<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 1996.
REGISTRATION NO. 333-11519
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BITSTREAM INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7371 04-2744890
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
215 FIRST STREET
CAMBRIDGE, MASSACHUSETTS 02142
(617) 497-6222
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
C. RAYMOND BOELIG
PRESIDENT AND CHIEF EXECUTIVE OFFICER
BITSTREAM INC.
215 FIRST STREET
CAMBRIDGE, MASSACHUSETTS 02142
(617) 497-6222
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
PAUL A. GAJER, ESQ. GORDON H. HAYES, JR., ESQ.
RUBIN BAUM LEVIN CONSTANT & FRIEDMAN TESTA, HURWITZ & THIBEAULT, LLP
30 ROCKEFELLER PLAZA HIGH STREET TOWER
NEW YORK, NY 10112 125 HIGH STREET
TELEPHONE: (212) 698-7700 BOSTON, MASSACHUSETTS 02110
FACSIMILE: (212) 698-7825 TELEPHONE: (617) 248-7000
FACSIMILE: (617) 248-7100
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
====================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED BE REGISTERED(1) PER SECURITY(2) PRICE(2) REGISTRATION FEE(2)
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Class A Common Stock............ 3,450,000 $10.00 $34,500,000 $11,897
====================================================================================================================
<FN>
(1) Includes 450,000 shares which the Underwriters have the option to purchase
from the Company and certain stockholders of the Company, respectively, to
cover over-allotments, if any.
(2) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
BITSTREAM INC.
CROSS REFERENCE SHEET FURNISHED PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY PART I ITEMS OF FORM
S-1
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM AND CAPTION LOCATION IN PROSPECTUS
---------------------------------------- ----------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus.............................. Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus..................... Inside Front and Outside Back Cover Pages;
Additional Information
3. Summary Information and Risk Factors.... Prospectus Summary; Risk Factors; The Company
4. Use of Proceeds......................... Use of Proceeds
5. Determination of Offering Price......... Outside Front Cover Page; Risk Factors;
Underwriting
6. Dilution................................ Risk Factors; Dilution
7. Selling Security Holders................ Principal and Selling Stockholders
8. Plan of Distribution.................... Outside Front Cover Page; Underwriting
9. Description of Securities to be
Registered.............................. Description of Capital Stock
10. Interests of Named Experts and
Counsel................................. Not Applicable
11. Information with Respect to the
Registrant.............................. Outside Front Cover Page of Prospectus;
Prospectus Summary; The Company; Risk Factors;
Use of Proceeds; Dividend Policy;
Capitalization; Dilution; Selected
Consolidated Financial Data; Management's
Discussion and Analysis of Financial Condition
and Results of Operations; Business;
Management; Certain Transactions; Principal
and Selling Stockholders; Description of
Capital Stock; Shares Eligible for Future
Sale; Consolidated Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................. Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 15, 1996
3,000,000 SHARES
[BITSTREAM LOGO]
CLASS A COMMON STOCK
------------------------
Of the 3,000,000 shares of Class A Common Stock offered hereby (the
"Offering"), 2,100,000 shares are being offered by Bitstream Inc. ("Bitstream"
or the "Company") and 900,000 shares are being offered by selling stockholders
(the "Selling Stockholders"). The Company will not receive any proceeds from the
sale of shares by the Selling Stockholders. See "Principal and Selling
Stockholders." Prior to this Offering, there has been no public market for the
Company's Class A Common Stock. The Company has two classes of authorized common
stock, the Class A Common Stock offered hereby and the Class B Common Stock.
Shares of the Class B Common Stock are non-voting and are convertible into the
same number of shares of Class A Common Stock. It is currently estimated that
the initial public offering price will be between $8.00 and $10.00 per share of
Class A Common Stock. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. Application has
been made to have the Class A Common Stock quoted on the Nasdaq National Market
under the symbol "BITS."
------------------------
THE CLASS A COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 5-9.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
=========================================================================================================
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2) SELLING STOCKHOLDERS
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................. $ $ $ $
- ---------------------------------------------------------------------------------------------------------
Total(3).................. $ $ $ $
=========================================================================================================
<FN>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses, payable by the Company, estimated at $950,000.
(3) The Company and certain Selling Stockholders have granted the Underwriters a
30-day option to purchase up to 450,000 additional shares of Class A Common
Stock on the same terms and conditions as set forth above solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions, Proceeds to Company
and Proceeds to Selling Stockholders will be $ , $ ,
$ and $ , respectively. See "Underwriting."
</TABLE>
------------------------
The shares of Class A Common Stock are offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that the certificates for the shares of Class A Common Stock will be
available for delivery at the offices of Volpe, Welty & Company, One Maritime
Plaza, San Francisco, California, on or about , 1996.
VOLPE, WELTY & COMPANY ADVEST, INC.
The date of this Prospectus is , 1996
<PAGE> 4
GRAPHIC ON INSIDE FRONT COVER PAGE OF THE PROSPECTUS
Superimposed on a picture of a relief map of the world is a graphic
illustration setting forth some of the Company's computer software products for
existing and new markets. On the northern edge of the map under a long
rectangular box containing the phrase "Software Solutions for Bitstream's
Existing Markets" are four rectangular boxes each of which lists existing
markets for the Company's products. On the southern edge of the map under a long
rectangular box containing the phrase "Software Available for New Markets" are
three boxes each listing a potential new market for the Company's products.
Beneath each box containing an existing or a potential new market for the
Company's products is a rectangular box listing the types of products the
Company offers or expects to offer to address such markets. Across the middle of
the map are seven horizontal boxes containing illustrations that are intended to
depict uses for, or evoke images associated with, the Company's software
products and the markets they serve. Each box containing products serving the
Company's existing markets on the northern edge of the map and each box
containing a potential new market on the southern edge of the map is connected
by a dotted line to the appropriate illustration.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON
STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Prospectus. Prospective
investors should consider carefully the information discussed under "Risk
Factors." Except as otherwise indicated, all information in this Prospectus (i)
assumes no exercise of the Underwriters' over-allotment option, (ii) reflects
the automatic conversion of all shares of Class A Preferred Stock and all shares
of Class B Preferred Stock into an equal number of shares of Class A Common
Stock and Class B Common Stock, respectively, on the date of this Prospectus,
(iii) reflects a two-for-three conversion of shares as part of the
reincorporation of the Company in Delaware in May 1996, see
"Business -- Delaware Reincorporation," and (iv) reflects a change in the
Company's fiscal year, effective December 31, 1995 from a fiscal year end of
September 30 to a fiscal year end of December 31. All references to fiscal years
ended in 1995 and earlier refer to the fiscal year ended September 30.
THE COMPANY
Bitstream develops and markets software products and technologies to
enhance the creation, transport, viewing and printing of electronic documents.
The Company's products and technologies consist of (i) type products, such as
libraries of type designs (fonts) and custom type products; (ii) enabling
technologies, which deliver typographic capabilities to hardware output devices
and software applications; and (iii) TrueDoc, a portable type technology
providing for the efficient distribution of text, with fidelity, in a highly
compressed format. In addition, beginning in the first half of 1997, the Company
expects to market a family of TrueDoc-enhanced portable document products that
are based upon Novell, Inc.'s portable document technology, Envoy. The Company
has obtained from Novell, Inc. ("Novell") certain rights to market and
distribute Envoy. Bitstream primarily licenses its products and technologies to
original equipment manufacturers ("OEMs") and independent software vendors
("ISVs") for inclusion in their output devices, embedded systems, applications,
Internet authoring tools, World Wide Web browsers and other products.
The rapid growth in the use of personal computers, advanced software
applications and laser printers has dramatically transformed the document
creation, production and distribution process, giving rise to the widespread use
of word processing and desktop publishing applications. However, these
technologies generally operate as stand-alone systems utilizing unique and often
competing standards. The problems presented by such competing standards have
been further complicated by the adoption of multi-vendor client/server network
architectures and the advent of new distribution media, including the Internet,
corporate intranets and new classes of information appliances.
Currently, techniques used to present text and graphics are based on
existing desktop publishing technologies and, when used in new distribution
media, often result in a loss of visual integrity, degraded system performance
or both. To efficiently deliver digital information that retains the author's
intended visual impression, it is necessary to utilize enabling technologies
that reduce file size, minimize bandwidth consumption and operate reliably
across heterogeneous computing environments.
The Company's enabling technologies and TrueDoc allow text-based digital
information to retain its intended appearance without regard to the specific
computing platforms, operating systems or resident applications used to create
the original document. In addition, with products based upon TrueDoc-enhanced
Envoy technology, the Company expects to offer a portable document solution that
addresses both text and graphics in a simplified and resource-efficient
application.
The Company markets its products to OEM and ISV customers worldwide through
its direct sales force. Outside North America, the Company distributes software
products to corporations and end users through a distributor network. The
Company's customers include Accent Software International Ltd., Apple Computer,
Inc. ("Apple"), Barco Graphics N.V., Corel Systems Corporation, Interleaf, Inc.,
Kyocera Corp., Macromedia, Inc., Seiko Epson Corporation, Silicon Graphics, Inc.
and Sun Microsystems, Inc. In June 1996, the Company entered into licensing
agreements with Oracle Corporation ("Oracle") and Spyglass, Inc. ("Spyglass") to
provide them with the Company's TrueDoc technology for incorporation into their
World Wide Web browser products or navigation tools.
In fiscal year 1993, the Company decided to curtail product distribution
through the computer software reseller channel and to concentrate the efforts of
the Company on the development and sale of technology and products to OEM and
ISV customers. In conjunction with this shift in strategic focus, the Company
reorganized its operations, reduced its work force, recapitalized its financial
structure, changed senior management and restructured its type design group.
This shift in strategic focus took place over a period from approximately July
1993 through September 1994. See "Business -- Shift in Strategic Focus."
The Company was incorporated in the Commonwealth of Massachusetts in
December 1981 and was reincorporated in the State of Delaware in May 1996. The
Company's executive offices are located at 215 First Street, Cambridge,
Massachusetts 02142 and its telephone number is (617) 497-6222.
3
<PAGE> 6
<TABLE>
- ------------------------------------------------------------------------------------------
THE OFFERING
<S> <C>
Class A Common Stock offered by:
The Company................................ 2,100,000 shares
The Selling Stockholders................... 900,000 shares
Class A and Class B Common Stock to be
outstanding after the Offering............. 5,782,439 shares(1)
Use of proceeds.............................. Repayment of indebtedness, working capital
and other general corporate purposes,
including product development and potential
acquisitions.
Proposed Nasdaq National Market symbol....... BITS
<FN>
- ---------------
(1) Excludes 1,733,244 shares of Class A Common Stock or Class B Common Stock
issuable upon exercise of outstanding options and warrants. See
"Management -- Stock Plans" and "Description of Capital Stock."
</TABLE>
<TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,(1) JUNE 30,
---------------------------------------------- -------------------- ---------------
1991 1992 1993 1994 1995 1994 1995 1995 1996
-------- ------- ------- ------ ------ ------ ------ ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues............................... $ 25,093 $20,548 $17,430 $9,832 $8,970 $2,276 $2,355 $4,774 $5,411
Gross profit........................... 17,196 15,115 11,154 7,533 7,391 2,003 1,944 3,980 4,603
Operating income (loss)................ (9,819) (3,339) (4,468) 1,019 1,795 742 250 969 1,002
-------- ------- ------- ------ ------ ------ ------ ------ ------
Net income (loss)...................... $(10,262) $(3,624) $(4,805) $ 846 $1,688 $ 723 $ 738 $ 849 $1,044
======== ======= ======= ====== ====== ====== ====== ====== ======
Pro forma net income per common and
common equivalent share(2)........... $ .38 $ .17 $ .24
====== ====== ======
Pro forma weighted average common and
common equivalent shares
outstanding(2)....................... 4,984 4,705 4,745
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-------------------------
ACTUAL AS ADJUSTED(3)
------ --------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................................................. $ 686 $16,440
Working capital........................................................................... 1,729 18,424
Total assets.............................................................................. 5,957 21,570
Long-term obligations..................................................................... 292 23(4)
Stockholders' equity...................................................................... 2,852 19,679
<FN>
- ---------------
(1) Effective December 31, 1995, the Company changed its fiscal year end from
September 30 to December 31. The information reflected represents results
for the three months ended December 31, 1994 and December 31, 1995. The
Company's current fiscal year commenced January 1, 1996.
(2) Calculated on the basis described in Note 3 of the Notes to the Consolidated
Financial Statements.
(3) Adjusted to give effect to the sale of 2,100,000 shares of Class A Common
Stock offered by the Company hereby at an assumed initial public offering
price of $9.00 per share, and the application of the net proceeds therefrom
and approximately $200,000 in proceeds to be received by the Company on the
exercise of certain options and warrants by certain Selling Stockholders in
connection with their sale of shares in the Offering. See "Principal and
Selling Stockholders."
(4) Does not include $941,000 of short-term indebtedness outstanding as of June
30, 1996 to be repaid by the Company with a portion of the proceeds of this
Offering. See "Use of Proceeds" and "Capitalization."
</TABLE>
------------------------
Except for the historical information contained herein, the discussion in
this Prospectus contains forward-looking statements relating to future events or
future financial performance of the Company that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed in the forward-looking statements. Factors which could cause or
contribute to such differences include, but are not limited to, those discussed
in the sections entitled "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," as well as those
discussed elsewhere in this Prospectus.
------------------------
Bitstream[Registered Trademark] and TrueDoc[Registered Trademark] are
federally registered trademarks of the Company; the Company claims trademark
rights in Cyberbit.[Trademark] All other trademarks, service marks or
tradenames referred to in this Prospectus are the property of their respective
owners.
- --------------------------------------------------------------------------------
4
<PAGE> 7
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information in this Prospectus before purchasing the shares of Class A
Common Stock offered hereby.
Limited History of Profitability; Business Transition. Bitstream was
founded in 1981, and from the fiscal year ended September 30, 1991 through the
fiscal year ended September 30, 1993, the Company incurred significant losses.
Beginning in fiscal year 1993, the Company reorganized its operations, reduced
its work force, recapitalized its financial structure, changed senior management
and restructured its type design group. In conjunction with its restructuring
initiatives, the Company curtailed its distribution of products through the
computer software reseller channel and focused its business activities on the
sale and licensing of software products and technology to OEMs and ISVs that
integrate the Company's technology into their products. Although the Company
achieved profitability in fiscal years 1994 and 1995, this shift in strategic
focus resulted in a substantial decline in revenues from approximately $17.4
million in fiscal year 1993 to approximately $9.8 million in fiscal year 1994
and to approximately $9.0 million in fiscal year 1995. The Company's transition
to a business focused on OEMs and ISVs is still evolving, and there can be no
assurance that the transition will be successful or that the Company's recent
profitability will continue. The Company's business is affected by numerous
factors, some of which are beyond the Company's control. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview," and "Business -- Shift in Strategic Focus."
Fluctuations in Quarterly Operating Results. The Company has experienced
certain quarter-to-quarter fluctuations in its operating results. The Company's
quarterly operating results may fluctuate as a result of a number of factors
including the timing of new product introductions, announcements of new products
by the Company, its competitors or its customers, slower-than-anticipated growth
rates of emerging markets, slower adoption of new products and technologies into
which the Company's products are incorporated, delays in customer purchases in
anticipation of industry developments, and gross margin fluctuations relating to
variations in product mix involving products with different rates of royalties
payable to third-party licensors. Furthermore, a significant portion of the
Company's expenses are relatively fixed in nature and the Company may not be
able to reduce spending in response to shortfalls or delays in sales. Such
shortfalls or delays may result in a material adverse effect on the Company's
business, financial condition and results of operations. As a result, the
Company believes that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as indications of
future performance. Moreover, the Company does not operate with a significant
backlog and often tends to realize a disproportionate share of its revenues in
the last few weeks of a fiscal quarter, thereby impairing the Company's ability
to accurately forecast quarter-to-quarter sales results. Due to the foregoing
factors, it is likely that in one or more future fiscal quarters the Company's
operating results may be below the expectations of public market analysts and
investors. Such an event would have a material adverse effect on the market
price of the Class A Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Dependence on OEMs and ISVs. The Company markets its products in large
part to OEMs and ISVs that integrate the Company's products into their own
hardware and software products. The businesses of the Company's OEM and ISV
customers are intensely competitive. The Company is therefore subject to the
risk that the price of or demand for the products sold by its OEM and ISV
customers will decline, which could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
because the Company generally markets its products through OEMs or ISVs, the
Company is subject to the risk that the ultimate consumers of the products of
OEMs and ISVs will discontinue using such OEMs' or ISVs' products for reasons
unrelated to the quality or price of or demand for the Company's products, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company is also subject to the risk
that its OEM and ISV customers will replace the Company's products with products
developed internally by them or will license replacement products from the
Company's competitors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
5
<PAGE> 8
Reliance on TrueDoc. Although the Company's sales of products
incorporating its TrueDoc technology have not generated significant revenues for
the Company to date, Bitstream expects that a substantial portion of the
Company's future revenue will be derived from the sale of products incorporating
TrueDoc technology. The first product incorporating the Company's TrueDoc
technology was released commercially in January 1995. If sales of TrueDoc
technology or pricing levels of products incorporating TrueDoc technology were
to fail to meet projected levels, whether as a result of TrueDoc's failure to
achieve market acceptance, product innovations by others, pricing practices of
competitors or other factors, the Company's business, financial condition and
results of operations would be materially and adversely affected. See
"Business -- Products" and "-- Competition."
Competition. The computer software market is highly competitive and is
characterized by rapid technological change and the adoption of new industry
standards. As the markets in which the Company's products are sold continue to
develop and as the Company enters new markets, the Company expects to continue
to face substantial competition from other software developers and anticipates
that additional competitors will enter those markets. Many of the Company's
competitors or potential competitors have significantly greater financial,
marketing and technical resources than the Company. These competitors may be
able to adapt more quickly to new or emerging technologies and standards or
changes in customer requirements or may be able to devote greater resources to
the promotion and sale of their products than the Company. Many of these
competitors currently market, or can potentially market, their products directly
to the ultimate consumers of such products as part of a broader product
offering. There can be no assurance that the Company will be able to compete
successfully in this industry. Continued investment in research and product
development and in marketing will be required to permit the Company to compete
successfully, and there can be no assurance that the Company will have the
necessary capital resources to fund such investment. Several software
application developers, with financial and technical resources significantly
greater than those of the Company, have recently announced their intentions
jointly to develop type products, enabling technologies and portable document
products that may be similar to those sold by the Company. Currently, the
Company is unable to determine the effect, if any, that such products and
technologies will have on the Company's business. If the products and
technologies contemplated by these arrangements were to generate significant
sales the Company's business, financial condition and results of operations
could be materially and adversely affected. See "Business -- Competition."
Dependence on the Expansion of Corporate Intranets and Workgroup
Technologies. The Company expects to derive significant revenues through the
sale of planned product offerings designed to work with corporate intranets. The
market for products and services designed for use with corporate intranets has
only recently begun to develop, and the success of the Company's portable
document technology and products will depend in large part on the widespread
adoption of intranets for use by corporations. The adoption of intranets for
in-house corporate communication, particularly by those individuals and
enterprises that have historically relied upon alternative means of
communication, generally requires the acceptance of a new model of conducting
business and exchanging information. Enterprises that have already invested
substantial resources in other means of conducting business or exchanging
information may be particularly reluctant or slow to adopt a new strategy that
may make their existing infrastructure obsolete or that require additional
significant capital investment. If the use of intranets and workgroup technology
develops at a rate slower than anticipated by the Company or does not develop in
a meaningful way, the Company's opportunity to sell its products designed for
use in intranets could be limited, and the Company's business, financial
condition and results of operations could be materially and adversely affected.
See "Business -- Industry Background" and "-- Products."
Risks Related to Envoy Technology. The Company expects to derive
significant revenues from the sale of the portable document technology, Envoy.
The Company has obtained an exclusive license from Novell to market and sell
Envoy on a worldwide basis to companies that incorporate Envoy in their own
products, such as OEMs and ISVs, and a nonexclusive license to distribute Envoy
to end users (collectively, the "Envoy License"). Envoy incorporates the
Company's TrueDoc technology pursuant to a separate license from the Company to
Novell. The Envoy License expires on November 1, 2001, and renews on a
year-to-year basis thereafter unless terminated by either party after November
1, 2001 on 90 days' written notice. The Company
6
<PAGE> 9
does not expect to commence marketing TrueDoc-enhanced Envoy portable document
products until the first half of 1997. There can be no assurance that the
marketing of such products by the Company will in fact occur at such time or at
any time, or that such products will achieve market acceptance. Any of such
events would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Products."
Dependence on the Internet and Internet Infrastructure Development. The
Company expects to derive revenues through the Internet primarily from licensing
a component of its TrueDoc technology to companies developing Internet-based
applications. The market for products and services designed for the Internet has
only recently begun to develop, and the success of products incorporating the
Company's technology will depend on increased commercial use of the Internet.
