                    | $      | 473 |   |

 

11

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**ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

Thefollowing discussion should be read in conjunction with the consolidatedfinancial statements and notes thereto.

** **

**OVERVIEW**

 

        Bitstream Inc. (“Bitstream” or the “Company”), headquarteredin Cambridge, Massachusetts, is composed of three separate and distinctbusinesses: (1) type and technology (“Type”), in which Bitstream develops andlicenses font technology and custom font designs to manufacturers of Internetappliances, wireless devices, set-top boxes, embedded systems, printers, andpersonal digital assistants; (2) MyFonts.com (“MyFonts”), a showcase of theworld’s fonts in one easy-to-use e-commerce web site operated by Bitstream’swholly-owned subsidiary, MyFonts.com, Inc. which Bitstream established inDecember 1999; and (3) Pageflex, in which the Company’s wholly-owned subsidiaryPageflex, Inc. (“Pageflex”) develops, markets and supports on-demand documentcomposition solutions which automatically produce customized one-to-onemarketing collateral such as datasheets and brochures directly from XML textand graphics data stored in Web servers and/or databases.  Pageflex, Inc. was established by theCompany in January 1999 as a wholly-owned subsidiary for the purpose ofdeveloping on-demand marketing software.

 

**FORWARDLOOKING STATEMENTS**

 

      Except for the historical informationcontained herein, this Quarterly Report on Form 10-Q may containforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Act of1934, as amended. Investors are cautioned that forward-looking statements areinherently uncertain.  Actualperformance and results of operations may differ materially from thoseprojected or suggested in the forward-looking statements due to certain risksand uncertainties, including, without limitation, market acceptance of theCompany’s products, competition and the timely introduction of new products.Additional information concerning certain risks and uncertainties that wouldcause actual results to differ materially from those projected or suggested inthe forward-looking statements is contained in the Company’s filings with theSecurities and Exchange Commission, including those risks and uncertaintiesdiscussed in the Company’s final Prospectus, dated October 30, 1996, includedas part of the Company’s Registration Statement on Form S-1 (333-11519), in thesection entitled “Risk Factors.” The forward-looking statements containedherein represent the Company’s judgment as of the date of this report, and theCompany cautions readers not to place undue reliance on such statements.  Management undertakes no obligation topublicly release any revisions to the forward-looking statements or reflectevents or circumstances after the date of this document.

 

12

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** **

**RESULTSOF 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 endedJune 30, 2002 as compared to the three months ended June 30, 2001 wasattributable to increased revenue in the Company’s Pageflex and MyFontssegments of $169 and $218, respectively, partially offset by a decrease in Typerevenue of $45.  Revenue for the sixmonths ended June 30, 2002 increased for all three of the Company’s businesssegments as compared to the six months ended June 30, 2001.  The increase in cost of revenue for thethree months and six months ended June 30, 2002 as compared to the three monthsand six months ended June 30, 2001 was primarily due to increased royaltyexpense for the Company’s MyFonts segment resulting from increased sales. Costof revenue for the Company includes fees paid to third parties for thedevelopment or license of rights to technology and/or unique typeface designs,costs incurred in the fulfillment of custom orders, and costs associated withthe duplication, packaging and shipping of product. Gross profit generated byeach segment is discussed in more detail below.

 

13

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**TypeGross 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 threemonths ended June 30, 2002 versus the three months ended June 30, 2001 was theresult of decreases in revenue from retail sales of $32 and custom designservices of $13.  The increase inrevenue for the six months ended June 30, 2002 as compared to the six monthsended 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 customdesign services of $36.  Retail sales ofthe Company’s Type products and custom design work have decreased over the pastyear because of consumer concerns over the economy and decreases inspending.  Cost of revenue during thesecond quarter of 2002 increased primarily due to an increase in royalties dueto an increase in sales of products developed by third parties.  This increase was partially offset by adecrease in costs attributable to custom design services.

** **

**14**

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**MyFontsGross 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 | % |
|                              |        |              |        |                   |        |              |        |                   |        |             |        |  |  |  |  |  |  |

** **

**Revenuefor MyFonts has increased as consumer purchases of the Company’s products hasincreased.  MyFonts has beensuccessfully increasing the number of fonts available on its site, the number offoundries participating, and the visibility of the site through increasedmarketing activities.  Myfonts hasattracted new purchasers while also retaining existing customers who accountedfor approximately 25% of orders during the first six months of 2002.  Inter-company sales, which MyFonts generatedfrom the resale of Bitstream fonts, have been excluded.  Total MyFonts revenue, before theelimination of inter-company royalties resulting from the resale of Bitstreamproducts, 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 becausethe sales of fonts from non-affiliated foundries increased.  Royalties payable to non-affiliatedfoundries on sales of their fonts are approximately 80% of the revenuegenerated.**