Because global commerce and on-line exchange of information over the Internet is
new and still evolving, it is difficult to predict with any certainty whether
the Internet will prove to be a viable marketplace for commercial transactions.
Significant commercial use of the Internet has not developed to date. Failure of
the Internet to develop as a viable means of commerce or interchange generally
or the failure of the Company's technology to gain acceptance among Internet
software developers specifically could have a material adverse affect on the
Company's business, financial condition and results of operations. There can be
no assurance that the infrastructure or complementary products necessary to make
the Internet a viable commercial marketplace will be developed. Continued
evolution of the Internet may be expected, including evolution in directions
unforeseen by the Company, some of which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Rapid Technological Change. The Company's future financial performance
will depend upon its ability to enhance its current products, to develop and
introduce new products that keep pace with technological developments, respond
to evolving customer requirements, meet the technical requirements of the
Company's OEM and ISV customers and achieve market acceptance for such products.
Any failure by the Company to anticipate or respond to new technological
developments and customer requirements, or any significant delays in product
development or introduction, could have a material adverse effect on the
Company's business, financial condition and results of operations. Moreover,
several of the markets addressed by the Company's current and planned products
are rapidly evolving and are characterized by emerging standards and competing
technological platforms. There can be no assurance that products designed by the
Company for sale into these markets will adequately address the requirements
dictated by evolving standards or that the Company will be able to adapt its
products to changes in technology. Accordingly, the Company may invest in
products and technologies which never gain market acceptance. Such investments
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In addition, new products, when first released by the Company, may contain
undetected errors that, despite quality control measures employed by the
Company, are discovered only after a product has been integrated into the OEM
and ISV product and used by customers. Such errors may cause delays in product
introduction and delivery or may require design modifications which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
International Operations; Seasonality. Sales to OEM and ISV customers
outside the United States represented 44.5% of the Company's revenues for the
fiscal year ended September 30, 1995. These revenues do not include revenues
derived from products sold into the international market by the Company's
domestic OEM and ISV customers. The Company expects that its international
business will continue to account for a significant portion of its future
revenues. Substantially all of the Company's international sales are denominated
in U.S. currency. An increase in the value of the U.S. dollar relative to
foreign currencies could make the Company's products more expensive and
therefore less competitive in foreign markets. Additional risks inherent in the
Company's international business activities generally include unexpected changes
in regulatory requirements, tariffs and other trade barriers, longer accounts
receivable payment cycles, potentially adverse tax consequences, and the burdens
of complying with a wide variety of foreign laws. There can be no assurance that
such factors will not have an adverse effect on the Company's future
international revenues and the Company's results of operations. In addition, the
Company's European business is significant and has historically been negatively
affected during the three months ended September 30 due to the summer closing or
slowdown of several European customers. These seasonal factors have affected and
may continue to affect
7
<PAGE> 10
the Company's quarterly results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quarterly Results."
Risks Associated with Managing a Changing Business. Beginning in fiscal
1993 through fiscal 1994, the Company effected a shift in its strategic focus to
an OEM- and ISV-based business model. Although the Company's senior management
has been associated with the Company for several years, such management has
little experience in managing a business which is undergoing rapid change.
Additionally, the Company's ability to manage its shift in strategic focus
effectively will require it to continue to improve its infrastructure and to
attract, train, and retain key employees. If the Company's management is unable
to manage such change effectively, the Company's business, financial condition
and results of operations could be materially and adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview," "Business -- Shift in Strategic Focus" and
"Management."
Dependence on Key Personnel. The Company's performance depends to a
significant extent on the continued service of its senior management and certain
key technical employees, including C. Raymond Boelig, the Company's President
and Chief Executive Officer and John S. Collins, its Vice President of
Engineering. None of the Company's employees is bound by employment agreements.
The Company's future results will depend upon its ability to attract and retain
highly skilled technical, managerial, and marketing personnel. Competition for
such personnel in the software industry is intense. There can be no assurance
that the Company will be successful in attracting and retaining the personnel
required to sustain its business. Failure to attract and retain such personnel
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Employees" and
"Management."
Intellectual Property and Proprietary Rights. The Company regards its
software as proprietary and attempts to protect it with a combination of
copyright, patent, trademark, and trade secret laws, employee and third-party
nondisclosure agreements and other methods of protection. There can be no
assurance that these measures will be adequate or that the Company's competitors
will not independently develop technologies that are substantially equivalent or
superior to the Company's technologies. It may be possible for unauthorized
third parties to copy or reverse engineer portions of the Company's products or
otherwise obtain and use information that the Company regards as proprietary.
Furthermore, the laws of certain foreign countries in which the Company's
products are or may be developed, manufactured or sold may not protect the
Company's products or intellectual property rights to the same extent as do the
laws of the United States and thus make the possibility of unauthorized use of
the Company's technologies and products more likely. Significant and protracted
litigation may be necessary to protect the Company's intellectual property
rights. Such litigation would likely result in significant expenditures and the
diversion of management's attention. Any such litigation involving the Company
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Intellectual Property."
Concentration of Share Ownership; Control by Existing Stockholders. Upon
completion of this Offering, the directors, executive officers, principal
stockholders and their respective affiliates will beneficially own approximately
45.0% of the shares of Class A Common Stock outstanding or immediately issuable
upon conversion of Class B Common Stock or exercise of outstanding options or
warrants held by such persons. These stockholders will be able to exercise
significant influence over all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions.
Such concentration of ownership may also have the effect of delaying or
preventing a change in control of the Company. See "Principal and Selling
Stockholders."
Shares Eligible for Future Sale; Possible Adverse Effect on Future Market
Prices. Sales of substantial numbers of shares of Class A Common Stock in the
public market could have an adverse affect on the market price of the Class A
Common Stock. Upon completion of this Offering, the Company will have 5,782,439
shares of Class A Common Stock outstanding or issuable upon the conversion of
outstanding Class B Common Stock (assuming no exercise of outstanding options or
warrants other than options and warrants for 189,192 shares of Class A Common
Stock exercised by certain Selling Stockholders in connection with this
Offering). Of these shares, the 3,000,000 shares of Class A Common Stock sold in
this Offering will generally be freely tradeable without restriction or further
registration under the Securities Act, as amended (the "Securities Act"). Of the
remaining 2,782,439 shares of Class A Common Stock outstanding or issuable on
8
<PAGE> 11
conversion of outstanding Class B Common Stock, 51,825 shares of Class A Common
Stock are not subject to the lock-up agreements described in "Shares Eligible
for Future Sale -- Lock-Up Agreements" (the "Lock-Up Agreements"), and will be
eligible for immediate sale in the public market pursuant to Rule 144(k) under
the Securities Act ("Rule 144(k)"). 165,853 shares of Class A Common Stock which
are issuable on the exercise of certain outstanding options and warrants at
exercise prices below the assumed initial public offering price of $9.00 per
share and which are not subject to the Lock-Up Agreements, will be eligible for
resale in the public market in accordance with Rule 701 under the Securities Act
("Rule 701") beginning 90 days after the date of this Prospectus. Upon the
expiration of the Lock-Up Agreements, or earlier in the sole discretion of
Volpe, Welty & Company, approximately 2,730,614 additional shares of Class A
Common Stock, outstanding or issuable upon the conversion of Class B Common
Stock, will become eligible for immediate sale in the public market pursuant to
the provisions of Rule 144(k). Approximately 180 days after the date of this
Prospectus, the Company will file a registration statement under the Securities
Act covering the shares issuable on the exercise of options and warrants granted
under its Stock Plans. See "Shares Eligible for Future Sale."
No Prior Public Market; Determination of Public Offering Price; Possible
Volatility of Stock Price. Prior to this Offering, there has been no public
market for the Class A Common Stock. There can be no assurance that an active
trading market will develop or be sustained after this Offering. The initial
public offering price will be determined through negotiations between the
Company and the representatives of the Underwriters. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The public offering price may not be indicative of the market
price for the Class A Common Stock that may prevail following this Offering. In
recent years, the stock market in general, and the prices of stock of technology
companies in particular, have experienced extreme price fluctuations, sometimes
without regard to the operating performance of particular companies. Factors
such as quarterly variations in actual or anticipated operating results, the
failure of the Company to achieve earnings estimates projected by market
analysts or changes in earnings estimates by such analysts, market conditions in
the industry, announcements by competitors, regulatory actions and general
economic conditions may have a significant effect on the market price of the
Class A Common Stock.
Immediate and Substantial Dilution; Dilutive Effect of Outstanding Options
and Warrants. Purchasers of the Class A Common Stock offered hereby will suffer
an immediate and substantial dilution, in the amount of $5.54 per share in net
tangible book value per share as of June 30, 1996, based on an assumed initial
public offering price of $9.00 per share. Such dilution computation does not
take into account the further dilutive effect resulting from the exercise of
outstanding options and warrants. As of June 30, 1996, there were 1,826,438
shares of Class A Common Stock and Class B Common Stock issuable upon the
exercise of options and warrants outstanding on that date at exercise prices
below the assumed offering price of $9.00 per share. If all of such outstanding
options and warrants were exercised in full, the amount of dilution per share in
net tangible book value per share to new investors would be $6.15. See
"Dilution."
Certain Anti-Takeover Provisions. The Board of Directors of the Company
(the "Board") has the authority to issue up to 6,000,000 additional shares of
Preferred Stock and to determine the price, rights, preferences and privileges
of those shares without any further vote or action by the stockholders. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future. The issuance of shares of Preferred Stock could have the effect
of making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. The Company has no present intention to
issue additional shares of Preferred Stock. Additionally, the Company is subject
to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which will prohibit the Company from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
The application of Section 203 also could have the effect of delaying or
preventing a change-in-control of the Company. This provision may also reduce
the likelihood of an acquisition of the Company at a premium price by another
person or entity. See "Description of Capital Stock -- Preferred Stock" and
"-- Delaware Law and Certain Provisions of Charter and By-Laws."
9
<PAGE> 12
THE COMPANY
The Company was incorporated in December 1981 in the Commonwealth of
Massachusetts and was reincorporated in the State of Delaware in May 1996 (the
"Delaware Reincorporation"). All of the business activities described herein are
conducted by the Company and its wholly-owned direct and indirect subsidiaries,
and when used in this Prospectus, unless the context requires otherwise, the
terms "Bitstream" and "Company" refer to Bitstream Inc. and all of its
subsidiaries. The Company's executive offices are located at 215 First Street,
Cambridge, Massachusetts 02142 and its telephone number is (617) 497-6222.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,100,000 shares of
Class A Common Stock offered by the Company hereby, at an assumed initial public
offering price of $9.00 per share are estimated to be approximately $16,627,000,
after deducting the underwriting discounts and commissions and estimated
offering expenses ($19,452,000 if the Underwriter's over-allotment option is
exercised in full). The Company will not receive any proceeds from the sale of
shares of Class A Common Stock by the Selling Stockholders. See "Principal and
Selling Stockholders."
The Company currently intends to use a portion of the net proceeds of this
Offering for the repayment of certain indebtedness described below, for working
capital and other corporate purposes, including expansion of sales and marketing
and customer support activities, investments in research and development and for
acquisitions of complementary technologies, products or businesses that broaden
or enhance the Company's current technology or product offerings. However, the
Company has no specific commitments with respect to any such acquisitions.
Pending such uses, the net proceeds will be invested in short-term,
interest-bearing, investment grade securities.
A portion of the proceeds of the Offering, totalling approximately
$1,200,000, will be used to repay all of the Company's outstanding long-term and
short-term borrowings and capitalized leases. As of June 30, 1996, such
indebtedness included (i) a bank line of credit with $150,000 outstanding,
bearing interest at a per annum rate equal to BayBank's "prime rate" ("Prime")
+1.50% and maturing on June 15, 1997; (ii) an equipment line with $191,000
outstanding, bearing interest at a per annum rate of Prime +1.50% and maturing
on March 18, 1999, the proceeds of which were used to purchase computer
equipment and software; (iii) an equipment term loan with $83,000 outstanding,
bearing interest at a per annum rate of Prime +2.00% and maturing on July 14,
1998; (iv) three capital leases with $3,000, $41,000 and $111,000 outstanding,
respectively, bearing interest at a per annum rate of 8.00%, 8.64% and 9.00%,
respectively, and expiring on August 1, 1996, February 10, 1997 and December 15,
2000, respectively; and (v) loans (the "Bridge Loans") from certain entities,
including certain directors and principal stockholders of the Company
(collectively, the "Bridge Lenders"), with $626,000 outstanding, including
accrued interest, bearing interest at a per annum rate of 12.00% and maturing on
December 22, 1996. See "Certain Transactions--Bridge Loans."
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain earnings, if any, to support its growth
strategy and does not anticipate paying cash dividends on its capital stock in
the foreseeable future.
10
<PAGE> 13
CAPITALIZATION
<TABLE>
The following table sets forth the short-term debt and capitalization of
the Company as of June 30, 1996 (i) on an actual basis, and (ii) as adjusted to
reflect the estimated net proceeds from the sale of 2,100,000 shares of Class A
Common Stock offered by the Company hereby at an assumed initial public offering
price of $9.00 per share and the application of the net proceeds therefrom. This
table should be read in conjunction with the Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus. See "Use of Proceeds."
<CAPTION>
AS OF JUNE 30, 1996
----------------------------
ACTUAL AS ADJUSTED(1)(2)
-------- -----------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Short-term debt.................................................... $ 916 $ --
======== ========
Long-term debt..................................................... $ 292 $ 23
Stockholders' equity:
Preferred stock, $.01 par value, no shares authorized, issued or
outstanding; 6,000,000 shares authorized, no shares issued or
outstanding, as adjusted...................................... -- --
Convertible preferred stock, $.01 par value(1) --
Class A -- 3,000,000 shares authorized, 2,782,575 shares
issued and outstanding; 3,000,000 shares authorized, no
shares issued or outstanding, as adjusted.................... 28 --
Class B -- 1,000,000 shares authorized, 391,162 shares issued
and outstanding; 1,000,000 shares authorized, no shares
issued or outstanding, as adjusted........................... 4 --
Common Stock, $.01 par value --
Class A -- 20,000,000 shares authorized, 288,646 shares issued
and outstanding; 30,000,000 shares authorized, 5,360,413
shares issued and outstanding, as adjusted................... 3 54
Class B -- 1,333,333 shares authorized, 30,864 shares issued
and outstanding; 500,000 shares authorized, 422,026 shares
issued and outstanding, as adjusted.......................... -- 4
Additional paid-in capital....................................... 14,454 31,258
Accumulated deficit.............................................. (11,586) (11,586)
Cumulative translation adjustment................................ (51) (51)
-------- --------
Total stockholders' equity............................... 2,852 19,679
-------- --------
Total capitalization..................................... $ 3,144 $ 19,702
======== ========
<FN>
- ---------------
(1) After giving effect to the automatic conversion of all outstanding shares of
Class A Preferred Stock and Class B Preferred Stock into 2,782,575 shares of
Class A Common Stock and 391,162 shares of Class B Common Stock,
respectively, on the date of this Prospectus. See "Description of Capital
Stock."
(2) Includes 189,192 shares of Class A Common Stock issuable upon the exercise
of options or warrants by certain Selling Stockholders immediately prior to
this Offering, in connection with the sale of shares by them in the
Offering, which exercise will result in approximately $200,000 of proceeds
to the Company. Excludes 666,667 shares reserved for issuance pursuant to
the 1996 Stock Plan. See "Management -- 1996 Stock Plan," "Principal and
Selling Stockholders" and "Description of Capital Stock."
</TABLE>
11
<PAGE> 14
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1996
was approximately $2,711,000, or $0.78 per share of Class A Common Stock and
Class B Common Stock (collectively, the "Common Stock"). Pro forma net tangible
book value per share represents the amount of the Company's total tangible
assets less total liabilities divided by the number of shares of Common Stock
then outstanding, determined after giving effect to (i) the conversion of each
three shares of stock into two shares of the same class in connection with the
Delaware Reincorporation (the "2-for-3 Conversion"), and (ii) the conversion of
all outstanding shares of Class A Preferred Stock and Class B Preferred Stock
into 2,782,575 shares of Class A Common Stock and 391,162 shares of Class B
Common Stock, respectively, upon effectiveness of the registration statement of
which this Prospectus is a part (the "Effective Date"). See "Description of
Capital Stock" and Notes 1 and 10 to "Notes to Consolidated Financial
Statements." After giving effect to the sale of shares of Class A Common Stock
offered hereby at an assumed initial public offering price of $9.00 per share,
and after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company, the Company's pro forma net tangible
book value as of June 30, 1996 would have been approximately $19,338,000, or
$3.46 per share. This represents an immediate increase in pro forma net tangible
book value of $2.68 per share to existing stockholders and an immediate dilution
of $5.54 per share to new investors purchasing shares of Class A Common Stock in
this Offering. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $9.00
Pro forma net tangible book value per share before Offering........ $0.78
Increase in pro forma net tangible book value per share
attributable to new investors................................... 2.68
-----
Pro forma net tangible book value per share after Offering........... 3.46
-----
Pro forma net tangible book value dilution per share to new
investors.......................................................... $5.54
=====
</TABLE>
The following table sets forth on a pro forma basis as of June 30, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid, and the average price paid per share by existing
stockholders and by the new investors purchasing shares of Class A Common Stock
from the Company in this Offering at an assumed initial offering price of $9.00
per share (before deducting underwriting discounts and commissions and estimated
offering expenses), after giving effect to (i) the 2-for-3 Conversion, and (ii)
the conversion of all outstanding shares of Class A Preferred Stock and Class B
Preferred Stock into 2,782,575 shares of Class A Common Stock and 391,162 shares
of Class B Common Stock, respectively, upon the Effective Date.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 3,493,247 62.5% $15,201,000 44.6% $4.35
New investors......................... 2,100,000 37.5 18,900,000 55.4% 9.00
--------- ----- ---------- -----
Total................................. 5,593,247 100.0% $34,101,000 100.0%
========= ===== ========== =====
</TABLE>
As of June 30, 1996, there were 1,826,438 shares of Class A Common Stock
issuable upon the exercise of options and warrants outstanding on that date at
exercise prices below the assumed offering price of $9.00 per share. The
issuance of shares upon exercise of these options and warrants is not reflected
in the preceding tables. If all of these outstanding options and warrants were
exercised in full, the dilution per share to new investors would be $6.15. Such
exercises would increase the number of shares held by existing stockholders to
5,319,685 shares, or 71.7% of the total number of shares of Common Stock to be
outstanding after this Offering, and would (i) decrease the number of shares
held by new investors to 28.3% of the total number of shares of Common Stock to
be outstanding after this Offering, (ii) increase the total consideration paid
to the Company by existing stockholders to $16,984,000 or 47.3% of the total
consideration paid to the Company, and (iii) decrease the average price per
share paid by existing stockholders to $3.19.
12
<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of September
30, 1994 and 1995 and December 31, 1995 and for each of the three years in the
period ended September 30, 1995 and for the three months ended December 31,
1995, have been derived from, and are qualified by reference to, the Company's
consolidated financial statements which have been audited by Arthur Andersen
LLP, independent public accountants, whose report thereon is included elsewhere
in this Prospectus. The selected consolidated financial data presented below as
of September 30, 1991, 1992 and 1993 and for each of the two years in the period
ended September 30, 1992 have been derived from, and are qualified by reference
to, the Company's audited financial statements, which are not included in this
Prospectus. The selected consolidated financial data as of June 30, 1996 and for
the six month periods ended June 30, 1995 and June 30, 1996 have been derived
from the unaudited consolidated financial statements of the Company included
elsewhere in this Prospectus. The selected consolidated statement of operations
data for the three months ended December 31, 1994 have been derived from the
unaudited consolidated financial statements of the Company, which are not
included in this Prospectus. In the opinion of management, the unaudited
financial statements of the Company have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of financial position and results of operations for these periods.
Results for the six months ended June 30, 1996 are not necessarily indicative of
results to be expected for the fiscal year ending December 31, 1996 or for any
future period. The selected consolidated financial data set forth below should
be read in conjunction with, and are qualified by reference to, the Consolidated
Financial Statements of the Company and Notes thereto, with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus, and other financial data appearing
elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------
1991 1992 1993 1994 1995
-------- ------- ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues................................................... $ 25,093 $20,548 $17,430 $9,832 $8,970
Cost of revenues........................................... 7,897 5,433 6,276 2,299 1,579
-------- ------- ------- ------ ------
Gross profit.............................................. 17,196 15,115 11,154 7,533 7,391
-------- ------- ------- ------ ------
Operating expenses:
Marketing and selling..................................... 12,086 10,530 9,080 3,334 3,264
Research and development.................................. 5,512 5,686 3,536 1,534 1,071
General and administrative................................ 2,799 2,237 3,006 1,281 1,261
Restructuring charge...................................... 6,618 -- -- 365 --
-------- ------- ------- ------ ------
Total operating expenses............................ 27,015 18,454 15,622 6,514 5,596
-------- ------- ------- ------ ------
Operating income (loss).................................... (9,819) (3,339) (4,468) 1,019 1,795
-------- ------- ------- ------ ------
Other income (expense), net................................ (514) (107) (18) (40) 11
-------- ------- ------- ------ ------
Provision for (benefit from) income taxes.................. (71) 178 319 133 118
-------- ------- ------- ------ ------
Net income (loss).......................................... $(10,262) $(3,624) $(4,805) $ 846 $1,688
======== ======= ======= ====== ======
Pro forma net income per common and common equivalent
share(2).................................................. $ .38
======
Pro forma weighted average common and
common equivalent shares outstanding(2)................... 4,984
======
<CAPTION>
THREE MONTHS
ENDED DECEMBER 31, SIX MONTHS
---------------------- ENDED JUNE 30,
1994(1) -----------------
----------- 1995(1) 1995 1996
------ ------ ------
(UNAUDITED)
<S> <<C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues................................................... $ 2,276 $2,355 $4,774 $5,411
Cost of revenues........................................... 273 411 794 808
------- ------ ------ ------
Gross profit.............................................. 2,003 1,944 3,980 4,603
------- ------ ------ ------
Operating expenses:
Marketing and selling..................................... 740 978 1,691 2,145
Research and development.................................. 255 331 547 680
General and administrative................................ 266 385 773 776
Restructuring charge...................................... -- -- -- --
------- ------ ------ ------
Total operating expenses............................ 1,261 1,694 3,011 3,601
------- ------ ------ ------
Operating income (loss).................................... 742 250 969 1,002
------- ------ ------ ------
Other income (expense), net................................ (2) 17 (37) (44)
------- ------ ------ ------
Provision for (benefit from) income taxes.................. 17 (471) 83 (86)
------- ------ ------ ------
Net income (loss).......................................... $ 723 $ 738 $ 849 $1,044
======= ====== ====== ======
Pro forma net income per common and common equivalent
share(2).................................................. $ .17 $ .24
====== ======
Pro forma weighted average common and
common equivalent shares outstanding(2)................... 4,705 4,745
====== ======
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
---------------------------------------------------------
1991 1992 1993 1994 1995
------- ------ ------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 1,347 $ 347 $ 1,068 $ 654 $ 523
Working capital (deficit)................................ 2,804 (976) (2,266) (920) 881
Total assets............................................. 11,347 7,895 5,029 2,640 3,194
Long-term obligations.................................... 1,049 566 17 125 124
Mandatorily redeemable convertible preferred stock....... -- -- 1,204 2,311 --
Stockholders' equity (deficit)........................... 3,760 153 (2,803) (3,041) 1,066
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
1995(1) 1996
------------------ ---------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 390 $ 686
Working capital (deficit)................................ 1,254 1,729
Total assets............................................. 4,328 5,957
Long-term obligations.................................... 210 292
Mandatorily redeemable convertible preferred stock....... -- --
Stockholders' equity (deficit)........................... 1,806 2,852
<FN>
- ---------------
(1) Effective December 31, 1995, the Company changed its fiscal year end from a
fiscal year end of September 30 to a calendar year end. The current fiscal
year commenced January 1, 1996. Because of this change in fiscal year, the
Company is presenting certain consolidated statement of operations data for
the three months ended December 31, 1994 and December 31, 1995, as well as
consolidated balance sheet data as of December 31, 1995.
(2) Calculated on the basis described in Note 3 of Notes to the Consolidated
Financial Statements.
</TABLE>
13
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Bitstream develops and markets software products and technologies to
enhance the creation, transport, viewing and printing of electronic documents.
The Company primarily licenses its products and technologies to OEMs and ISVs
for inclusion in their output devices, embedded systems, applications, Internet
authoring tools, World Wide Web browsers and other products.
Prior to July 1993, the Company's principal marketing strategy was to sell
its software products directly to end users through the computer software
reseller channel. Although not its primary focus, prior to this time the Company
also marketed its technology directly to OEMs and ISVs and licensed customized
type products to corporate customers. In fiscal year 1993, the Board decided to
curtail product distribution through the computer software reseller channel and
to concentrate the efforts of the Company on the development and sale of
technology and products to OEM and ISV customers. In conjunction with this shift
in strategic focus, the Board reorganized the Company's operations,
recapitalized the Company's financial structure, changed senior management and
restructured the Company's type design group. This reorganization included,
among other things: (i) the elimination and consolidation of departments, which
resulted in a reduction in the total number of Company employees from
approximately 235 in early 1993 to approximately 60 in late 1994; (ii) the
closing of the Company's disk duplication and distribution facility in Clinton,
Massachusetts; and (iii) a shift in product development and marketing emphasis
away from the design of new type styles to the development of enabling
technologies, such as TrueDoc. The shift in strategic focus took place over a
period from approximately July 1993 through September 1994, and, related
thereto, the Company incurred a restructuring charge of $365,000 during its
fiscal year ended September 30, 1994, principally relating to severance
obligations to terminated employees.
The Company derives revenues principally from the following sources: (i)
licensing fees and royalty payments paid by OEM and ISV customers; (ii) direct
sales of custom and other type products to end users such as graphic artists,
desktop publishers and corporations; and (iii) sales of type products to foreign
customers primarily through distributors. Royalty payments due from OEM and ISV
customers, who generally pay specified minimums or fixed fees for the right to
include the Company's products as a component of a larger product for a
specified time period or volume limit, are generally recognized as revenue at
the time the software is delivered to the OEM or ISV customer. If the royalty
payments are to be received over a period of time greater than one year, the
amount recognized is discounted to the present value of the future minimum
payments. Certain OEM and ISV customers pay royalties only upon the sublicensing
of the Company's products to end users. Royalties due from these OEM and ISV
customers are recognized when such sublicenses are reported to the Company by
the OEM or ISV customer. Revenues from sales to end users and foreign
distributors are generally recognized at the time the software products are
delivered to the customer.
Cost of revenues is comprised of direct costs of licenses and royalties, as
well as direct costs of product sales to end users. Included in cost of licenses
and royalties are fees paid to third parties for the development or license of
rights to technology and/or unique typeface designs and the costs incurred in
the fulfillment of custom orders from OEM and ISV customers. Included in cost of
product sales to end users and distributors are the direct costs associated with
the duplication, packaging and shipping of products.
Operating expenses consist primarily of sales and marketing expenses
(principally sales compensation and commissions), research and development
expense and general and administrative expenses. In accordance with Statement of
Financial Accounting Standards No. 86, Accounting for the Cost of Computer
Software to be Sold, Leased or Otherwise Marketed, the Company has, since 1991,
expensed research and development costs as incurred. See Note 1 to Notes to
Consolidated Financial Statements.
Except for the historical information contained herein, the discussion in
this Prospectus contains forward-looking statements relating to future events or
the future financial performance of the Company that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed in the forward-looking statements. Factors which could cause or
contribute to such differences include, but are not limited to, those discussed
in this section, the section entitled "Risk Factors" as well as those discussed
elsewhere in this Prospectus.
14
<PAGE> 17
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues represented by
certain items reflected in the Company's Statements of Operations Data for the
periods presented.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED DECEMBER ENDED
YEAR ENDED SEPTEMBER 30, 31, JUNE 30,
-----------------------------------------
-------------- --------------
1993 1994 1995 1994 1995 1995 1996
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........................ 36.0 23.4 17.6 12.0 17.5 16.6 14.9
----- ----- ----- ----- ----- ----- -----
Gross profit.......................... 64.0 76.6 82.4 88.0 82.5 83.4 85.1
----- ----- ----- ----- ----- ----- -----
Operating expenses:
Marketing and selling................. 52.1 33.9 36.4 32.5 41.5 35.4 39.7
Research and development.............. 20.3 15.6 11.9 11.2 14.1 11.5 12.6
General and administrative............ 17.3 13.0 14.0 11.7 16.4 16.2 14.3
Restructuring charge.................. -- 3.7 -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
Total operating expenses........... 89.7 66.2 62.3 55.4 72.0 63.1 66.6
----- ----- ----- ----- ----- ----- -----
Operating income (loss)................. (25.7) 10.4 20.1 32.6 10.5 20.3 18.5
----- ----- ----- ----- ----- ----- -----
Other income (expense), net............. (0.10) (0.4) -- (0.1) 0.8 (0.8) (0.8)
----- ----- ----- ----- ----- ----- -----
Provision for (benefit from) income
taxes................................. 1.8 1.4 1.3 0.8 (20.0) 1.7 (1.6)
----- ----- ----- ----- ----- ----- -----
Net income (loss)....................... (27.5)% 8.6% 18.8% 31.7% 31.3% 17.8% 19.3%
===== ===== ===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Revenues. Revenues for the six months ended June 30, 1996 increased by
$637,000, or 13.3%, to approximately $5.4 million, compared to approximately
$4.8 million for the six months ended June 30, 1995. Revenues from OEM and ISV
customers for the six months ended June 30, 1996 increased by $806,000, or
22.5%, to approximately $4.4 million, from approximately $3.6 million for the
six months ended June 30, 1995, reflecting the continued strengthening of the
Company's OEM and ISV business. Revenues from end users and distributors for the
six months ended June 30, 1996 declined by $168,000, or 14.1%, to approximately
$1.0 million, from approximately $1.2 million for the six months ended June 30,
1995. The Company does not expect sales of products to end users through the
domestic computer software reseller channel to be material in the future.
Gross Profit. Gross profit for the six months ended June 30, 1996
increased by $623,000, or 15.7%, to approximately $4.6 million, compared to
approximately $4.0 million for the six months ended June 30, 1995. Gross profit
as a percentage of revenues for the six months ended June 30, 1996 increased to
85.1%, compared to 83.4% for the six months ended June 30, 1995. The increase in
gross profit as a percentage of revenues reflects the increase in the percentage
of revenues from OEM and ISV sales and a decrease in costs of licensing fees and
royalties. Gross profit and gross profit as a percentage of revenues in the
future may be affected by a variety of factors including third party licensing
fees and royalties, pricing of the Company's products and changes in the product
mix of the Company's revenues.
Marketing and Selling. Marketing and selling expenses for the six months
ended June 30, 1996 increased by $454,000 or 26.8%, to approximately $2.1
million, compared to approximately $1.7 million for the six months ended June
30, 1995. In future periods, the Company believes marketing and selling expenses
may increase in absolute dollars due to higher levels of sales commissions and
higher levels of promotional activities in support of new product introductions.
Research and Development. Research and development expenses for the six
months ended June 30, 1996 increased by $133,000 or 24.3%, to $680,000 from
$547,000 for the six months ended June 30, 1995,
15
<PAGE> 18
reflecting the addition of personnel to support expanded development of the
Company's enabling technologies. Research and development expenses consist
primarily of personnel costs and fees paid for outside software development and
consulting fees. The Company expects to increase research and development
expenditures in absolute dollars in future periods to support development of
current and future products and technologies.
General and Administrative. General and administrative expenses for the
six months ended June 30, 1996 increased slightly to $776,000, compared to
$773,000 for the six months ended June 30, 1995. As a percentage of revenues,
general and administrative expenses declined to 14.3% for the six months ended
June 30, 1996 from 16.2% for the six months ended June 30, 1995.
The Company recorded a tax benefit of $86,000 for the six months ended June
30, 1996. This benefit consisted of a reduction of the valuation allowance for
deferred tax assets by $158,000 partially offset by a current tax provision of
$72,000. The reduction to the valuation allowance is primarily based upon
estimated future utilization of net operating loss carryforwards and federal tax
credits. The Company recorded a tax provision of $83,000, reflecting an
effective tax rate of 8.9%, for the six months ended June 30, 1995. See Note 4
to Notes to Consolidated Financial Statements.
THREE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1994
Revenues. Revenues for the three months ended December 31, 1995 increased
by $79,000, or 3.5%, to approximately $2.4 million, compared to $2.3 million for
the three months ended December 31, 1994. This increase is due to the 18.0%
increase in revenues from product sales to OEM and ISV customers, from
approximately $1.5 million to $1.8 million, offset by a 26.8% decrease in
product sales to end users and distributors to $540,000 from $738,000.
Gross Profit. Gross profit for the three months ended December 31, 1995
decreased by $59,000, or 2.9%, to approximately $1.9 million, compared to
approximately $2.0 million for the three months ended December 31, 1994. Gross
profit as a percentage of revenues for the three months ended December 31, 1995
declined to 82.5%, compared to 88.0% for the three months ended December 31,
1994. The decrease in gross profit as a percentage of revenues reflects an
increase in third party royalties and development fees.
Marketing and Selling. Marketing and selling expenses for the three months
ended December 31, 1995 increased by $238,000, or 32.2%, to $978,000, from
$740,000 for the three months ended December 31, 1994 as a result of additional
sales personnel and marketing programs needed to support new products.
Research and Development. Research and development expenses for the three
months ended December 31, 1995 increased by $76,000, or 29.8%, to approximately
$331,000, from approximately $255,000 for three months ended December 31, 1994.
The increase in research and development costs was due to higher outside
consulting fees and the hiring of an additional person into the Company's
software engineering group.
General and Administrative. General and administrative expenses for the
three months ended December 31, 1995 increased by $119,000, or 44.7%, to
$385,000, from $266,000 for the three months ended December 31, 1994 reflecting
an increase in payroll related costs in the three months ended December 31,
1995.
The Company recorded a tax benefit of $471,000 for the three months ended
December 31, 1995. This benefit consisted of the recognition of a net deferred
tax asset, of $600,000 partially offset by a current tax provision of $129,000.
The recognized deferred tax asset is based primarily upon estimated future
utilization of net operating loss carryforwards and federal tax credits. See
Note 4 to Notes to the Consolidated Financial Statements.
YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO YEAR ENDED SEPTEMBER 30, 1994
Revenues. Revenues for the fiscal year ended September 30, 1995 decreased
by $862,000, or 8.8%, to approximately $9.0 million, compared to approximately
$9.8 million for the fiscal year ended September 30, 1994. Revenues from product
sales to OEM and ISV customers for the fiscal year ended September 30, 1995
increased by $568,000, or 9.9%, to approximately $6.3 million, from
approximately $5.8 million for the fiscal
16
<PAGE> 19
year ended September 30, 1994, as a result of the continuing acceptance of the
Company's type products and enabling technologies by OEM and ISV customers, as
well as the license by eight OEM and ISV customers of the Company's TrueDoc
technology. Revenues from product sales to end users and distributors for the
fiscal year ended September 30, 1995 declined by approximately $1.4 million, or
35.2%, to $2.6 million, from $4.1 million for the fiscal year ended September
30, 1994, as a result of the Company's withdrawal from the computer software
reseller channel beginning in fiscal year 1993. Revenue from sales to corporate
end users and foreign distributors contributed the majority of revenue in this
category for the first time in the fiscal year ended September 30, 1995.
Gross Profit. Gross profit for the fiscal year ended September 30, 1995
decreased by $142,000, or 1.2%, to approximately $7.4 million, compared to
approximately $7.5 million for the fiscal year ended September 30, 1994. Gross
profit as a percentage of revenues for the fiscal year ended September 30, 1995
increased to 82.4%, compared to 76.6% for the fiscal year ended September 30,
1994. The increase in gross profit as a percentage of revenue reflects the
decline in the costs of product sales to end users and distributors in the
fiscal year ended September 30, 1995 to $500,000, compared to approximately $1.4
million in the fiscal year ended September 30, 1994, arising from a decline in
royalties paid on products sold in the domestic computer software reseller
channel. The Company also realized a reduction in expenses resulting from the
closing of its Clinton, Massachusetts disk duplication and distribution
facility.
Marketing and Selling. Marketing and selling expenses for the fiscal year
ended September 30, 1995 remained relatively constant at approximately $3.3
million, compared to fiscal year ended September 30, 1994, although a greater
percentage of marketing and selling expenses in the fiscal year ended September
30, 1995 were in the area of OEM and ISV sales and marketing activities than in
the fiscal year ended September 30, 1994.
Research and Development. Research and development expenses for the fiscal
year ended September 30, 1995 decreased by $463,000, or 30.2%, to approximately
$1.1 million, compared to approximately $1.5 million for the fiscal year ended
September 30, 1994. The decrease in research and development expenses was due to
the full year impact of the Company's decision to restructure its type design
group in the prior fiscal year. The decrease in research and development
expenses related to the design of new type products was offset in part by an
increase in personnel in the Company's engineering group, which is responsible
for developing software products such as the Company's enabling technologies and
TrueDoc.
General and Administrative. General and administrative expenses for the
fiscal year ended September 30, 1995 decreased by $20,000, or 1.6%, and remained
at approximately $1.3 million for the fiscal year ended September 30, 1995 as
compared to the fiscal year ended September 30, 1994.
The Company's effective tax rate for the fiscal year ended September 30,
1995 was 6.5% compared to 13.6% for the fiscal year ended September 30, 1994,
reflecting foreign withholding taxes and its utilization of available net
operating loss and tax credit carryforwards for federal and state income tax
purposes. At September 30, 1995, the Company had available net operating loss
carryforwards for income tax purposes of approximately $10.3 million and federal
tax credit carryforwards of approximately $2.0 million.
YEAR ENDED SEPTEMBER 30, 1994 COMPARED TO YEAR ENDED SEPTEMBER 30, 1993
Revenues. Revenues for the fiscal year ended September 30, 1994 decreased
by approximately $7.6 million, or 43.6%, to approximately $9.8 million, compared
to approximately $17.4 million for the fiscal year ended September 30, 1993.
Revenues from product sales to OEM and ISV customers for the fiscal year ended
September 30, 1994 decreased by approximately $4.7 million, or 44.8%, to
approximately $5.8 million, from approximately $10.5 million for the fiscal year
ended September 30, 1993, as a result of a sharp decline in typeface prices, as
well as the lack of new product introductions in the area of OEM and ISV
enabling technologies. Revenues from product sales to end users and distributors
for the fiscal year ended September 30, 1994 decreased by approximately $2.8
million, or 41.1%, to approximately $4.1 million, from approximately $6.9
million for the fiscal year ended September 30, 1993, due to the Company's
continuing withdrawal from the computer software reseller channel. In the fiscal
year ended September 30, 1994, the Company continued a shift in strategic focus
which commenced in approximately July 1993 to concentrate the
17
<PAGE> 20
efforts of the Company on the development and sale of technology and products to
OEM and ISV customers and to curtail product distribution through the computer
software reseller channel. In conjunction with this shift in strategic focus,
the Company reorganized its operations, reduced its workforce, changed senior
management and restructured its type design group.
Gross Profit. Gross profit for the fiscal year ended September 30, 1994
decreased by approximately $3.6 million, or 32.5%, to approximately $7.5
million, compared to approximately $11.2 million for the fiscal year ended
September 30, 1993, as a result of the corresponding decrease in revenues. Gross
profit as a percentage of revenues for the fiscal year ended September 30, 1994
increased to 76.6%, compared to 64.0% for the fiscal year ended September 30,
1993, reflecting sales of a substantial amount of end user inventories through
the domestic computer software reseller channel during fiscal 1993 at sharply
discounted levels. The increase in gross profit as a percentage of revenues was
offset, in part, by minimum royalty commitments due to third party licensors in
the fiscal year ended September 30, 1994.
Marketing and Selling. Marketing and selling expenses for the fiscal year
ended September 30, 1994 decreased by approximately $5.7 million, or 63.3%, to
approximately $3.3 million, compared to approximately $9.1 million for the
fiscal year ended September 30, 1993, as a result of the Company's curtailment
of product distribution through the computer software reseller channel, which
had accounted for the majority of sales and marketing personnel, as well as
advertising and promotional costs.
Research and Development. Research and development expenses for the fiscal
year ended September 30, 1994 decreased by approximately $2.0 million, or 56.6%,
to approximately $1.5 million, compared to approximately $3.5 million for the
fiscal year ended September 30, 1993. The decrease in research and development
costs was due to the Company's decision to restructure its type design group as
part of its shift in strategic focus.
General and Administrative. General and administrative expenses for the
fiscal year ended September 30, 1994 decreased by approximately $1.7 million, or
57.4%, to approximately $1.3 million, from approximately $3.0 million for the
fiscal year ended September 30, 1993, reflecting the reduction in the number of
administrative personnel which occurred in connection with the Company's
business reorganization.
During the fiscal year ended September 30, 1994, the Company recorded a
restructuring charge totalling $365,000 relating to the reorganization of its
operations, principally consisting of severance pay for terminated employees,
and a loss of $53,000 recognized on the disposition of certain property and
equipment.