** **

**15**

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**PageflexGross 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 | % |

 

**Theincrease in Pageflex license revenue for the three and six month periods endedJune 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 anincrease in Mpower monthly subscription fees generated by an expanding customerbase.  The increase in service revenueis primarily due to increases in maintenance support fees attributable to theincreased customer base.  The decreasein cost of revenue for the three months ended June 30, 2002 as compared to thethree months ended June 30, 2001 was the result of a decrease in amounts paidto third parties resulting from the payment of a one time commission of $51 inthe second quarter of 2001.  Thisdecrease was partially offset by an increase in shipping and manufacturing supplycosts, as well as payroll costs resulting from the reassignment of twoemployees to provide support and infrastructure to the Company’s increasedcosts customer base during the first quarter of 2002.  These increased costs were greater than the one time commissiondiscussed above, causing a total cost of revenue to increase for the six monthsended June 30, 2002 as compared to the six months ended June 30, 2001.**

** **

**16**

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**Marketingand Selling:**

 
|                                |   | **June 30,** |   | **% of  Segment** |   | **June 30,** |   | **% of  Segment** |   | **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 inabsolute dollars and as a percentage of revenue for the three month and sixmonth periods ended June 30, 2002 as compared to the three month and six monthperiods ended June 30, 2001 reflects expense reductions implemented bymanagement in the fourth quarter of 2001. Type marketing and selling expenses decreased primarily due toreductions in personnel and decreases in marketing expenditures for tradeshows, and print and production costs for advertising and marketing.  These reductions accounted for $102 and $154of the decreases for the three months and six months ended June 30,2002 ascompared to the same periods ended June 30, 2001. Pageflex marketing andselling 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 comparedto the same periods ended June 30, 2001, and due to a reduction in consultingexpenses of $22 and $36, respectively, for the three and six months ended June30, 2002 versus the three and six months ended June 30, 2001. Also, Pageflextradeshow 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 expensesmoderately increased primarily due to increased utilization of the Company’smarketing staff.

 

17

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**Researchand Development (“R&D”)**:
|                                   |   | **June 30,** |   | **% of  Segment** |   | **June 30,** |   | **% of  Segment** |   | **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 | )% |

 

        Thedecrease in R&D expenses in absolute dollars and as a percentage of revenuefor the three and six month periods ended June 30, 2002 as compared to the sameperiods ended June 30, 2001 is primarily attributable to cost reductions adoptedduring the fourth quarter of 2001.  Theincrease in R&D expenses for the Type segment for the three months endedJune 30, 2002 as compared to the three months ended June 30, 2001 was primarilyattributable to an increase in internally allocated resources and correspondingfacility charges of $45, and $10 in engineering consulting. This increase waspartially offset by a $30 decrease in goodwill amortization of technologyassociated with the acquisition of Type Solutions, Inc. resulting from the Company’sadoption of SFAS No. 142 effective January 1, 2002.  See Note 1(d) in the Notes to the Consolidated FinancialStatements included herewith.  Thedecrease in Type R&D expenses for the six months ended June 30, 2002 ascompared to the six months ended June 30, 2001 was primarily the result of adecrease in goodwill amortization of $60, partially offset by the increasesdiscussed above.  The MyFonts decreasewas primarily the result of the decreased use of outside consultants and theabsorption of that work by employees. The Pageflex decrease was primarily attributable to headcount reductionscompleted as part of the Company’s restructuring in the fourth quarter of 2001,which resulted in savings of $129 and $280 in salaries, benefits, travel andfacility costs, as well as decreases of $44 and $88 resulting from thereassignment of two employees to customer support positions which are includedin cost of revenue for the three month and six month periods ended June 30,2002, respectively. Pageflex also decreased the outsourcing of engineeringprojects, which resulted in savings of $22 and $83 for the three month and sixmonth periods ended June 30, 2002 as compared to the three month and six monthperiods ended June 30, 2001, respectively.

 

18

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**Generaland Administrative (“G&A”)**:
|                                     |   | **June 30,** |   | **% of  Segment** |   | **June 30,** |   | **% of  Segment** |   | **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 | )% |

 