The Company's effective tax rate for the fiscal year ended September 30,
1994 was 13.6% compared to 7.1% for the fiscal year ended September 30, 1993,
reflecting foreign withholding tax and its utilization of available net
operating loss and tax credit carryforwards for federal and state income tax
purposes. At September 30, 1994 the Company had available net operating loss
carryforwards of approximately $12 million, and federal tax credit carryforwards
of approximately $1.9 million.
18
<PAGE> 21
QUARTERLY RESULTS
The following table sets forth certain consolidated statements of
operations data for each of the Company's last ten quarters during the period
ended June 30, 1996. This quarterly information has been prepared on the same
basis as the annual information presented elsewhere in this Prospectus and, in
management's opinion, reflects all adjustments, consisting only of normally
recurring adjustments, necessary for the fair presentation of financial
condition and results of operations for these periods. The operating results for
any quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------------------------------
MARCH SEPT. MARCH SEPT. MARCH
31, JUNE 30, 30, DEC. 31, 31, JUNE 30, 30, DEC. 31, 31, JUNE 30,
1994 1994 1994 1994 1995 1995 1995 1995 1996 1996
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $2,995 $2,853 $2,222 $2,276 $2,352 $ 2,422 $1,920 $2,355 $2,706 $2,705
Cost of
revenues 732 641 591 273 457 337 512 411 356 452
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Gross
profit 2,263 2,212 1,631 2,003 1,895 2,085 1,408 1,944 2,350 2,253
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Operating
expenses:
Marketing
and
selling 753 686 863 740 808 883 833 978 1,106 1,039
Research
and
development 351 294 322 255 264 283 269 331 333 347
General and
administrative 278 349 325 266 369 404 222 385 399 377
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total
operating
expenses 1,382 1,329 1,510 1,261 1,441 1,570 1,324 1,694 1,838 1,763
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Operating
income
(loss) 881 883 121 742 454 515 84 250 512 490
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Other income
(expense),
net (15) (13) (1) (2) (14) (23) 50 17 (9) (35)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Provision for
(benefit
from)
income
taxes 55 7 57 17 40 43 18 (471) (37) (49)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income
(loss) $ 811 $ 863 $ 63 $ 723 $ 400 $ 449 $ 116 $ 738 $ 540 $ 504
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The Company's European business is significant and has historically been
negatively affected during the three months ended September 30 due to the summer
closing or slowdown of several European customers. In addition, the timing of
OEM and ISV revenues is difficult to forecast and may vary from quarter to
quarter due to a number of factors including new product developments,
announcements of products by the Company, announcements of its competitors, or
its customers, and delays in customer purchases in anticipation of industry
developments. Moreover, the Company does not operate with a significant backlog
and often tends to realize a disproportionate share of its revenues in the last
few weeks of a fiscal quarter, thereby impairing the Company's ability to
accurately forecast quarter-to-quarter sales results. Due to the foregoing
factors, it is likely that in one or more future fiscal quarters the Company's
operating results may be below the expectations of public market analysts and
investors. Such an event would have a material adverse effect on the market
price of the Class A Common Stock.
The Company believes that quarter to quarter comparisons of its financial
results are not necessarily meaningful and should not be relied upon as an
indication of future performance.
19
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily through cash flow from
operations, the private sale of equity securities, bank indebtedness and the
Bridge Loans. See "Certain Transactions -- Bridge Loans." The Company's
operating activities used cash of approximately $1.5 million in the fiscal year
ended September 30, 1993, and provided cash of approximately $339,000 and
$248,000 for the fiscal years ended September 30, 1994 and 1995, respectively.
The Company's investing activities used cash of $26,000, $65,000 and $137,000
for the fiscal years ended September 30, 1993, 1994 and 1995, respectively. The
Company's financing activities provided approximately $2.3 million in cash in
fiscal year 1993, primarily from the sale of preferred stock, and used cash of
$688,000 and $242,000 in fiscal years 1994 and 1995, respectively, to fund a net
reduction of outstanding debt. As of June 30, 1996, the Company had cash and
cash equivalents of $686,000 and working capital of approximately $1.9 million.
Additionally, as of June 30 1996, the Company had approximately $1.2 million in
outstanding long and short-term indebtedness, of which $424,000 was outstanding
under its line of credit and equipment loan facilities with a bank, $156,000
constituted outstanding capitalized lease obligations and $626,000 constituted
outstanding indebtedness, including accrued interest under the Bridge Loans. The
bank credit facilities consist of a $1.0 million working capital line, with
availability based on a percentage of accounts receivable, and a $500,000
equipment line. All such indebtedness will be repaid out of the proceeds of the
Offering. See "Use of Proceeds."
At June 30, 1996, the Company recorded a net deferred tax asset of
$758,000, related principally to the Company's federal and state net operating
loss carryforwards. As of June 30, 1996, the Company had net operating loss
carryforwards for federal and state income tax purposes of approximately $8.7
million, and federal tax credit carryforwards of approximately $2.2 million.
These loss carryforwards are available to reduce federal and state taxable
income in future years. The Company has established a partial valuation
allowance against its deferred tax assets to reflect uncertainties with respect
to the full realization of such assets. In determining the amount of valuation
allowance required, the Company considers numerous factors including historical
profitability, estimated future taxable income and the volatility of the
industry in which it operates. See Note 4 to Notes to the Consolidated Financial
Statements.
The Company believes that the cash generated from the proceeds of this
Offering, cash from operations and current cash balances will be sufficient to
meet the Company's operating capital requirements for at least the next 12
months. There can be no assurance, however, that the Company will not require
additional financing in the future. If the Company were required to obtain
additional financing in the future, there can be no assurance that sources of
capital will be available on terms favorable to the Company, if at all.
20
<PAGE> 23
BUSINESS
GENERAL
Bitstream develops and markets software products and technologies to
enhance the creation, transport, viewing and printing of electronic documents.
The Company's products and technologies consist of (i) type products, such as
libraries of type designs (fonts) and custom type products; (ii) enabling
technologies, which deliver typographic capabilities to hardware output devices
and software applications; and (iii) TrueDoc, a portable type technology
providing for the efficient distribution of text, with fidelity, in a highly
compressed format. The Company's enabling technologies and TrueDoc allow
text-based digital information to maintain its intended appearance in any
computing environment. In addition, beginning in the first half of 1997, the
Company expects to market a family of TrueDoc-enhanced portable document
products that are based upon Novell's portable document technology, Envoy, and
provide a portable document solution that addresses both text and graphics in a
simplified and resource-efficient application. Pursuant to the Envoy License,
the Company has obtained from Novell certain rights to market and distribute
Envoy. The Company primarily licenses its products and technologies to OEMs and
ISVs for inclusion in their output devices, embedded systems, applications,
Internet authoring tools, World Wide Web browsers and other products.
Bitstream was founded in 1981 as a digital type supplier to computer
hardware and software developers. The Company's library of type products is used
by OEMs, ISVs and end users around the world in the creation of electronic
documents. The Company was also an early developer of typographic enabling
software for hardware and software developers. Its font processor products are
used to provide type scaling functionality to operating systems, network servers
and a wide variety of computer printers and other output devices. Recently, the
Company has focused its product development and marketing efforts on technology
solutions that address the font-related issues of document portability in the
Internet and corporate intranets.
INDUSTRY BACKGROUND
The rapid growth in the use of personal computers, advanced software
applications and laser printers has dramatically transformed the document
creation, production and distribution process, giving rise to the widespread use
of word processing and desktop publishing applications. Underlying the growth in
word processing and desktop publishing were enabling technologies such as page
description languages, printer control languages and outline font technologies.
Adobe Systems Corporation's PostScript Type One format ("Type One"), the
original outline font technology, gained acceptance among graphic artists and
the high-end electronic publishing market due to the technology's close links to
high-resolution output devices used in service bureaus and publishing houses.
TrueType was developed by Apple as an alternative outline font technology to
Type One and is integrated into the Windows and Macintosh operating systems.
While capable of producing high-quality printed images and documents, these
technologies were designed to operate as part of stand-alone systems. As a
result, users were required to invest in expensive hardware and software
combinations to enable competing technologies to co-exist and work together in
the same environment. The problems presented by such competing standards have
been further complicated by the adoption of multi-vendor client/server network
architectures and the advent of new distribution media, including the Internet,
corporate intranets, and new classes of information appliances.
The increased use of distributed client/server network architectures in the
1990s has resulted in complex computing environments comprised of mixed
operating systems and multiple networking protocols. To create, transport, view
and print text-based digital information in such an environment, while
preserving the appearance intended by the document's author, each individual
computer must have resident on it specific font software and hardware drivers to
display or print the document as the author intended. If a user's system should
lack a particular typeface used by the author or attempt to output a document to
a device that differs from the device on which the document was originally
created, the user's end-product often lacks the appearance intended by the
creator. For example, if an output device prints a document with a font used in
substitution of the author's original font, a complete loss of original
pagination or formatting within the document can often result. Such a result
would make it difficult, if not impossible, for multiple users to review and
comment collaboratively on the same document. Difficulties in retaining text
integrity can be further
21
<PAGE> 24
complicated when users try to incorporate non-Latin fonts such as Kanji, Greek
or Hebrew, because font substitution for non-Latin fonts is typically not
available in most operating systems and output devices.
Currently, techniques used to present text and graphics are based on
existing desktop publishing technologies and, when used in new distribution
media, often result in a loss of visual integrity, degraded system performance,
or both. To efficiently deliver digital information that retains the author's
intended visual impression, computer systems must utilize enabling technologies
that reduce file size, minimize bandwidth consumption and operate reliably
across heterogeneous computing environments.
THE BITSTREAM SOLUTION
Bitstream markets products and technologies that provide the ability to
create, view, transport and print documents without regard to the specific
computing platforms, operating systems or resident applications used to create
or view the original document. The Company's enabling technologies and TrueDoc
allow text-based digital information to maintain its intended appearance in any
computing environment. Based upon technology developed over the last six years,
Bitstream's enabling technologies and its TrueDoc portable type technology allow
OEMs and ISVs to embed compact, portable type information into output devices,
embedded systems, applications, Internet authoring tools, World Wide Web
browsers and other products. In addition, with TrueDoc-enhanced Envoy
technology, the Company expects to provide a portable document solution that
addresses both text and graphics in a simplified and resource-efficient
application.
STRATEGY
Bitstream's goal is to become the leading supplier of type products,
enabling technologies and portable document products for the creation,
transport, viewing and printing of electronic documents. Key elements of the
Company's strategy include the following:
Maintain Technology Leadership. Since its founding over 15 years ago,
Bitstream has played a leading role in the development of industry-standard type
products and enabling technologies (e.g. font processing software). Recently,
Bitstream has been actively developing font portability and compression
technology. The Company has built substantial expertise in digital type design
and production, technical font formats, and font portability and compression
software. Bitstream intends to continue to develop or acquire technology to
support its leadership position in these areas.
Expand OEM and ISV Distribution Channels. In fiscal year 1993, the Board
decided to curtail product distribution through the computer software reseller
channel and to concentrate the efforts of the Company on the development and
sale of technology and products to OEM and ISV customers. The Company believes
that marketing to OEMs and ISVs provides it with the opportunity to build a base
of revenue and to minimize production, marketing and inventory costs. The
Company plans to continue to place significant emphasis on building its OEM and
ISV customer base.
Extend Technology to New Markets. The Company believes that certain
features of its products such as their small file and application size, high
typographic quality, performance, system scalability and cross-platform
portability will facilitate their adaptation to new and emerging markets. These
markets include the Internet, corporate intranets, embedded systems,
multi-function devices (e.g. combined printer/fax/copiers) and information
appliances. Bitstream is currently developing, adapting and marketing its
enabling technologies and type products to third parties whose products address
these new and developing markets.
Promote and Expand the Use of Portable Documents. As the use of the
Internet and corporate intranets grows, the Company believes that the need for
efficient portable document technology will increase. The Company intends to
promote the use of TrueDoc-enhanced Envoy technology in a variety of
communications and electronic publishing-related applications and to seek to
establish Envoy as a preferred portable document solution.
Support Industry Standards. Bitstream's products have been designed to
support existing typographic standards, such as TrueType and Type One, and to be
embedded within full-featured products produced by OEMs and ISVs. The Company's
products have also been designed to function in multi-platform computing
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environments, including Windows, UNIX and Macintosh. The Company plans to
continue to promote the use of its products in multi-vendor configurations and
is a member of the World Wide Web Consortium and the Unicode Consortium.
PRODUCTS
The Company's products and technologies consist of (i) type products, such
as libraries of type designs (fonts) and custom type products; (ii) enabling
technologies, which deliver typographic capabilities to hardware output devices
and software applications; and (iii) TrueDoc, portable type technology providing
for the efficient distribution of text, with fidelity, in a highly compressed
format. In addition, beginning in the first half of 1997, the Company expects to
market a family of TrueDoc-enhanced portable document products that are based
upon Novell's portable document technology, Envoy, and provide a portable
document solution that addresses both text and graphics in a simplified and
resource-efficient application.
Type Products
Bitstream has developed a library of over 1,400 digital typefaces
deliverable in industry-standard font formats (such as TrueType or Type One).
Approximately 1,200 of these typefaces are for use with English or other western
European language-based computer systems. This large number of typefaces is
necessary to support OEMs and ISVs focused on the graphic arts market, who are
accustomed to having a wide variety of type designs to choose from. The
remainder of the Company's type designs are non-western language typefaces such
as Kanji, Greek, Chinese, Korean, Russian, Hebrew and Arabic that are marketed
only to OEM and ISV customers. In addition to typefaces, the Company also offers
custom type services to its customers. Depending on the needs of the client, the
Company can digitize corporate logos, modify existing typeface designs, add
special characters to typefaces and create new typefaces. The Company's custom
type services are marketed to its OEM, ISV and large corporate customers.
Bitstream has developed its own proprietary type product design software
tools. These tools enable the Company's type product engineers to develop and
expand the Company's library of type products and to generate custom type
products in an efficient and cost-effective manner. By using its own tools,
Bitstream can largely avoid licensing or paying royalties for the use of third
party development tools. In addition, the Company believes that its design tools
improve its competitive position in the marketplace by assisting the Company in
adapting its products rapidly to the specific requirements of its customers.
In May 1996, the Company introduced a new multi-lingual type product called
Cyberbit. Cyberbit consists of a group of typefaces deliverable in TrueType
format that contain characters from the majority of the world's languages.
Cyberbit allows for the authoring, distributing, viewing and printing of
multi-lingual electronic documents on computer systems that typically do not
incorporate non-Western language fonts.
Enabling Technologies
The Company's enabling technologies consist of font processors (also known
as type scalers or rasterizers) in a modular architecture that provide OEM and
ISV customers with a complete type processing subsystem for integration into
their hardware or software products. Font processors are a necessary component
in laser printers and operating systems because they interpret type information
stored within a document and generate the indicated characters in the required
size and resolution as determined by the application, the output device or
user-defined specifications.
The modular architecture of the Company's "4-in-1" enabling technology
provides software hooks to allow OEMs and ISVs to incorporate font scaling
technologies into their products. The four font scaling technologies provided
for are the two industry standard font formats (TrueType and Type One), the
resident fonts used in Hewlett-Packard Company LaserJet laser printers, and a
Bitstream TrueDoc-based type rasterizer that processes Bitstream-supplied
resident font sets. In addition, this 4-in-1 architecture includes software that
routes incoming typeface data to the appropriate processor, and prepares the
final rasterized characters for imaging by an output device or computer screen.
The Company markets this technology, under the name "Bitstream 4-in-1 TrueDoc
Printing System," to OEM printer manufacturers and also markets a slightly
modified version, the "Bitstream 4-in-1 TrueDoc Imaging System," to ISV software
developers.
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TrueDoc
TrueDoc is a portable type compression technology designed for electronic
document distribution. OEMs and ISVs license and incorporate TrueDoc into their
document creation and viewing products to achieve the reliable, compact and
efficient recording, transport, viewing and printing of typographic information
regardless of whether the fonts used for the original creation of the document
are resident on the recipient's system. TrueDoc has been engineered to be small
in file and application size, to comply with all industry font standards, and to
be cross-platform compatible.
TrueDoc is composed of two main software components. The TrueDoc Character
Shape Recorder, approximately 55 kilobytes in size, captures character shapes
from a font processor, such as TrueType or Type One, and creates a portable font
resource ("PFR") that is transportable across networks or the Internet.
TrueDoc's Character Shape Player, approximately 45 kilobytes in size, recreates
the type shapes stored in the PFR and displays the text in a manner that
maintains the integrity of the original type shapes. The Company believes that
TrueDoc's small file size and efficient playback capabilities present advantages
in applications where limitations on bandwidth and memory are significant
factors.
As of June 30, 1996, TrueDoc was licensed to 17 OEMs and ISVs. In June
1996, the Company entered into a licensing agreement with Spyglass pursuant to
which Spyglass licensed the TrueDoc Character Shape Player (viewing component)
from the Company. The Company anticipates that Spyglass will integrate TrueDoc's
Character Shape Player into the browser component of Spyglass' Web Technology
Kit. In addition, in June 1996, the Company entered into a licensing agreement
with Oracle pursuant to which Oracle licensed the Company's TrueDoc technology.
The Company anticipates that Oracle will incorporate TrueDoc into its World Wide
Web navigation tool, Power Browser, which Oracle markets for publishing and
viewing data on corporate intranets and on the Internet. Although the Company
expects that it will receive no or only nominal royalty payments under these
agreements, the inclusion of TrueDoc viewing technology into Spyglass' and
Oracle's World Wide Web browser products or navigation tools will create an
installed TrueDoc user base of these two companies' customers. The Company
believes that this will stimulate demand by ISVs to license the recording
component of TrueDoc, the Character Shape Recorder, for use in their Internet
and corporate intranet applications on a royalty basis. There can, however, be
no assurance that Spyglass or Oracle will include TrueDoc in its products or
that the Company will achieve any commercial benefit from the inclusion of
TrueDoc in such products. The Company is also pursuing similar arrangements with
other developers of World Wide Web browser products or navigation tools.
Portable Document Products
Portable document products are software applications that provide users
with the ability to create electronic documents that can be shared, viewed,
annotated, indexed, searched and printed by other users regardless of the
computer system or application used to create the documents. Pursuant to the
Envoy License, Bitstream has obtained certain rights to market and distribute
Novell's portable document technology, Envoy. Through a separate license with
Tumbleweed Software Corporation ("Tumbleweed"), the Company has obtained certain
rights to market and distribute Tumbleweed's Envoy enhancement products,
including Tumbleweed Publishing Essentials.
Envoy enables a user to transport, view and print digital documents that
combine text and graphics. These documents can contain photographs, graphic
elements, color and detailed text, which historically have been difficult to
disseminate across networks due to large file size and inability to be
transmitted with full integrity. Pursuant to a separate license from the Company
to Novell, Envoy incorporates TrueDoc for type recording, transport and display,
regardless of whether the typefaces used to create that document are available
on the user's workstation. Through the use of the Envoy "driver" application,
Envoy allows document creators to quickly and easily convert existing electronic
documents (from word processing software, graphics software, spreadsheets, etc.)
into Envoy format. These documents can then be distributed throughout the
enterprise and viewed by other users, through the use of the Envoy "viewer"
application, with the original formatting intact. The Envoy viewer also allows
users to annotate, print and redistribute Envoy documents. The Envoy driver and
viewer applications are available to both the Microsoft Windows and
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Macintosh platforms. Thus, users can create Envoy documents on a Macintosh and
share them with Windows 3.1 or Windows 95 users or vice versa.
Tumbleweed's Publishing Essentials is a set of enhancements to Envoy that
provides advanced document publishers and viewers with more sophisticated
document processing, formatting and navigation capabilities. These include the
ability to (i) generate indices for the content of Envoy documents; (ii) perform
searches through Envoy documents; (iii) automatically generate outlines of Envoy
documents; (iv) convert other portable documents to Envoy format; and (v)
generate hypertext links between Envoy documents and to Hypertext Markup
Language ("HTML") documents that allow viewers to navigate through them.
The Envoy License grants the Company the exclusive right to distribute
Envoy portable document technology to companies that incorporate Envoy in their
own products, such as OEMs and ISVs (other than Corel Systems Corporation, as to
which Novell also has the rights to distribute Envoy). The Envoy License also
grants the Company non-exclusive rights to distribute Envoy to end users.
The Envoy License expires on November 1, 2001, and renews on a year-to-year
basis thereafter unless terminated by either party after November 1, 2001 on 90
days' written notice. The Envoy License is subject to earlier termination in the
event of breach by the Company, if the Company develops, markets or sells a
software product that directly competes with Envoy, if there is a "change of
control" (as defined in the Envoy License) of the Company, or in the event that
Novell determines that Envoy infringes another party's patent, trademark or
copyright rights. Bitstream pays Novell a royalty based on a percentage of
revenues, with a required annual minimum royalty. In addition, the Envoy License
may be terminated upon one year prior written notice given after Novell sells
Envoy or determines to discontinue the Envoy product. In the event, however,
that Novell determines to sell or discontinue Envoy it must make a proposal to
the Company to purchase Envoy, which must remain open for 10 business days. If
the Company does not accept such proposal to purchase within such period, Novell
shall be free to offer Envoy to other parties. However, if Novell offers to sell
or engages in discussions to sell Envoy to other parties on terms materially
different than those set forth in the original proposal made to the Company,
Novell is obligated to engage the Company in good faith negotiations regarding
the purchase by the Company of Envoy.
The Company is responsible for funding required future development costs
for Envoy. The Company expects to commence commercial shipments of Envoy in the
first half of 1997, although there can be no assurance in this regard.
In June 1996, the Company obtained a non-exclusive license from Tumbleweed
to market and distribute Tumbleweed Publishing Essentials and several other
products and technologies which enhance Envoy-based applications (the
"Tumbleweed License"). The Tumbleweed License is for a term of three years and
provides for an initial minimum royalty payment, which is credited against
future royalties. Royalties are based in part on revenues generated from sales
of Envoy by the Company to OEM and ISV customers. The Tumbleweed License can be
terminated by either party on 30 days' prior notice.
Future Products
The Company has identified other emerging and complementary areas for which
it believes its products will be well suited. Bitstream is currently developing
products to enhance the performance of text-based document creation, transport,
viewing and printing within such markets. Products under development and future
markets being addressed include:
- Server-based products that supply typefaces and enabling technologies to
network devices including workstations and printers. Such products are
being developed to simplify network maintenance, improve application and
network performance and help simplify copyright compliance. The first of
these products, expected to commence shipment in late 1997, is the
Bitstream Advanced Font Services for Networks ("AFSN") product. This
product is expected to work with the Netware Direct Print Services
("NDPS") features of the "Green River" release of Novell's Netware
network operating system. Green River is expected to ship in late 1996.
NDPS is expected to ship in mid 1997.
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- TrueDoc-based utilities for the graphic arts market that address font
portability issues in the electronic delivery of desktop publishing
documents.
- Type products, enabling technologies and versions of TrueDoc for
integration into new products and applications such as set-top boxes,
personal digital assistants and other information applications based on
new programming languages or operating systems, such as Sun Microsystems,
Inc.'s Java.
The Company has not determined the approximate time when such future products,
if completed, may be released for future sale, if at all. There can be no
assurance that any of the Company's planned or contemplated products will reach
commercialization or, if released for sale, will gain market acceptance, or that
the markets targeted by the Company will develop as anticipated.
MARKETING AND SALES
The principal objective of the Company's marketing strategy is to continue
to expand the sale of the Company's products and technologies to OEMs and ISVs
who integrate the Company's software into their own products. OEM and ISV
relationships range from the license of a small group of typefaces to agreements
whereby an entire range of type products and/or technologies are incorporated
into the customer's hardware or software products. As new opportunities arise,
particularly in the newly emerging areas of corporate intranets and portable
document software, the Company intends to evaluate other marketing approaches.
This may include marketing through the value added reseller channel serving the
networking market or increased direct corporate and international marketing.
The Company's sales organization, as of June 30, 1996, consisted of 10
people focused on OEM and ISV sales and six people focused on corporate direct
sales. The Company's sales efforts are managed from its corporate headquarters
in Cambridge, Massachusetts. In addition, the Company maintains a European sales
headquarters in Amsterdam, The Netherlands and sales offices in Burlingame,
California, Beaune, France and Reading, England. Finally, the Company has a
sales agent based in Tokyo to facilitate OEM sales to Japanese hardware
manufacturers. The Company's direct sales personnel receive a base salary plus
commissions based on meeting annual sales targets, with additional commissions
for sales in excess of annual targets.
The Company seeks to enhance its relationships with existing customers
through a four-person technical support team that works with customers or
prospects to support sales and to facilitate the implementation and use of the
Company's software products and technologies. Marketing activities are carried
out by a team of six people located at the Company's headquarters in Cambridge,
Massachusetts. In addition, the Company promotes its products through attendance
and exhibition at major industry trade shows. The Company intends to expand its
sales and marketing efforts in the future.
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CUSTOMERS
<TABLE>
The Company licenses type products, enabling technologies and TrueDoc to a
wide variety of OEM and ISV customers. In addition, the Company sells custom and
other type products directly to corporate customers. No single Bitstream
customer accounted for 10% or more of the Company's revenues for any of the
three fiscal years ended September 30, 1995, except for one customer which
accounted for approximately 13% of revenues in fiscal 1993. From time to time,
product sales to large customers during a single fiscal quarter may constitute
more than 10% of Company revenues for such quarter. See Note 14 to Notes to
Consolidated Financial Statements for information as to revenues derived by the
Company from sales outside of the United States. In the future, the Company
intends to broaden its customer base through expanded product offerings and
increased marketing efforts of current and planned products. Customers which are
representative of the various industry groups served by the Company include
those listed below.
<CAPTION>
---------------------------------------------------------------------------------------------
ISVS
---------------------------------------------------------------------------------------------
<S> <C> <C>
Application Developers Graphic Arts Operating Systems
Accent Software International Ltd. Barco Graphics N.V. Apple Computer, Inc.
Corel Systems Corporation DaiNippon Screen QNX Software
Hummingbird Communications Inc. Manufacturing Co., Systems Ltd.
Macromedia, Inc. Ltd. Intergraph Silicon Graphics, Inc.
Corporation Sun Microsystems, Inc.
Interleaf, Inc.
<CAPTION>
---------------------------------------------------------------------------------------------
OEMS
---------------------------------------------------------------------------------------------
Printer Companies Broadcast Television
<S> <C> <C>
Hewlett-Packard Company Seiko Epson Corporation Victor Company of Japan (JVC)
Kyocera Corp. Sharp Electronics Corporation The Walt Disney Company
---------------------------------------------------------------------------------------------
CORPORATE END USERS
---------------------------------------------------------------------------------------------
CNA Insurance Company Kemper Financial Services TV Guide
Deluxe Corporation Price Waterhouse L.L.P.
---------------------------------------------------------------------------------------------
</TABLE>
RESEARCH AND PRODUCT DEVELOPMENT
Bitstream is committed to developing innovative software to enhance
electronic document creation, transport, viewing and printing. To accomplish
this goal, the Company has invested, and expects to continue to invest,
significant resources in research and development. The Company's research and
development activities are centered around advancing the Company's software
products for its OEM, ISV and corporate customers. The Company maintains
specific expertise in the areas of font formats, multi-lingual fonts, font
portability, font compression and font processing technology.
The Company emphasizes cross-platform portability, small file and
application size and extensibility to new technologies in its software
development. To support these design objectives, the Company employs advanced
software development techniques. For example, the Company is developing software
using the Java programming language to adapt its products to devices and
software applications written to take advantage of Java's advanced structure and
cross-platform portability.
As of June 30, 1996, the Company employed 16 individuals who engage in
research and development activities. Of these, 11 focus on type product
development and five work on developing enabling technologies and TrueDoc. For
the fiscal years ended September 30, 1993, 1994 and 1995, the Company's research
and development expenditures were $3.5 million, $1.5 million, and $1.1 million,
respectively.
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COMPETITION
The markets in which the Company participates are intensely competitive,
evolving and subject to rapid technological change. The Company expects
competition to persist and increase in the future. Certain of the Company's
competitors, including Adobe Systems Corporation ("Adobe") and Agfa Division,
Miles Inc. ("Agfa"), have greater name recognition, a larger customer base and
significantly greater financial, technical and marketing resources than the
Company. The Company's products compete with the solutions offered by a variety
of companies, including other suppliers of enabling technologies, software
application developers, and vendors of computer operating systems. Moreover, the
market for the Company's enabling technologies and products may be adversely
impacted to the extent that computer hardware, operating system and application
software vendors incorporate similar functionality or bundle competitive
offerings with their products and thereby reduce the market for the Company's
technology or products. The Company's markets are the subject of intense
industry activity, and it is likely that a number of software developers are
devoting significant resources to developing and marketing technology and
products that may compete with the Company's technology and products.
The competition for the Company's sales of type products to OEM and ISV
customers generally comes from a number of comparably sized or smaller companies
offering their own type libraries and custom type services. Competition to the
Company's enabling technologies principally comes from Agfa with its Universal
Font Scaling Technology ("UFST"). UFST has a similar architecture to the
Company's 4-in-1 enabling technology product.
The competition for TrueDoc includes software from Ares Software Corp.,
recently acquired by Adobe, and Agfa, which offer compression features for
platform-independent electronic documents. When Bitstream begins to market
TrueDoc-enhanced Envoy portable document products, the Company expects that it
will face competition from Adobe's Acrobat products.
The Company also faces competition in its efforts to have TrueDoc accepted
and supported by Internet-browser companies. In March 1995, Adobe and Netscape
Communications Corporation ("Netscape") announced their intention to integrate
Adobe technology into Netscape products, including plans for a future version of
Netscape's Internet browser product, Netscape Navigator, that will include the
capability to view documents created by Adobe's Acrobat portable document
software product.
Future sales of the Company's products will depend upon the Company's
ability to develop or acquire, on a timely basis, new products or enhanced
versions of its existing products that compete successfully with products
offered by developers of competing technologies. There can be no assurance that
the Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, financial condition and results of
operations.
SHIFT IN STRATEGIC FOCUS
Following development of the Company's first font scaling technology in
1990, the Company pursued a strategy of initially licensing such technology for
relatively nominal initial cost to OEMs and ISVs with the goal of establishing
it as a standard in DOS-based software applications. The Company's principal
marketing strategy at that time was to sell font products as well as
enhancements and extensions, directly to end-users, through the computer
software reseller channel. However, due principally to intense competition, the
Company experienced a significant buildup of retail inventories that had been
shipped to domestic distributors during 1992 and 1993 and later were returned to
the Company. A substantial amount of such returned inventory was sold at sharply
discounted levels during fiscal year 1993.
In fiscal year 1993, the Board decided to curtail product distribution
through the computer software reseller channel and to concentrate the efforts of
the Company on the development and sale of technology and products to OEM and
ISV customers. In conjunction with this shift in strategic focus, the Board
reorganized the Company's operations, changed senior management and restructured
the Company's type design group. The reorganization of operations included,
among other things: (i) the elimination and consolidation of departments, which
resulted in a reduction in the total number of Company employees from
approximately
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235 in early 1993 to approximately 60 in late 1994; (ii) the closing of the
Company's disk duplication and distribution facility in Clinton, Massachusetts;
(iii) the recapitalization of its financial structure; and (iv) a shift in
product development and marketing emphasis away from the design of new type
styles to the development of enabling technologies, such as TrueDoc. This shift
in strategic focus took place over a period from approximately July 1993 through
September 1994.
In connection with this shift in strategic focus, on October 28, 1994, the
Company entered into an Agreement and Plan of Recapitalization (the "Plan") with
certain existing stockholders who forfeited certain liquidation preferences and
redemption rights pursuant to the terms of the Plan. Pursuant to the Plan, the
Company converted three classes of old common stock and five classes of old
preferred stock into the Class A Common Stock and the Class B Common Stock and
four classes of old preferred stock into the Class A Preferred Stock and the
Class B Preferred Stock (collectively, these transactions are hereinafter
referred to as "the Recapitalization"). See "Certain Transactions -- The 1994
Recapitalization."
INTELLECTUAL PROPERTY
The Company relies on a combination of trade secret, copyright, patent, and
trademark laws and contractual restrictions to establish and protect proprietary
rights in its technology. The Company has entered into confidentiality and
invention assignment agreements with its employees, and when obtainable, enters
into non-disclosure agreements with its suppliers, distributors and others so as
to limit access to and disclosure of its proprietary information. There can be
no assurance that these statutory and contractual arrangements will prove
sufficient to deter misappropriation of the Company's technologies or that the
Company's competitors will not independently develop non-infringing technologies
that are substantially similar to or superior to the Company's technology. The
laws of certain foreign countries in which the Company's products are or may be
developed, manufactured or licensed may not protect the Company's products or
intellectual property rights to the same extent as do the laws of the United
States and thus make the possibility of piracy of the Company's technology and
products more likely. The Company believes that, because of the rapid pace of
technological change in the software and electronic commerce markets, legal
protection for its products will be a less significant factor in the Company's
future success than the knowledge, ability and experience of the Company's
employees, the frequency of product enhancements and the ability of the Company
to satisfy its OEM and ISV customers.
The Company's policy is to apply for U.S. patents with respect to its
technology and seek copyright registration of its technology or trademark
registration of its marks from time to time when management determines that it
is competitively advantageous and cost effective to do so. The Company has
rights in three patent applications now pending before the United States Patent
and Trademark Office and each is directed to certain aspects or applications of
the Company's TrueDoc technology. Additionally, the Company has sought foreign
patent rights to certain aspects of its TrueDoc technology by filing an
International Application under the Patent Cooperation Treaty.
EMPLOYEES
As of June 30, 1996, the Company employed 61 persons, including 26 in sales
and marketing, 16 in research and development and 19 in general administrative
functions. Of the Company's 61 employees, 60 are full time and one is part time.
The Company also retains consultants from time to time to assist it with
particular projects for limited periods of time. The Company believes that its
future success will depend in part on its ability to attract, motivate and
retain highly qualified personnel. None of the Company's employees is
represented by a labor union and the Company has not experienced any work
stoppages. The Company considers its employee relations to be good.
FACILITIES
The Company's corporate headquarters is located in Cambridge, Massachusetts
where it currently leases approximately 20,000 square feet under a lease
expiring in 1998, with the right to renew for an additional five years.
Management believes that these facilities are adequate for the Company's current
needs and that
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suitable additional space, should it be needed, will be available to accommodate
expansion of the Company's operations on commercially reasonable terms.
LEGAL PROCEEDINGS
On May 26, 1995, The Friends of the Museum of Printing, Inc. ("the Museum")
filed a lawsuit in the Middlesex County Superior Court of Massachusetts against
the Company in connection with a letter dated July 23, 1992 (the "Letter") from
the Company to the Museum concerning the storage of certain font materials for
the Museum. The Letter provided that the Company would store and maintain the
font materials for a period of two years from the date of the Letter and that
the Company would have no liability to the Museum, over and above the proceeds
of insurance, for damage or loss of any of the font materials, and that neither
the Company nor the Museum would incur any liability to the other for any loss
or damage arising out of their respective rights and obligations set forth in
the Letter. The Museum alleges that after the two year storage period had
expired, the Company disposed of the font materials and that such conduct by the
Company breached the terms of the Letter and violated Chapter 93A of the
Massachusetts General Laws ("Chapter 93A"), which provides, among other things,
that persons found to have engaged in any unfair or deceptive act in the conduct
of a trade or business may be liable for double or treble damages and attorneys
fees (the "93A Claim"). The Museum further demanded an accounting of royalties
the Museum claims are due from the Company for use of the font materials.
The Company believes that its available insurance will cover liability, if
any, incurred by the Company in connection with the above-referenced lawsuit,
except for any liability in respect of the 93A Claim, up to a maximum of $1.01
million, subject to a $10,000 deductible. The Company further believes that its
available insurance will cover one half of any liability incurred by the Company
in excess of $1.01 million to a maximum of $1.8 million. The Company's insurer
is currently paying all of the costs incurred by the Company in defending this
lawsuit. The Company has established a reserve in the amount of its deductible
of $10,000 against any liability resulting from the lawsuit.
The Company cannot ensure that current reserves and insurance coverage will
be sufficient to cover any liability incurred by the Company in connection with
this lawsuit.
Pursuant to a letter dated May 6, 1996, a former director and officer of
the Company asserted that the Company has breached certain obligations he
alleges are due to him under a severance agreement dated May 22, 1991 (the
"Severance Agreement") between him and the Company. The former director and
officer claims that a provision in the Severance Agreement entitles him to
additional shares of Class A Common Stock and a reduction in the exercise price
of options to purchase Class A Common Stock held by him. The Company believes
that these claims are without merit and intends vigorously to contest their
validity. As of August 15, 1996, this former director and officer has not
commenced an action in any court in respect of the claims he has asserted
against the Company under the Severance Agreement.
Except as set forth above, as of the date hereof, the Company is not party
to any material legal proceedings and is not aware of any material threatened
litigation.
DELAWARE REINCORPORATION
The Company was reincorporated in Delaware on May 21, 1996 by merging
Bitstream Inc., a Massachusetts corporation ("Bitstream-Massachusetts") into the
Company, which was a wholly-owned subsidiary of Bitstream-Massachusetts. In
connection with the Delaware Reincorporation, each three outstanding shares of
stock of Bitstream-Massachusetts was converted into two shares of the same class
of stock of the Company. Such conversion is referred to herein as the "2-for-3
Conversion."
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MANAGEMENT
The Company's directors and executive officers and their ages as of June
30, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- ---- -------------------------------------------------
<S> <C> <C>
Amos Kaminski(1)....... 67 Chairman of the Board
C. Raymond Boelig...... 42 President, Chief Executive Officer and Director
James D. Hart.......... 38 Vice President, Finance and Administration,
Treasurer and Chief Financial Officer
John S. Collins........ 57 Vice President, Engineering and Development
Geoffrey W. Greve...... 38 Vice President, Type Operations
John S. Seguin......... 41 Vice President, Sales and Marketing
David G. Lubrano(1).... 66 Director
George B. Beitzel(1)... 68 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee and Audit Committee.
Amos Kaminski has been Chairman of the Board since 1991 and a Director of
the Company since 1985. Mr. Kaminski founded Interfid Ltd. ("Interfid"), a
private investment advisory firm, in 1984 and has served as its President and on
its Board of Directors since its formation. Mr. Kaminski is also the founder,
President and Chairman of the Board of Directors of AFA Asset Services, Inc., a
private real estate asset management company.
C. Raymond Boelig has been a director of the Company since May 1, 1996 and
President and Chief Executive Officer of the Company since September 1993. Mr.
Boelig has been employed by the Company since December 1987 and has served most
recently as Chief Operating Officer from July 1993 through September 1993, Vice
President of OEM Sales and Marketing from February 1992 through July 1993 and
Director of OEM Sales and Marketing from January 1990 through February 1992.
James D. Hart has been Vice President, Finance and Administration and Chief
Financial Officer of the Company since May 1, 1996 and Treasurer of the Company
since March 1994. From March 1994 until May 1, 1996, Mr. Hart also served as
Secretary and acting Chief Financial Officer of the Company. Prior to May 1,
1996, Mr. Hart was a Vice President of Interfid and his services were provided
to the Company on an as needed basis by Interfid. Mr. Hart was a Vice President
of Interfid from 1990 until May 1, 1996 and was responsible for selecting,
evaluating, monitoring and negotiating the terms of venture capital investments
made and proposed to be made by Interfid's clients, principally in high
technology areas. See "Certain Transactions -- Interfid."
John S. Collins has been Vice President of Engineering and Development
since 1988. Mr. Collins has been employed by the Company since 1986. Mr. Collins
was the inventor or a co-inventor in respect of a number of the patents held by
the Company relating to font imaging technology. He is the principal inventor of
the Company's TrueDoc technology. Mr. Collins holds a B.Sc. and a PhD in
Electrical Engineering from the University of London.
Geoffrey W. Greve has been Vice President of Type Operations of the Company
since May 1995. Mr. Greve has been employed by the Company since 1987 and
previously served as Director of Production Control from 1990 through May 1995.
John S. Seguin has been Vice President of Sales and Marketing since August
1994. Mr. Seguin served as Vice President and General Manager of XLI Corp., a
corporation engaged in manufacturing printer enhancements, from July 1993
through July 1994, and as Vice President of Sales and Marketing of Howtek, Inc.,
a corporation engaged in manufacturing color imaging products, from November
1987 through July 1993.
David G. Lubrano has been a director of the Company since 1987. Mr. Lubrano
retired in 1985 from Apollo Computer Inc., a corporation engaged in
manufacturing workstations, which he co-founded and where
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<PAGE> 34
he had been a Senior Vice President of Finance and Administration, Chief
Financial Officer and a director. Mr. Lubrano also serves on the board of
directors of Staples, Inc., a corporation engaged in the retail sale of office
and stationary supplies and products.
George B. Beitzel has been a director of the Company since April 1989. Mr.
Beitzel retired in 1987 from International Business Machines Corporation where
he had been a Senior Vice President and a director. Mr. Beitzel currently serves
on the board of directors of: Bankers Trust New York Corporation, a commercial
bank, Caliber System, Inc., a corporation engaged in providing value-added
transportation, logistics and related information services, Computer Task Group,
Inc., a corporation engaged in providing information technology services,
Datalogix International, Inc., a corporation engaged in providing open,
client/server software solutions, FlightSafety International, Inc., a
corporation engaged in providing training to operators of aircrafts and ships,
Phillips Petroleum Company, a corporation engaged in producing and distributing
petroleum products, Phillips Gas Co., a subsidiary of Phillips Petroleum Company
engaged in natural gas gathering, processing and marketing, Rohm & Haas Co., a
corporation engaged in specialty chemical manufacturing and distribution, TIG
Holdings, Inc., a holding company for a property and casualty insurance group,
and Xillix Technologies Corporation, a corporation engaged in developing and
marketing medical imaging systems for cancer detection.