        Theincrease in Type G&A expenses for the three months ended June 30, 2002 ascompared to the three months ended June 30, 2001 was primarily the result of achange in bad debt expense of $29, partially offset by a savings of $22 ingoodwill amortization related to the acquisition of Mainstream SoftwareSolutions, Ltd., which was fully amortized as of December 31, 2001.  The decrease in Type G&A expenses forthe six months ended June 30, 2002 reflects first quarter savings in goodwillamortization of $22 and reductions in the cost of professional services.  Pageflex G&A for the three and six monthperiods ended June 30, 2002 versus the same periods ended June 30, 2001reflects decreased employee insurance and administrative expense allocations,of approximately $62 and $123, respectively, attributable to the headcountreduction completed as part of the Company’s restructuring in the fourthquarter of 2001.  Pageflex alsobenefited from decreased goodwill amortization in connection with the Alarasacquisition 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 inaccordance with the Company’s adoption of SFAS No. 142 on January 1, 2002. SeeNote 1(d) in the Notes to the Consolidated Financial Statements includedherewith for further information.  Thesedecreases in Pagefelx G&A expenses were partially offset by increases inbad debt expense of $111 and $208, respectively, attributable to net recoveriesof $(111) and $(226) for the three and six month periods ended June 30, 2001,respectively.

 

19

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**Loss onInvestment 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 1998the 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 investmentstotaling $410 in DiamondSoft, resulting in an increase in Bitstream’s ownershippercentage to 31.7% at December 31, 2001 and June 30, 2002.  The gain (loss) above represents the Company’s pro rata share of DiamondSoft’snet income (loss). (See Note 3 in the Notes to the Consolidated FinancialStatements included herewith.)

 

**Interestincome, 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 oncash and money market instruments and has decreased as the Company has usedcash to fund operations and also as the interest rates have decreased.

 

**Provisionfor 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 Company’sprovision 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 licenseroyalties from customers in countries who have signed tax conventions with theUnited States including Japan, Korea, and Poland, and also with the results ofoperations from the Company’s location in the United Kingdom.

 

20

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**LIQUIDITY AND CAPITAL RESOURCES (inthousands)**

 

The Company has funded its operations primarilythrough the public sale of equity securities, cash flows from operations andcash received from the sale of the Company’s MediaBank and InterSep OPI productlines to Inso Providence Corporation in August of 1998.  As of June 30, 2002, the Company had networking 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, 2002and 2001, respectively. The cash was used primarily to fund the Company’s netlosses. The net losses after adjustment for non-cash expenses resulted in theuse of $337 and $1,604 in cash during the six months ended June 30, 2002 and2001, respectively.  Changes inoperating assets and liabilities resulted in cash savings of $141 and $1,338for 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 inaccounts payable and accruals of approximately $265.  During the six months ended June 30, 2001, the primary change inoperating assets and liabilities was the collection of accounts receivable andthe resulting $1,112 decrease in outstanding accounts receivable.

 

     The Company’s investing activities usedcash of $129 and $477 for the six months ended June 30, 2002 and 2001,respectively.  Additions of property andequipment and intangible assets used $129 and $227 in cash for the six monthsended June 30, 2002 and 2001, respectively. During the six months ended June 30, 2001 the Company also increased itsinvestment in DiamondSoft, Inc. by $250.

 

     The Company’s financing activitiesprovided 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 itscurrent cash and cash equivalent balances will be sufficient to meet theCompany’s operating and capital requirements for at least the next 12months.  There can be no assurance,however, that the Company will not require additional financing in thefuture.  If the Company were required toobtain additional financing in the future, there can be no assurance thatsources of capital will be available on terms favorable to the Company, if atall.

 

As of June 30, 2002, theCompany had no material commitments for capital expenditures.  From time to time, the Company evaluatespotential acquisitions of products, businesses and technologies that maycomplement or expand the Company’s business. Any such transactions consummated may use a portion of the Company’sworking capital or require the issuance of equity or debt.  As of June 30, 2002, the Company had futureminimum annual lease payments under the Company’s leased facilities of $201 forthe remainder of 2002 and $301 for the year ended December 31, 2003.

** **

**NASDAQLISTING REQUIREMENTS**

 

The Company’s Common Stock currently tradeson the NASDAQ National Market System. Effective November 1, 2002, the NASDAQ has changed its National MarketSystem continued listing standard from a minimum $4,000,000 net tangible assetrequirement to a minimum $10,000,000 stockholders’ equity requirement.  Based on its financial position as of June30, 2002, the Company would not meet the continued listing requirements for theNational Market System that will apply to

 

21

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it as of November 1, 2002.  Although the Company is currently pursuingoptions to meet this new National Market System standard, if the Company isunable to qualify for continued listing as of November 1, 2002, the Company’sCommon Stock is likely to be delisted from the NASDAQ National MarketSystem.  In such event, the Companyintends to apply for continued listing on the NASDAQ Small Cap Market.  Delisting from the National Market System orchanging to the NASDAQ Small Cap Market may materially adversely affect theability of the Company’s stockholders to sell their shares and may make it moredifficult for the Company to raise additional funding through the sale of itsequity securities.