The Company's By-laws provide that the Board will be elected at the annual
meeting of the stockholders, or at a special meeting of the stockholders in lieu
thereof, and that all directors shall hold office until the next annual meeting
of stockholders, or next special meeting of the stockholders in lieu thereof, or
until their successors are chosen and qualified.
Officers are elected by and serve at the discretion of the Board. There are
no family relationships among the directors or executive officers of the
Company.
BOARD COMMITTEES
The Board has established an Audit Committee and a Compensation Committee.
The Audit Committee reviews the Company's accounting practices, internal
accounting controls and financial results and oversees the engagement of the
Company's independent auditors. The Compensation Committee establishes salaries,
incentives and other forms of compensation for directors, officers and other
employees of the Company. The Compensation Committee also administers the
Company's benefit plans and will administer the issuance of stock options and
other awards under the Company's 1996 Incentive Stock Plan to all Company
employees and directors, including the members of such committee. Mr. Lubrano
serves as the Chairman of the Audit Committee and Mr. Beitzel serves as the
Chairman of the Compensation Committee.
DIRECTOR COMPENSATION
For the fiscal year ended September 30, 1995, each director received for
service as director $12,000 in cash compensation, which was payable quarterly in
arrears at the end of each full quarter of service. In addition, on November 30,
1994, each of Messrs. Kaminski, Lubrano and Beitzel was issued (i) 40,000 shares
of Class A Common Stock (as adjusted for the 2-for-3 Conversion) in payment of
$60,000 in accrued and unpaid directors fees due to each of them for services
rendered in fiscal years 1992 through 1994, and (ii) a warrant to purchase
40,000 shares of Class A Common Stock (as adjusted for the 2-for-3 Conversion)
issued under the 1994 Stock Plan (the "Directors' Warrants"). The Directors
Warrants provide that they vest ratably over three years following each full
year of service as director and are exercisable at $0.90 per share, as adjusted.
All such warrants were granted at an exercise price at least equal to the fair
market value of the Class A Common Stock as determined by the Board on the date
of the grant.
For the fiscal year ending December 31, 1996, each director who is not an
employee of the Company will receive $12,000 in cash compensation for service as
a director and Mr. Kaminski will receive additional cash compensation of $50,000
for serving as Chairman of the Board.
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<PAGE> 35
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning
compensation paid by the Company to its Chief Executive Officer (the "CEO") and
each of the Company's other executive officers who were serving as executive
officers on September 30, 1995 (together with the CEO, the "Named Executive
Officers") whose aggregate salary and bonus exceeded $100,000 for the fiscal
year ended September 30, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION AWARDS
---------------------- ------------------- ALL OTHER
NAME AND POSITION SALARY($) BONUS($) OPTIONS/WARRANTS(1) COMPENSATION ($)(2)
- -------------------------------------- --------- -------- ------------------- -------------------
<S> <C> <C> <C> <C>
C. Raymond Boelig..................... 172,692 -- 199,773(3) 1,848
President and Chief Executive
Officer
John S. Collins....................... 114,584 -- 149,830(4) 2,451
Vice President, Engineering and
Development
John S. Seguin........................ 105,000 30,428 66,666(5) 1,530
Vice President, Sales and Marketing
</TABLE>
- ---------------
(1) As adjusted for the 2-for-3 Conversion. Represents options and warrants to
purchase Class A Common Stock with an exercise price of $0.90 per share,
which was the fair market value of the shares at the time of the grant as
determined by the Board, granted on November 30, 1994 pursuant to the 1994
Stock Plan. All options represented expire November 30, 2004 and are fully
vested. All warrants represented expire on November 30, 2001 and are fully
vested. See "-- Option and Warrant Grants in Last Fiscal Year," and
"-- Stock Plans -- 1994 Stock Plan." The Company did not make any restricted
stock awards, grant any stock appreciation rights or make any long-term
incentive plan payouts during the fiscal year ended September 30, 1995.
(2) Represents matching contributions by the Company for the account of the
Named Executive Officer under the Company's 401(k) Plan, and, in the case of
Mr. Collins, deferred compensation of $1,200.
(3) Represents options to purchase 110,000 shares of Class A Common Stock and a
warrant to purchase 89,773 shares of Class A Common Stock. Pursuant to the
Stock Option Agreement entered into by Mr. Boelig with the Company in
connection with the options granted to him under the 1994 Stock Plan, Mr.
Boelig waived all prior rights to purchase stock of the Company including
options to purchase 15,100 shares of Class A Common Stock issued under the
1993 Non Qualified Stock Option Plan.
(4) Represents options to purchase 110,000 shares of Class A Common Stock and a
warrant to purchase 39,830 shares of Class A Common Stock. Pursuant to the
Stock Option Agreement entered into by Mr. Collins with the Company in
connection with the options granted to him under the 1994 Stock Plan, Mr.
Collins waived all prior rights to purchase stock of the Company including
options to purchase 7,581 shares of Class A Common Stock issued under the
1993 Non Qualified Stock Option Plan.
(5) Represents options to purchase Class A Common Stock.
All of the Company's Named Executive Officers are employed on an at will
basis and, except for the compensation arrangements discussed below, none of the
Named Executive Officers is party to any employment agreements with the Company.
Pursuant to an agreement with the Company, for the fiscal year ending December
31, 1996, Mr. Seguin will receive a bonus based on the amount of Company
revenues. Such bonus is set at $12,500 per quarter for revenues meeting the
Company's business plan for the quarter, and will vary based on actual revenues.
In addition, Mr. Seguin will receive additional bonus payments based on a
percentage of annual Company revenues in excess of targeted revenues for the
year. Each of the executive officers may also receive discretionary bonuses as
may be determined by the Compensation Committee. During the three months ended
December 31, 1995, Messrs. Boelig and Collins received discretionary bonuses of
$50,000 and $25,000, respectively.
33
<PAGE> 36
Effective May 1, 1996, James D. Hart entered into an agreement with the
Company pursuant to which he became a full-time employee of the Company, on an
at will basis, and Vice President, Finance and Administration, Treasurer and
Chief Financial Officer. Pursuant to such agreement, Mr. Hart's current annual
salary is $130,000, Mr. Hart received a $15,000 bonus upon accepting employment
with the Company, and he has received a payment of $35,000 to defer the cost of
his relocation from the New York City area to the Boston, Massachusetts area, as
well as a $65,000 loan from the Company. Such loan bears interest at the rate of
6.66% per annum, is payable quarterly, and provides for payment of interest only
until June 30, 1999. The principal balance of such loan is payable in equal
quarterly installments from July 1, 1999 until June 30, 2006, at which time,
such loan is due and payable in full. The principal balance of such loan will be
forgiven by the Company if Mr. Hart's employment is terminated by the Company
without cause or due to his death or disability. Such loan shall become
immediately due and payable if Mr. Hart voluntarily terminates his employment or
his employment is terminated by the Company for cause. Prior to May 1, 1996, Mr.
Hart's services were provided to the Company on an as needed basis by Interfid.
See "Certain Transactions -- Interfid."
OPTION AND WARRANT GRANTS
The following table sets forth certain information regarding options and
warrants granted during the fiscal year ended September 30, 1995 to the
Company's Named Executive Officers.
OPTION AND WARRANT GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
INDIVIDUAL GRANTS AT
--------------------------------------------------------------- ASSUMED ANNUAL
TOTAL PERCENT OF RATES OF
OPTIONS AND STOCK PRICE
WARRANTS APPRECIATION FOR
NUMBER OF GRANTED TO EXERCISE OR OPTION TERM(4)
OPTIONS/WARRANTS EMPLOYEES IN BASE PRICE EXPIRATION ----------------
NAME GRANTED(1) FISCAL YEAR(1)(2) (1)(3) DATE 5% ($) 10% ($)
- --------------------------- ---------------- ----------------- ----------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
C. Raymond Boelig(5)....... 110,000 $ .90 11/30/04 62,261 157,781
89,773 11.7% .90 11/30/01 32,892 76,652
John S. Collins(6)......... 110,000 .90 11/30/04 62,261 157,781
39,830 8.8% .90 11/30/01 14,593 34,009
John S. Seguin(7).......... 66,666 3.9% .90 11/30/04 37,733 95,624
</TABLE>
- ---------------
(1) As adjusted for the 2-for-3 Conversion. See "Business -- Delaware
Reincorporation." All such options and warrants were granted under the 1994
Stock Plan and are immediately exercisable. See Footnote 1 to table
contained in "-- Executive Compensation" and "-- Stock Plans -- 1994 Stock
Plan."
(2) Based on an aggregate of 1,706,720 shares subject to options and warrants
granted to employees and directors in the fiscal year ended September 30,
1995.
(3) All options and warrants were granted at an exercise price equal to or
greater than the fair market value of the Class A Common Stock as determined
by the Board on the date of grant.
(4) Amounts represent hypothetical gains that could be achieved for the
respective options or warrants if exercised at the end of the term of the
options or warrant. These gains are based on assumed rates of stock
appreciation of 5% and 10% compounded annually from the date the respective
options or warrants were granted to their expiration date and are not
intended to forecast possible future appreciation, if any, in the price of
the Class A Common Stock. The gains shown are net of the option or warrant
exercise price, but do not include deductions for taxes or other expenses
associated with the exercise of the options or warrants or the sale of the
underlying shares. The actual gains, if any, on the stock option or warrant
exercises will depend on the future performance of the Class A Common Stock,
the holder's continued employment through applicable vesting periods and the
date on which the options or warrants are exercised. The potential
realizable value of the foregoing options and warrants is calculated by
assuming
34
<PAGE> 37
that the fair market value of the Class A Common Stock on the date of grant
of such options or warrants equalled the exercise price of such options or
warrants.
(5) See Footnote 3 to table contained in "Executive Compensation."
(6) See Footnote 4 to table contained in "Executive Compensation."
(7) See Footnote 5 to table contained in "Executive Compensation."
The following table sets forth certain information concerning exercisable
and unexercisable options and warrants to purchase Class A Common Stock held by
each of the Named Executive Officers as of September 30, 1995. None of the Named
Executive Officers exercised any stock options during the year ended September
30, 1995.
AGGREGATED OPTION/WARRANT EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/WARRANT VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/WARRANTS OPTIONS/WARRANTS
AT SEPTEMBER 30, 1995 AT SEPTEMBER 30, 1995(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
C. Raymond Boelig................................ 110,000 -- $ 891,000 --
89,773 -- 727,162 --
John S. Collins.................................. 110,000 -- 891,000 --
39,830 -- 322,623 --
John S. Seguin................................... 66,666 -- 539,995 --
</TABLE>
- ---------------
(1) There was no public trading market for the Class A Common Stock on September
30, 1995. Accordingly, solely for purposes of this table, the values in this
table have been calculated on the basis of an assumed initial public
offering price of the Class A Common Stock of $9.00 per share, minus the
exercise price of $.90 per share, multiplied by the number of shares
underlying the option or warrant.
STOCK PLANS
1996 Stock Plan
On May 1, 1996, the Board adopted the 1996 Stock Plan, and on July 1, 1996,
the stockholders of the Company approved the 1996 Stock Plan by written consent.
The objectives of the 1996 Stock Plan are to attract and retain qualified
personnel, to provide additional incentives to directors, officers, and
employees of and consultants to the Company. A total of 666,667 shares of Class
A Common Stock have been reserved for issuance under the 1996 Stock Plan. The
1996 Stock Plan authorizes (i) the grant of options to purchase Class A Common
Stock intended to qualify as incentive stock options under Section 422 of the
Code ("Incentive Options"), (ii) the grant of options that do not so qualify
("Non-Qualified Options"), (iii) the grant of warrants that do not so qualify
and (iv) the grant of stock purchase rights ("Stock Rights").
The 1996 Stock Plan is administered by the Compensation Committee. The
Compensation Committee has full power to select the individuals to whom awards
will be granted, to make any combination of awards to such individuals, and to
determine the specific terms of each award, subject to the provisions of the
1996 Stock Plan. Persons eligible to participate in the 1996 Stock Plan are
directors, officers and employees of and consultants to the Company. Any
director who is a member of the Compensation Committee may receive awards under
the 1996 Stock Plan only upon approval of a majority of the disinterested
members of the Compensation Committee.
The option exercise price of each option granted under the 1996 Stock Plan
shall be determined by the Compensation Committee, but shall not be less than
100% of the fair market value of the shares on the date of grant. The term of
each option shall be fixed by the Compensation Committee and may not exceed 10
years from the date of grant. The Compensation Committee determines at what time
or times each option may be exercised and, subject to the provisions of the 1996
Stock Plan, the period of time, if any, after death, disability, or termination
of employment during which options may be exercised. Options may be made
35
<PAGE> 38
exercisable in installments and the exercisability of options may be accelerated
by the Compensation Committee. In addition, the 1996 Stock Plan provides that
options granted thereunder subject to future vesting shall immediately vest upon
the occurrence of certain events, such as the acquisition or merger of the
Company or sale of all or substantially all of the assets of the Company.
1994 Stock Plan
In connection with the Recapitalization, the Company adopted the 1994 Stock
Plan. Pursuant to the 1994 Stock Plan, the Company was authorized to grant
Incentive Options, Non-Qualified Options and warrants to purchase up to
1,833,333 shares of Class A Common Stock. Non-Qualified Options and warrants
granted pursuant to the 1994 Stock Plan have an exercise price of no less than
the lesser of (i) the book value per share of the Class A Common Stock as of the
end of the fiscal year immediately preceding such grant, or (ii) fifty percent
of the fair market value per share of Class A Common Stock on the date of such
grant and expire no later than seven years and one day from the date of the
grant. Incentive Options granted pursuant to the 1994 Stock Plan have an
exercise price of not less than the fair market value of the Class A Common
Stock on the date of such grant, expire no later than ten years from the date of
the grant and vest over a period of up to three years. Employees receiving
grants of Incentive Options under the 1994 Stock Plan waived all rights under
any prior grants of options and warrants to purchase the Class A Common Stock.
As of June 30, 1996 there were Incentive Options, Non-Qualified Options and
warrants to purchase 1,826,438 shares of Class A Common Stock outstanding
pursuant to the 1994 Stock Plan with exercise prices ranging from $0.90 to $3.00
per share, of which 1,674,805 are fully vested.
1993 Non-Qualified Stock Option Plan
In December 1992, the Company adopted the 1993 Non Qualified Stock Option
Plan (the "1993 Stock Plan"). Pursuant to the 1993 Stock Plan, the Company was
authorized to issue Non-Qualified Options to purchase up to 62,222 shares of the
Class A Common Stock (at a price not less than fifty percent of the fair market
value thereof at the time of the grant). Such options expire no later than ten
years from the date of the grant and are all fully-vested. Holders of
Non-Qualified Options granted under the 1987 Non-Qualified Class A Common Stock
Option Plan who were employed by the Company when the 1993 Stock Plan was
adopted were offered the right to cancel and terminate such options in exchange
for options granted under the 1993 Stock Plan. Any options so exchanged have an
exercise price equal to the fair market value of the Class A Common Stock on the
date of grant of the options issued under the 1993 Stock Plan.
Currently, there are Non-Qualified Options to purchase 4,197 shares of
Class A Common Stock outstanding pursuant to the 1993 Stock Plan with an
exercise price of $11.25 per share, all of which are fully vested.
1987 Non-Qualified Class A Common Stock Option Plan
During 1987 the Company adopted the 1987 Non-Qualified Class A Common Stock
Option Plan (the "1987 Stock Plan") pursuant to which the Company was authorized
to grant Non-Qualified Options to purchase up to 80,000 shares of Class A Common
Stock at an exercise price equal to the fair market value per share on the date
of the grant. Options issued pursuant to the 1987 Stock Plan expire no later
than ten years from the date of the grant and are all fully-vested.
Currently, there are Non-Qualified Options to purchase 15,846 shares of
Class A Common Stock outstanding pursuant to the 1987 Stock Plan with exercise
prices ranging from $41.63 to $84.38 per share, all of which are fully vested.
401(K) PLAN
The Company maintains a 401(k) savings and retirement plan (the "401(k)
Plan") which covers substantially all employees of the Company. The 401(k) Plan
allows participants to agree to certain salary deferrals which the Company
allocates to the participant's plan account. These amounts may not exceed
statutorily mandated annual limits set forth in Section 401(k), 404 and 415 of
the Internal Revenue Code.
36
<PAGE> 39
Participants are also eligible to receive from the Company, but the Company is
not obligated to provide, matching contributions each year in an amount up to
20% of the participant's contribution up to a maximum of 5% of such
participant's annual compensation. All contributions to a participant's plan
account are subject to limitations imposed on retirement plans generally and
401(k) plans in particular. The Company's contributions vest 100% when made.
Distribution of a participant's account under the 401(k) Plan may be made at
retirement, death, permanent disability or other termination of employment in a
lump-sum form of payment. Participants may withdraw amounts from their plan
accounts after attainment of age 59 1/2 or in the event of proven financial
hardship, and may also take loans against their plan account balances.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended September 30, 1995, the then members of the
Board fulfilled all functions of the Compensation Committee with regard to
determining compensation of executive officers of the Company. For a description
of the relationship between Mr. Amos Kaminski, Chairman of the Board, Mr. James
D. Hart, Vice-President, Finance and Administration, Treasurer and Chief
Financial Officer, Interfid and certain significant principal stockholders of
the Company, see "Certain Transactions--Interfid." Mr. Amos Kaminski, Mr. David
G. Lubrano, Mr. George B. Beitzel and a trust in which Mr. Beitzel and his
family members are the beneficiaries and in which Mr. Beitzel's wife and
children share voting power (the "Beitzel Family Trust"), were among certain
directors and principal stockholders who made loans to the Company. See "Certain
Transactions--Bridge Loans."
CERTAIN TRANSACTIONS
THE 1994 RECAPITALIZATION
The Company's previously outstanding Old Class H Preferred Stock contained
a mandatory redemption provision obligating the Company to redeem such class of
preferred stock for $2,042,070 on October 31, 1994. Holders of such Old Class H
Preferred Stock had the right to elect a majority of the members of the Board to
enable them to enforce their redemption rights and held irrevocable proxies
representing in excess of two-thirds of the vote of each class of outstanding
voting stock. The holders of the Old Class H Preferred Stock included Messrs.
Kaminski, Beitzel, Lubrano and Collins and BancBoston Ventures Inc., JHI
Development Capital Limited, Privest I N.V., Privest II, N.V., Interfid Ltd. and
the Beitzel Family Trust.
The Company executed an Agreement and Plan of Recapitalization dated as of
October 28, 1994 with the holders of the Old Class H Preferred Stock and certain
other stockholders. The plan of recapitalization eliminated the liquidation
preferences and redemption rights of such stockholders and, among other things,
provided for the conversion of one share of the Old Class H and I Preferred
Stock into three shares of Class A Preferred Stock of the Company, the
conversion of one share of Old Class F and G Preferred Stock into one share of
Class A or B Preferred Stock and the conversion of one share of each other old
class of preferred or common stock into one-fifteenth of a share of Class A or B
Common Stock. Additionally, each warrant and option to purchase shares of stock
was converted into a warrant or option to purchase one-fifteenth of a share of
Class A Common Stock or Class B Common Stock, at an exercise price equal to
fifteen times the original exercise price of such option or warrant. As used
herein, each reference to an "Old Class" of Common Stock or Preferred Stock
refers to such class of Common Stock or Preferred Stock outstanding prior to the
Recapitalization. See "Description of Capital Stock."
BRIDGE LOANS
On February 22, 1996, the Company entered into a Loan Agreement (the
"Bridge Loan Agreement") with certain parties (each a "Bridge Lender"), pursuant
to which the Company borrowed an aggregate amount of $600,000 (the "Bridge
Loan") from the Bridge Lenders. The Bridge Lenders were Messrs. Kaminski
($24,000 Bridge Loan), Lubrano ($18,000 Bridge Loan), Morton E. Goulder ($16,000
Bridge Loan), Beitzel ($11,500 Bridge Loan), The Beitzel Family Trust ($11,500
Bridge Loan), Gotthard Bank (Nassau Branch), acting for the account of certain
of its clients and their respective registered assigns
37
<PAGE> 40
($281,000 Bridge Loan), JHI Development Capital Limited ($155,000 Bridge Loan),
and BancBoston Ventures, Inc. ($83,000 Bridge Loan).
In connection with the Bridge Loan Agreement, the Company executed a
promissory note in favor of each Bridge Lender, pursuant to which the Company
agreed to pay the principal amount borrowed from such Bridge Lender, plus simple
interest at twelve percent (12%) per annum thereon, on August 22, 1996. The
Company agreed to an interest rate of 12% on the Bridge Loans given the fact
that the Bridge Loans are unsecured and subordinate to the Company's senior
indebtedness. At the time the Bridge Loan Agreement was entered into, the
interest rate on the Company's senior secured indebtedness was 10.5% per annum.
On August 22, 1996, the Company entered into an amendment extending the maturity
date of the Bridge Loans to October 22, 1996, and on October 9, 1996, the
Company entered into a further amendment extending the maturity date of the
Bridge Loans to December 22, 1996.
The Company used the proceeds of the Bridge Loans for working capital. The
proceeds of the Offering will be used to repay all amounts due to the Bridge
Lenders under the Bridge Loan Agreement. See "Use of Proceeds." As of June 30,
1996, the outstanding balance of the Bridge Loans (including accrued interest)
was $625,644.
INTERFID
As of May 1, 1996, Mr. James D. Hart became a full-time employee of the
Company. See "Management--Executive Compensation." From July 1, 1993 until April
30, 1996, the services of Mr. Hart, who, prior to May 1, 1996, was a
Vice-President of Interfid, were made available to the Company by Interfid on an
as-needed basis to render financial advisory services to the Company, and, from
March 1994 to May 1, 1996, to serve as Treasurer, Secretary and acting Chief
Financial Officer of the Company. As compensation for the services rendered by
Mr. Hart to the Company, the Company paid to Interfid $10,000 per month, with
respect to the period from January 1, 1996 until April 30, 1996, and $5,000 per
month with respect to the period from July 1, 1993 to December 31, 1995, and
reimbursed Interfid for reasonable out-of-pocket expenses incurred by Interfid
or Mr. Hart in connection with the performance of Mr. Hart's services to the
Company. There was no written agreement between the Company and Interfid in
respect of Mr. Hart's services. During the period prior to May 1, 1996, the
Company was not obligated to pay any compensation directly to Mr. Hart; his
compensation was paid by Interfid. However, the Board awarded Mr. Hart a
discretionary cash award of $20,000 for each of the fiscal years ended September
30, 1994 and September 30, 1995, respectively, and on November 30, 1994, granted
him a warrant to purchase 99,886 shares of Class A Common Stock under the 1994
Plan. Amos Kaminski, Chairman of the Board of the Company, is a director and the
controlling stockholder of Interfid. Interfid renders investment advisory
services to Premier Resources, Ltd., ("Premier"), a Bahamanian corporation.
Premier serves as an investment advisor to each of Privest I N.V. and Privest II
N.V. and may be deemed the beneficial owner of the Company's stock owned of
record by such entities. See "Principal and Selling Stockholders" and note 4 to
the table contained therein. Interfid has rendered investment advice to Premier
in connection with the investments by Privest I N.V. and Privest II N.V. in the
Company.
All future transactions between the Company, and its directors, officers
and principal stockholders, or affiliates of any such persons, including loans
to such persons, will be made for bona fide business purposes and will be on
terms no less favorable than could be obtained from an unaffiliated third party.
38
<PAGE> 41
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Class A Common Stock as of June 30, 1996 and as adjusted to
reflect the sale of shares of Class A Common Stock offered hereby, by (i) each
person or entity known to own beneficially more than 5% of the outstanding
shares of Class A Common Stock, (ii) each of the Company's directors, (iii) each
of the executive officers of the Company, (iv) all directors and executive
officers of the Company as a group, and (v) the other Selling Stockholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES TO BE
OWNED PRIOR TO BENEFICIALLY
OFFERING(1) NUMBER OWNED AFTER OFFERING(1)
----------------------- OF SHARES -----------------------
NAME(2) NUMBER PERCENT OFFERED NUMBER PERCENT
- ----------------------------------- ------- ------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
PRINCIPAL STOCKHOLDERS
JHI Development Capital Limited(3) 736,616 23.9% 184,040 552,576 10.3%
St. James House,
New St. James Place
St. Helier, Jersey JE4 8WH
Channel Islands..................
Privest I N.V.(4) 668,417 21.7 170,397 498,020 9.3
c/o Caribbean Management Company
14, John B. Gorsiraweg
Curacao, Netherland Antilles.....
Privest II N.V.(4) 665,244 21.6 169,607 495,647 9.2
c/o Caribbean Management Company
14, John B. Gorsiraweg
Curacao, Netherland Antilles.....
BancBoston Ventures, Inc.(5) 390,384 12.7 99,503 290,881 5.4
100 Federal Street
Boston, MA 02110.................
James W. Sole(6)................... 168,397 5.5 42,621 125,776 2.3
DIRECTORS AND EXECUTIVE OFFICERS
C. Raymond Boelig(7)............... 199,773 6.1 0 199,773 3.6
John S. Collins(8)................. 160,829 5.0 0 160,829 2.9
Amos Kaminski(9) 146,263 4.7 0 146,263 2.7
c/o Interfid Ltd.
150 E. 58th Street, 27th Floor
New York, NY 10155-2798..........
George Beitzel(10) 122,263 4.0 0 122,263 2.3
29 King Street
Chappaqua, NY 10514..............
James D. Hart(11).................. 100,996 3.2 0 100,996 1.9
David G. Lubrano(12) 97,375 3.2 0 97,375 1.8
94 Otis Street
Hingham, MA 02043................
Geoffrey W. Greve(13).............. 73,620 2.3 0 73,620 1.4
John S. Seguin(14)................. 66,666 2.1 0 66,666 1.2
All directors and executive 967,785 30.6 0 967,785 17.8
officers
as a group (8 persons)(7)(8)(9)
(10)(11)(12)(13)(14).............
OTHER SELLING STOCKHOLDERS
Morton E. Goulder(15).............. 73,514 2.4 10,000 63,514 1.2
Other Selling Stockholders (32 1,063,216 26.0 223,832 830,753 13.6
persons each holding less than 1%
of the Class A Common
Stock(16)).......................
</TABLE>
- ---------------
(1) Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them, subject to community
property laws where applicable. In accordance with the rules of the
Securities and
39
<PAGE> 42
Exchange Commission, Common Stock, subject to stock options or warrants
which are currently exercisable or which become exercisable within 60 days
after June 30, 1996, are deemed outstanding for computing the share
ownership and percentage ownership of the person holding such options or
warrants, but are not deemed outstanding for computing the percentage
ownership of any other person. The information set forth assumes the
automatic conversion of all shares of Class A Preferred Stock into an
equal number of shares of Class A Common Stock. The inclusion herein of
shares listed as beneficially owned does not constitute an admission
of beneficial ownership.
(2) Unless otherwise indicated, the address of the officer listed is: c/o
Bitstream Inc., 215 First Street, Cambridge, MA 02142.
(3) Includes 693,744 shares issuable upon conversion of Class A Preferred Stock
held of record by JHI Development Capital Limited and 14,234 shares
issuable to JHI Development Capital Limited upon the exercise of warrants.
JHI Development Capital Limited is a wholly owned subsidiary of James
Hardie (Holdings) Limited, a Jersey registered company, which has a
principal place of business at St. James House, New St. James Place, St.
Helier, Jersey JE4 8WH, Channel Islands. James Hardie (Holdings) Limited is
indirectly owned by James Hardie Industries Limited, an Australian publicly
held company, which has a principal place of business at 65 York Street,
Sydney NSW 2000, Australia. James Hardie Industries Limited may be deemed
the beneficial owner of the shares of the Company held by JHI Development
Capital Limited.
(4) Includes 633,333 shares and 633,333 shares of Class A Common Stock issuable
upon conversion of Class A Preferred Stock held of record by Privest I N.V.
and Privest II N.V., respectively, and 14,443 shares and 14,443 shares
issuable to Privest I and Privest II, respectively, upon the exercise of
warrants. Premier may be regarded as the beneficial owner of these shares
because it serves as an investment advisor to each of Privest I N.V. and
Privest II N.V. and has at times in the past been delegated, and may from
time to time in the future be delegated, the authority to vote or direct
the vote or to dispose or direct the disposition of these shares. Premier,
a corporation established under the laws of the Commonwealth of the
Bahamas, has a principal place of business at IBM House-East Bay Street,
Nassau, Bahamas and is a wholly owned subsidiary of Gesfid International
Ltd., a corporation established under the laws of the Commonwealth of the
Bahamas, which is a wholly owned subsidiary of Gesfid, S.A., a fiduciary
corporation established under the laws of Switzerland, which has a
principal place of business at Via Adamini, 10a, Lugano, Switzerland.
Gesfid, S.A. is indirectly controlled by Mr. Antonio Saladino, a citizen of
Switzerland, who has a principal place of business at Via Adamini, 10a,
Lugano, Switzerland. Mr. Saladino may be deemed to be the beneficial owner
of the shares of the Company held by Privest I N.V. and Privest II N.V. to
the extent that Premier is delegated the authority to vote or direct the
vote or to dispose of such shares.
(5) Includes 366,666 shares issuable upon conversion of Class A Preferred Stock
held of record by BancBoston Ventures, Inc. and 7,776 shares issuable to
BancBoston Ventures, Inc. upon the exercise of warrants. BancBoston
Ventures, Inc. is a wholly owned subsidiary of The First National Bank of
Boston, which is a national banking association. The First National Bank of
Boston disclaims beneficial ownership of any shares of the Company held by
BancBoston Ventures, Inc.
(6) Includes 160,666 shares issuable upon conversion of Class A Preferred Stock
and 2,176 shares and 1,111 shares issuable upon the exercise of warrants
and options, respectively.
(7) Includes 89,773 shares and 110,000 shares issuable to Mr. Boelig upon the
exercise of warrants and options, respectively. If the over-allotment
option is exercised in full, the Number of Shares Offered by Mr. Boelig and
the Number and Percent of Shares to be Beneficially Owned After Offering
will be 23,220, 176,513 and 3.3%, respectively.
(8) Includes 39,941 shares and 110,000 shares issuable to Mr. Collins upon the
exercise of warrants and options, respectively, and 888 shares and 10,000
shares issuable upon conversion of Class A Preferred Stock held by Mr. and
Mrs. Collins as joint tenants. If the over-allotment option is exercised in
full, the Number of Shares Offered by Mr. Collins and the Number and
Percent of Shares to be Beneficially Owned After Offering will be 18,698,
142,131 and 2.6%, respectively.
(9) Includes 70,666 shares issuable upon conversion of Class A Preferred Stock
held of record by Mr. Kaminski and 14,487 shares issuable to Mr. Kaminski
upon the exercise of warrants. Also includes
40
<PAGE> 43
20,000 shares issuable upon conversion of Class A Preferred Stock and 1,110
shares issuable upon the exercise of warrants held of record by Interfid of
which Mr. Kaminski is President and a director and, therefore, Mr. Kaminski
may be deemed to be a beneficial owner of such shares. If the
over-allotment option is exercised in full, the Number of Shares Offered by
Mr. Kaminski and the Number and Percent of Shares to be Beneficially Owned
After Offering will be 17,000, 129,263 and 2.5%, respectively.
(10) Includes 36,666 shares of Class A Common Stock issuable upon conversion of
Class A Preferred Stock held of record by Mr. Beitzel and 14,109 shares
issuable to Mr. Beitzel upon the exercise of warrants. Also includes 888
shares, 29,114 shares issuable upon conversion of Class A Preferred Stock
and 524 shares issuable upon the exercise of warrants, all held of record
by the Beitzel Family Trust. Since Mr. Beitzel and his family are the
beneficiaries of the Beitzel Family Trust and Mr. Beitzel's wife and
children share voting power therein, Mr. Beitzel may be deemed beneficial
owner of such shares. If the over-allotment option is exercised in full,
the Number of Shares Offered by Mr. Beitzel and the Number and Percent of
Shares to be Beneficially Owned After Offering will be 14,209, 108,054 and
2.1%, respectively.
(11) Includes 100,996 shares issuable to Mr. Hart upon the exercise of warrants.
If the over-allotment option is exercised in full, the Number of Shares
Offered by Mr. Hart and the Number and Percent of Shares to be Beneficially
Owned After Offering will be 12,306, 88,690 and 1.6%, respectively.
(12) Includes 40,666 shares issuable upon conversion of Class A Preferred Stock
held of record by Mr. Lubrano and 14,020 shares issuable to Mr. Lubrano
upon the exercise of warrants. If the over-allotment option is exercised in
full, the Number of Shares Offered by Mr. Lubrano and the Number and
Percent of Shares to be Beneficially Owned After Offering will be 11,316,
86,059 and 1.5%, respectively.
(13) Includes 73,616 shares issuable to Mr. Greve upon the exercise of options.
If the over-allotment option is exercised in full, the Number of Shares
Offered by Mr. Greve and the Number and Percent of Shares to be
Beneficially Owned After Offering will be 8,000, 65,620 and 1.2%,
respectively.
(14) Includes 66,666 shares issuable to Mr. Seguin upon the exercise of options.
If the over-allotment option is exercised in full, the Number of Shares
Offered by Mr. Seguin and the Number and Percent of Shares to be
Beneficially Owned After Offering will be 7,751, 58,915 and 1.1%,
respectively.
(15) Includes 70,341 shares issuable upon conversion of Class A Preferred Stock
and 1,676 shares issuable upon the exercise of warrants.
(16) Includes 17,380 shares issuable upon conversion of Class A Preferred Stock
held by such Selling Stockholders, in aggregate, and 1,023,942 shares
issuable to such Selling Stockholders, in aggregate, upon the exercise of
options and warrants. Ms. Susan Johnson, a stockholder who beneficially
owns 17,573 shares, was Chief Financial Officer of the Company from
February 1, 1993 through February 4, 1994. Mr. Lawrence Oppenberg, a
stockholder who beneficially owns 4,440 shares, was Vice President of Type
Operations from July 5, 1993 through June 30, 1994.
41
<PAGE> 44
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this Offering, the authorized capital stock of the
Company will consist of 30,500,000 shares of Common Stock, $0.01 par value,
(30,000,000 of which are authorized shares of Class A Common Stock and 500,000
of which are authorized shares of Class B Common Stock), and 10,000,000 shares
of preferred stock, $0.01 par value, (6,000,000 shares of which are authorized
shares of Preferred Stock, 3,000,000 of which are authorized shares of Class A
Preferred Stock, and 1,000,000 shares of which are authorized shares of Class B
Preferred Stock).
COMMON STOCK
As of June 30, 1996, there were 288,646 shares of Class A Common Stock and
30,864 shares of Class B Common Stock outstanding and held of record by 33
stockholders and one stockholder, respectively, and 2,782,575 shares of Class A
Common Stock and 391,162 shares of Class B Common Stock, issuable upon the
conversion of outstanding shares of Class A Preferred Stock and Class B
Preferred Stock, respectively. Upon the closing of this Offering, assuming no
exercise of outstanding stock options and warrants (other than those to be
exercised and sold by Selling Stockholders pursuant to this Offering), the
Company will have outstanding 5,360,413 shares of Class A Common Stock and
422,026 shares of Class B Common Stock. The holders of Class A Common Stock are
entitled to one vote for each share held of record on all matters submitted to a
vote of the stockholders and do not have cumulative voting rights. Holders of
Class A Common Stock that are subject to the provisions of the Bank Holding
Company Act of 1956 and Regulation Y promulgated thereunder and which hold
shares of Class B Common Stock or Class B Preferred Stock issued in connection
with the Reincorporation Merger have the option, at any time, to convert any or
all shares of Class A Common Stock into an equal number of shares of Class B
Common Stock. Holders of Class B Common Stock have identical rights to holders
of Class A Common Stock except that holders of Class B Common Stock are not
entitled to vote on matters upon which stockholders of the Company are entitled
to vote, except as provided by law or as specifically set forth in the
certificate of incorporation of the Company. Additionally, any holder of Class B
Common Stock has the option to convert their respective shares of Class B Common
Stock into an equal number of shares of Class A Common Stock to the extent such
holder and its affiliates shall be permitted to own control or have the power to
vote such Class A Common Stock under any law, rule or regulation at the time
applicable to such holder or its affiliates.
Subject to any preference that may be applicable to then outstanding
preferred stock, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, holders of the Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preference of any then outstanding preferred stock. There are no redemption or
sinking fund provisions applicable to Common Stock. All outstanding shares of
Common Stock are, and all shares of Common Stock to be outstanding upon
completion of this Offering will be, fully paid and nonassessable. The rights,
preferences and privileges of holders of Common Stock are subject to, and may be
adversely affected by, the rights of the holders of shares of any series of
Preferred Stock which the Company may designate and issue in the future.
PREFERRED STOCK
The outstanding shares of Class A Preferred Stock and the Class B Preferred
Stock automatically convert into an equal number of shares of Class A Common
Stock and Class B Common Stock, respectively, upon the effectiveness of an
underwritten public offering on a firm commitment basis pursuant to an effective
registration statement covering the offer and sale of Common Stock with the
proceeds to the Company of at least $5 million and a minimum price per share of
$3.00. Upon the effectiveness of the registration statement filed in connection
with this Offering, the outstanding shares of Class A Preferred Stock and Class
B Preferred Stock will, therefore, convert into an equal number of shares of
Class A Common Stock and Class B Common Stock, respectively, and the Company
will have no shares of Class A or Class B Preferred Stock outstanding. As of the
Effective Date, the Company will have 217,425 shares of Class A Preferred Stock
available for issuance, none of which will be outstanding, and 608,838 shares of
Class B Preferred Stock available for
42
<PAGE> 45
issuance, none of which will be outstanding. The Company intends to file an
amendment to the Company's Certificate of Incorporation immediately after the
Effective Date to eliminate the authorized shares of Class A Preferred Stock and
Class B Preferred Stock, which would leave the Preferred Stock described below
as the only authorized preferred stock.
Under the Company's certificate of incorporation, the Board has the
authority, without further action by the stockholders, to issue up to 6,000,000
shares of Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences,
sinking fund terms and the number of shares constituting any such series. The
issuance of Preferred Stock could adversely affect the rights and powers,
including voting rights, of holders of Common Stock and the availability of
earnings and assets for dividends, other distributions and payments upon
liquidation to the holders of Common Stock. The issuance of Preferred Stock
could have the effect of delaying, deferring or preventing a change-in-control
of the Company. In certain circumstances, such issuances could have the effect
of decreasing the market price of the Common Stock.
WARRANTS
As of June 30, 1996, there were outstanding warrants to purchase 62,917
shares of Class A Common Stock and 13,038 shares of Class B Common Stock,
respectively (other than warrants issued pursuant to the 1994 Stock Plan). Such
warrants have exercise prices ranging from $22.50 to $111.15 per share, and
expire commencing October 30, 1998 through October 30, 2005. The warrants are
subject to certain antidilution provisions.
REGISTRATION RIGHTS
The holders of substantially all of the outstanding shares of Common Stock
and the holders of the outstanding warrants and options issued under the 1994
Stock Plan are entitled to certain rights with respect to the registration of
such shares under the Securities Act. Under the terms of certain registration
rights agreements, if the Company proposes to register any of its securities
under the Securities Act, either for its own account or for the account of other
securityholders exercising registration rights, such holders are entitled to
notice of such registration and are entitled to include such shares of Common
Stock in the registration. The rights are subject to certain conditions and
limitations, among them, the right of the Underwriters of an offering subject to
the registration to limit the number of shares included in such registration.
Holders of Common Stock benefiting from these rights may also require the
Company to file a registration statement under the Securities Act at its expense
with respect to their shares of Common Stock, and the Company is required to use
its best efforts, to effect such registration, subject to certain conditions and
limitations. Furthermore, certain of such holders may require the Company to
file additional registration statements on Form S-3 subject to certain
conditions and limitations. In connection with this Offering, the rights of
substantially all such holders to have shares of Common Stock registered under
the Securities Act as part of this Offering either were waived or shares held by
such holders were included in the Offering pursuant to the exercise of such
rights by such holders. All fees, costs and expenses of such registrations will
be borne by the Company, with certain exceptions, provided that such holders
will be required to bear their pro rata share of underwriting discounts and
commissions.
DELAWARE LAW AND CERTAIN PROVISIONS OF CHARTER AND BY-LAWS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "DGCL"), an anti-takeover law. Subject to certain
exceptions, Section 203 prevents an "interested stockholder" (as defined below)
in a publicly-held Delaware corporation from engaging in a "business
combination" (as defined below) with such corporation for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the interested stockholder attained such status with the
approval of the board of directors or at the time of attaining such status or
thereafter, the board of directors approves the same and holders of at least
two-thirds of the outstanding shares of voting stock not owned by the interested
stockholder approve such business combination at a meeting of stockholders. A
"business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit
43
<PAGE> 46
to the interested stockholder. Subject to certain exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years prior to the proposed business combination, did own) 15% or
more of the Company's voting stock. The existence of this provision would be
expected to have an anti-takeover effect, including attempts that might result
in a premium over the market price for the shares of the Common Stock held by
stockholders.