 

**PART 1, ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

**RECENTACCOUNTING PRONOUNCEMENTS**

** **

        In June 2001, the FASBissued SFAS No. 143, *Accounting for Asset Retirement Obligations*.This Statement addresses financial accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs.  This Statementapplies to legal obligations associated with the retirement of long-livedassets that result from the acquisition, construction, development, or normaluse of the asset.  SFAS No. 143 iseffective for fiscal years beginning after June 15, 2002.  The Company does not expect SFAS No. 143 tohave a material impact on its financial position or results of operations uponits adoption January 1, 2003.

 

In June 2002, the FASB issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities,” whichsupercedes EITF 94-3, “Liability Recognition for Certain Employee TerminationBenefits and Other Costs to Exit an Activity (including Certain Costs Incurredin a Restructuring).”  The provisions ofthis Statement are required to be adopted for exit or disposal activities thatare initiated after December 31, 2002. Under this standard, a liability for acost associated with an exit or disposal activity formerly recognized upon theentity’s commitment to an exit plan are now recognized when the liability isincurred.  The Company does not expectSFAS No. 146 to have a material impact on its financial position or results ofoperations upon its adoption January 1, 2003.

 

**DerivativeFinancial Instruments, Other Financial Instruments and Derivative CommodityInstruments.**

 

        Asof June 30, 2002, the Company did not participate in any derivative financialinstruments or other financial and commodity instruments for which fair valuedisclosure would be required under SFAS No. 107. All of the Company’sinvestments are short-term, investment-grade commercial paper, and money marketaccounts that are carried on the Company’s books at amortized cost, whichapproximates fair market value. Accordingly, the Company has no quantitativeinformation concerning the market risk of participating in such investments.

 

22

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**Primary Market Risk Exposures**

 

      The Company’s primary market riskexposures are in the areas of interest rate risk and foreign currency exchangerate risk. The Company’s investment portfolio of cash equivalent and short-terminvestments is subject to interest rate fluctuations, but the Company believesthis risk is immaterial due to the short-term nature of these investments.  The Company’s exposure to currency exchangerate fluctuations has been, and is expected to continue to be, modest due tothe fact that the operations of its international subsidiaries are almostexclusively conducted in their respective local currencies. Internationalsubsidiary operating results are translated into U.S. dollars and consolidatedfor reporting purposes. The impact of currency exchange rate movements oninter-company transactions was immaterial for the six months ended June 30,2002.  Currently the Company does notengage in foreign currency hedging activities.

** **

**PART II— OTHER INFORMATION**

** **

**ITEM1. LEGAL PROCEEDINGS**

 

The Company is not a party to any material litigation.

 

**ITEM2. CHANGES IN SECURITIES AND USE OF PROCEEDS**

 

(a)        Instruments defining the rights of the holders of anyclass of registered securities of the Company have not been materially modifiedduring the three months ended June 30, 2002.

 

(b)       Rights evidenced by any class of registered securitiesof the Company have not been materially limited or qualified by the issuance ormodification of any other class of securities during the three months endedJune 30, 2002.

 

(c)        There were no unregistered securities sold by theCompany during the three months ended June 30, 2002.

 

**ITEM3. DEFAULTS UPON SENIOR SECURITIES**

 

Not applicable.

 

23

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**ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

    (a) On May21, 2002, the Annual Meeting of Stockholders of the Company was held at theBoston Marriott Cambridge, Two Cambridge Center, Corner of Broadway and ThirdStreet, Cambridge, Massachusetts 02142.

 

    (b) CharlesYing, George B. Beitzel, Amos Kaminski, Michael Lang and David G. Lubrano wereelected at the Annual Meeting to serve as directors of the Company.

 

    (c) Thefollowing votes were tabulated on the aforementioned proposal:

 

1. To elect a board offive (5) directors to serve until the next Annual Meeting of Stockholders oruntil 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.

 

 

**ITEM 5. OTHER INFORMATION**

 

Not applicable.

 

 

**ITEM6. EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)     Exhibits

  None

 

(b)     Reportson Form 8-K

 

          On April 30, 2002 the Company filed a Current Report onForm 8-K reporting a change in its independent accountants from Arthur AndersenLLP to PricewaterhouseCoopers LLP.

 

24

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon 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   |

 

**CERTIFICATIONPURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THESARBANES-OXLEY ACT OF 2002**

 

        In connection with the Quarterly Report of the Company onForm 10Q for the period ended June 30, 2002 as filed with the Securities andExchange on the date hereof (the “Report”), each of the undersigned, in thecapacities and on the dates indicated below, hereby certifies pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002, that to his or her knowledge:

 

1.               The Report complies with the requirementsof Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.               The information contained in the Reportfairly presents, in all material respects, the financial condition and resultsof 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) |            |   |

 

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