The Company's bylaws also require that, special meetings of the
stockholders may be called only by the Chairman of the Board or the Board. These
provisions may have the effect of deterring hostile takeovers or delaying,
deferring or preventing changes in control or management of the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the DGCL, the Company's Certificate of Incorporation
provides that no director of the Company will be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the DGCL, relating to prohibited dividends or
distributions or the repurchase or redemption of stock, or (iv) for any
transaction from which the director derives an improper personal benefit. In
addition, the Certificate of Incorporation provides that any director or officer
who was or is a party or is threatened to be made a party to any action or
proceeding by reason of his or her services to the Company will be indemnified
to the fullest extent permitted by the DGCL.
The Company intends to obtain directors' and officers' liability insurance
("D&O Insurance") prior to the effective date of this Offering, and expects to
continue to carry D&O Insurance following this Offering. In addition, the
Company has entered into an indemnification agreement with each of its directors
and certain officers under which the Company has indemnified each of them
against expenses and losses incurred for claims brought against them by reason
of being a director or officer of the Company.
The Company believes that the limitation of liability and indemnification
provisions in its Certificate of Incorporation, the D&O Insurance and the
indemnification agreements will enhance the Company's ability to continue to
attract and retain qualified individuals to serve as directors and officers.
There is no pending litigation or proceeding involving a director, officer or
employee of the Company to which the indemnification provisions would apply.
TRANSFER AGENT AND REGISTRAR
The Company's Transfer Agent and Registrar is Boston EquiServe.
NASDAQ NATIONAL MARKET LISTING
Application has been made to have the Class A Common Stock quoted on the
Nasdaq National Market under the symbol "BITS."
44
<PAGE> 47
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 5,782,439 shares of
Class A Common Stock outstanding or issuable on the conversion of outstanding
Class B Common Stock (assuming no exercise of outstanding options or warrants
other than options and warrants for 189,192 shares of Class A Common Stock
exercised by certain Selling Stockholders in connection with this Offering). Of
these shares, the 3,000,000 shares of Class A Common Stock sold in this Offering
will generally be freely tradeable without restriction or further registration
under the Securities Act. Of the remaining 2,782,439 shares of Class A Common
Stock outstanding or issuable on the conversion of outstanding Class B Common
Stock, 51,825 shares of Class A Common Stock are not subject to the Lock-Up
Agreements described below, and will be eligible for immediate sale in the
public market pursuant to Rule 144(k). 165,853 shares of Class A Common Stock
which are issuable on the exercise of certain outstanding options and warrants
exercisable at prices no greater than the assumed offering price of $9.00 per
share and which are not subject to the Lock-Up Agreements, will be eligible for
resale in the public market in accordance with Rule 701 beginning 90 days after
the date of this Prospectus. Upon the expiration of the Lock-Up Agreements, or
earlier in the discretion of Volpe, Welty & Company, approximately 2,730,614
additional shares of Class A Common Stock outstanding or issuable upon the
conversion of Class B Common Stock, will become eligible for immediate sale in
the public market pursuant to the provisions of Rule 144(k). The Company intends
to register all shares of Class A Common Stock reserved for issuance under its
stock option plans and pursuant to all outstanding warrants as described below,
thus permitting the sale of such shares in the public market without restriction
under the Securities Act.
SALE OF RESTRICTED SHARES
In general, pursuant to Rule 144 under the Securities Act ("Rule 144"),
beginning 90 days after the date of this Prospectus, a person (or persons whose
shares are aggregated) who has beneficially owned restricted shares ("Restricted
Shares") for at least two years, will be entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of (i)
1% of the then outstanding shares of Common Stock (approximately 5,782,439
shares immediately after this Offering) or (ii) the average weekly trading
volume of the Class A Common Stock on the Nasdaq National Market during the four
calendar weeks immediately preceding the date on which notice of such sale is
filed with the Securities and Exchange Commission. Sales pursuant to Rule 144
are also subject to certain requirements relating to the manner of sale, notice
and the availability of current public information about the Company. A person
(or persons whose shares are aggregated) who is not an Affiliate (as such term
is defined under the Securities Act) and has not been an Affiliate of the
Company at any time during the three months immediately preceding the sale and
who has beneficially owned Restricted Shares for at least three years is
entitled to sell such shares pursuant to Rule 144(k) without regard to the Rule
144 limitations described above.
Rule 701 under the Securities Act provides that the shares of Class A
Common Stock acquired upon the exercise of currently outstanding options and
warrants may be resold by persons, other than Affiliates, beginning 90 days
after the date of this Prospectus, subject only to the manner of sale of
provisions of Rule 144, and by Affiliates under Rule 144 without compliance with
its two-year minimum holding period requirement. The Securities and Exchange
Commission has proposed an amendment to Rule 144 which would reduce the holding
period for shares subject to Rule 144 to become eligible for sale in the public
market. This proposal, if adopted, would increase the number of shares of Common
Stock eligible for immediate sale following the expiration of any applicable
lock-up period.
As of June 30, 1996, options and warrants to purchase a total of 1,922,436
shares of Common Stock were outstanding, of which options and warrants to
purchase 1,674,805 shares were currently exercisable at prices ranging from
$0.90 to the assumed offering price of $9.00 per share; substantially all of the
shares issuable on exercise of options and warrants exercisable at prices no
greater than the assumed offering price of $9.00 per share are subject to
Lock-Up Agreements. Additionally, 666,667 shares of Class A Common Stock are
reserved for issuance in connection with future grants of options and warrants
under the Company's 1996 Stock Plan. See "Management -- Stock Plans."
45
<PAGE> 48
The Company intends to file a registration statement under the Securities
Act covering the shares issuable on the exercise of options or warrants granted
under its stock plans within 180 days after the date of this Prospectus. The
Company expects that this registration will automatically become effective upon
filing. Accordingly, shares registered under such registration statement will
immediately thereafter be available for sale in the public market, subject to
Rule 144 volume limitations applicable to Affiliates, and subject to any
applicable vesting restrictions.
LOCK-UP AGREEMENTS
Each of the Company's directors and officers, and certain other employees
and security holders of the Company, have agreed not to offer, sell, contract to
sell, make any short sale, pledge, or otherwise dispose of, directly or
indirectly, any of the shares of Class A Common Stock or other securities
convertible into or exchangeable for, or any rights to purchase or acquire,
Class A Common Stock (each, a "Transfer") beneficially owned by them (the
"Lock-Up Securities"), or enter into any swap or other agreement with respect to
Lock-Up Securities that transfers, in whole or part any of the economic
consequences of ownership (each, a "Swap") for a period of 180 days following
the Effective Date, without the prior written consent of Volpe, Welty & Company,
except for the sale of shares of Class A Common Stock in connection with this
Offering, including any shares sold in respect of the Underwriters'
overallotment option, the sale of shares purchased in the open market after the
Effective Date or the conversion of outstanding options, warrants or convertible
securities. The Company also has agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of Class A Common Stock or any securities
convertible into or exchangeable for, or any rights to purchase or acquire,
Class A Common Stock for a period of 180 days following the Effective Date
without the prior written consent of Volpe, Welty & Company except for the
granting of options or the sale of stock pursuant to the Company's existing
stock option plans, or the issuance of shares upon the exercise of presently
outstanding options or warrants. Volpe, Welty & Company, in its discretion, may
waive the foregoing restrictions in whole or in part, with or without a public
announcement of such action.
46
<PAGE> 49
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the
underwriters named below (the "Underwriters"), and each of such Underwriters,
for whom Volpe, Welty & Company and Advest, Inc. are acting as representatives
(the "Representatives"), has severally agreed to purchase from the Company and
the Selling Stockholders the respective number of shares of Class A Common Stock
set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Volpe, Welty & Company....................................................
Advest, Inc. .............................................................
---------
Total........................................................... 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose to offer the shares of Class A Common Stock to the
public at the offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession of not in excess of
$ per share, of which $ may be reallocated to other dealers.
After the Offering, the public offering price, concession and reallowance to
dealers may be reduced by the Representatives. No such reduction shall change
the amount of proceeds to be received by the Company and the Selling
Stockholders as set forth on the cover page of this Prospectus.
The Company and certain of the Selling Stockholders have granted the
Underwriters an option for thirty days after the date of this Prospectus to
purchase, at the offering price, less the underwriting discounts and commissions
as set forth on the cover page of this Prospectus, up to 337,500 and 112,500
additional shares of Class A Common Stock, respectively, at the same price per
share as the Company and the Selling Stockholders receive for the 3,000,000
shares of Class A Common Stock offered hereby, solely to cover over-allotments,
if any. If the Underwriters exercise their over-allotment option, the
Underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares of Class A
Common Stock to be purchased by each of them, as shown in the foregoing table,
bears to the 3,000,000 shares of Class A Common Stock offered hereby. The
Underwriters may exercise such option only to cover the over-allotments in
connection with the sale of the 3,000,000 shares of Class A Common Stock offered
hereby.
Each of the Company's directors and officers, and certain other security
holders of the Company, have agreed not to Transfer any of their Lock-Up
Securities or enter into any Swap for a period of 180 days following the
Effective Date, without the prior written consent of Volpe, Welty & Company
except for the sale of shares of Class A Common Stock in connection with this
Offering, including shares sold in respect of the Underwriters' over-allotment
option, or except in connection with the conversion of presently outstanding
convertible securities. The Company also has agreed not to offer, sell, contract
to sell or otherwise dispose of any shares of Class A Common Stock or any
securities convertible into or exchangeable for, or any rights to purchase or
acquire, Class A Common Stock for a period of 180 days following the Effective
Date without the prior written consent of Volpe, Welty & Company, except for the
granting of options or the sale of stock pursuant to the Company's existing
stock and option plans, or the issuance of shares upon the exercise of
47
<PAGE> 50
presently outstanding options or warrants or the conversion of presently
outstanding convertible securities. Volpe, Welty & Company, in its discretion,
may waive the foregoing restrictions in whole or in part, with or without a
public announcement of such action.
Prior to this Offering, there has been no public market for the Class A
Common Stock. The initial public offering price of the Class A Common Stock will
be determined by negotiations between the Company and the Representatives. Among
the factors that will be considered in determining the initial public offering
price of the Class A Common Stock, in addition to prevailing market conditions,
are the Company's historical performance, estimates of the business potential
and earnings prospects of the Company, an assessment of the Company's management
and the consideration of the above factors in relation to market valuations of
companies in related businesses.
The Offering of the shares of Class A Common Stock is made for delivery
when, as and if accepted by the Underwriters and subject to prior sale and to
withdrawal, cancellation or modification of the Offering without notice. The
Underwriters reserve the right to reject an order for the purchase of shares in
whole or in part.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities that may be incurred in connection with
this Offering, including liabilities under the Securities Act, or to contribute
payments that the Underwriters may be required to make in respect thereof.
LEGAL MATTERS
The validity of the issuance of the shares of Class A Common Stock offered
by the Company and certain of the Selling Stockholders will be passed upon by
Rubin Baum Levin Constant & Friedman, New York, New York. Certain legal matters
relating to the shares of Class A Common Stock offered hereby will be passed
upon for the Underwriters by Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts.
EXPERTS
The consolidated financial statements and the financial statement schedule
of the Company as of September 30, 1994 and 1995 and December 31, 1995, for the
years ended September 30, 1993, 1994 and 1995 and for the three month period
ended December 31, 1995, included in this prospectus and elsewhere in this
Registration Statement, have been audited by Arthur Andersen LLP, independent
accountants, as indicated in their reports with respect thereto and are included
herein in reliance upon the authority of said firm as experts in giving said
reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the Class A Common Stock. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. The
Company intends to furnish to its stockholders annual reports containing audited
financial statements examined by its independent certified public accountants
and quarterly reports containing unaudited consolidated financial data for the
first three quarters of each fiscal year. For further information with respect
to the Company and such Class A Common Stock, reference is made to the
Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus as to the contents of any contract or
other document filed as an exhibit to the Registration Statement are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement,
each statement being qualified in all respects by such reference. The
Registration Statement, including the exhibits and schedules filed therewith,
may be inspected without charge at the Commission's principal offices at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and its Regional Offices
located at Citicorp Center, Seven World Trade Center, 13th Floor, New York, New
York 10048 and 500 West Madison Street, Suite
48
<PAGE> 51
1400, Chicago, Illinois 60661-2511. Copies of such materials may be obtained
upon written request from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a web site that contains reports, proxy and information statements and
other information regarding the Company; the address of such site is
http://www.sec.gov.
49
<PAGE> 52
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF BITSTREAM INC. AND SUBSIDIARIES
Report of Independent Public Accountants............................................ F-2
Consolidated Balance Sheets as of September 30, 1994 and 1995, December 31, 1995 and
June 30, 1996 (Unaudited)........................................................ F-3
Consolidated Statements of Operations for Each of the Three Years in the Period
Ended September 30, 1995 and for the Three Months Ended December 31, 1995 and for
the Six Months Ended June 30, 1995 and 1996 (Unaudited).......................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for Each of the Three
Years in the Period Ended September 30, 1995 and for the Three Months Ended
December 31, 1995 and for the Six Months Ended June 30, 1996 (Unaudited)......... F-5
Consolidated Statements of Cash Flows for Each of the Three Years in the Period
Ended September 30, 1995 and for the Three Months Ended December 31, 1995 and for
the Six Months Ended June 30, 1995 and 1996 (Unaudited).......................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
</TABLE>
F-1
<PAGE> 53
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Bitstream Inc.:
We have audited the accompanying consolidated balance sheets of Bitstream
Inc. (a Massachusetts corporation) and subsidiaries as of September 30, 1994 and
1995 and December 31, 1995, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended September 30, 1995 and for the three-month period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bitstream
Inc. and subsidiaries as of September 30, 1994 and 1995 and December 31, 1995,
and the results of their operations and their cash flows for each of the three
years in the period ended September 30, 1995 and for the three-month period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
We have also audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets as of September 30, 1991, 1992 and
1993, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for the years ended September 30, 1991 and 1992
(none of which are presented herein), and have expressed an unqualified opinion
on those financial statements. In our opinion, the information set forth in the
selected consolidated financial data for each of the five years in the period
ended September 30, 1995 and for the three months ended December 31, 1995,
appearing on page 13, is fairly stated, in all material respects, in relation to
the financial statements from which it has been derived.
Arthur Andersen LLP
Boston, Massachusetts
April 30, 1996 (except with respect
to the matters discussed in Note 1(k)
and Note 10(d), as to which the date
is May 21, 1996)
F-2
<PAGE> 54
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------- DECEMBER 31, JUNE 30,
1994 1995 1995 1996
----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 654,000 $ 523,000 $ 390,000 $ 686,000
Accounts receivable, net of allowance for
doubtful accounts....................... 479,000 1,233,000 1,846,000 2,145,000
Current portion of long-term accounts
receivable and extended plan accounts
receivable, net of allowance for
doubtful accounts....................... 1,008,000 969,000 536,000 826,000
Deferred income taxes...................... -- -- 600,000 758,000
Other current assets....................... 184,000 160,000 194,000 127,000
----------- ------------ ------------ ------------
Total current assets............... 2,325,000 2,885,000 3,566,000 4,542,000
----------- ------------ ------------ ------------
Property and equipment, net.................. 253,000 304,000 530,000 851,000
----------- ------------ ------------ ------------
Other assets:
Long-term accounts receivable, net of
current portion......................... 57,000 -- 228,000 354,000
Other assets............................... 5,000 5,000 4,000 210,000
----------- ------------ ------------ ------------
62,000 5,000 232,000 564,000
----------- ------------ ------------ ------------
Total assets....................... $ 2,640,000 $ 3,194,000 $ 4,328,000 $ 5,957,000
=========== ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable.............................. $ -- $ -- $ 300,000 $ 150,000
Current maturities of long-term debt....... 156,000 -- -- --
Current maturities of capital lease
obligations............................. 83,000 112,000 134,000 166,000
Subordinated notes payable to
stockholders............................ -- -- -- 600,000
Accounts payable........................... 1,252,000 799,000 466,000 403,000
Accrued expenses........................... 1,754,000 1,093,000 1,412,000 1,494,000
----------- ------------ ------------ ------------
Total current liabilities.......... 3,245,000 2,004,000 2,312,000 2,813,000
----------- ------------ ------------ ------------
Capital lease obligations, less current
maturities................................. 111,000 108,000 184,000 269,000
----------- ------------ ------------ ------------
Other long-term liabilities.................. 14,000 16,000 26,000 23,000
----------- ------------ ------------ ------------
Commitments and contingent liabilities (Notes
7 and 8)
Mandatorily redeemable convertible preferred
stock, $.01 par value (Note 9)............. 2,311,000 -- -- --
----------- ------------ ------------ ------------
Stockholders' equity (deficit):
Convertible preferred stock................ 31,000 32,000 32,000 32,000
Common stock............................... 18,000 3,000 3,000 3,000
Additional paid-in capital................. 12,277,000 14,449,000 14,449,000 14,454,000
Accumulated deficit........................ (15,056,000) (13,368,000) (12,630,000) (11,586,000)
Cumulative translation adjustment.......... (50,000) (50,000) (48,000) (51,000)
Treasury stock, at cost -- 309,067 shares
of
Class A common stock at September 30,
1994.................................... (247,000) -- -- --
Notes receivable........................... (14,000) -- -- --
----------- ------------ ------------ ------------
Total stockholders' equity
(deficit)........................ (3,041,000) 1,066,000 1,806,000 2,852,000
----------- ------------ ------------ ------------
Total liabilities and stockholders'
equity (deficit)................. $ 2,640,000 $ 3,194,000 $ 4,328,000 $ 5,957,000
=========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 55
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE
MONTHS
YEARS ENDED SEPTEMBER 30, ENDED SIX MONTHS ENDED
------------------------------------- DECEMBER 31, -----------------------
1993 1994 1995 1995 1995 1996
----------- ---------- ---------- ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues............................ $17,430,000 $9,832,000 $8,970,000 $2,355,000 $4,774,000 $5,411,000
Cost of revenues.................... 6,276,000 2,299,000 1,579,000 411,000 794,000 808,000
----------- ---------- ---------- ---------- ---------- ----------
Gross profit...................... 11,154,000 7,533,000 7,391,000 1,944,000 3,980,000 4,603,000
----------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Marketing and selling............. 9,080,000 3,334,000 3,264,000 978,000 1,691,000 2,145,000
Research and development.......... 3,536,000 1,534,000 1,071,000 331,000 547,000 680,000
General and administrative........ 3,006,000 1,281,000 1,261,000 385,000 773,000 776,000
Restructuring charge.............. -- 365,000 -- -- -- --
----------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses................ 15,622,000 6,514,000 5,596,000 1,694,000 3,011,000 3,601,000
----------- ---------- ---------- ---------- ---------- ----------
Operating income (loss)... (4,468,000) 1,019,000 1,795,000 250,000 969,000 1,002,000
----------- ---------- ---------- ---------- ---------- ----------
Other income (expense), net......... (18,000) (40,000) 11,000 17,000 (37,000) (44,000)
----------- ---------- ---------- ---------- ---------- ----------
Income (loss) before provision
for (benefit from) income
taxes........................ (4,486,000) 979,000 1,806,000 267,000 932,000 958,000
Provision for (benefit from) income
taxes............................. 319,000 133,000 118,000 (471,000) 83,000 (86,000)
----------- ---------- ---------- ---------- ---------- ----------
Net income (loss)......... $(4,805,000) $ 846,000 $1,688,000 $ 738,000 $ 849,000 $1,044,000
=========== ========== ========== ========== ========== ==========
Pro forma net income per common and
common equivalent share........... $ .38 $ .17 $ .24
========== ========== ==========
Pro forma weighted average common
and common equivalent shares
outstanding....................... 4,983,678 4,704,805 4,745,292
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 56
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK COMMON STOCK
--------------------- ---------------------- ADDITIONAL CUMULATIVE
NUMBER $.01 NUMBER $.01 PAID-IN ACCUMULATED TRANSLATION TREASURY
OF SHARES PAR VALUE OF SHARES PAR VALUE CAPITAL DEFICIT ADJUSTMENT STOCK
--------- --------- ---------- --------- ----------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30,
1993.................... 3,052,647 $31,000 1,759,163 $18,000 $13,391,000 $(15,902,000) $(32,000) $ (17,000)
Exercise of stock
options............... -- -- 67 -- -- -- -- --
Accretion of Series H
and Series I
mandatorily redeemable
convertible preferred
stock to redemption
value................. -- -- -- -- (1,107,000) -- -- --
Transfer of notes
receivable into
treasury stock........ -- -- -- -- -- -- -- (230,000)
Reduction of notes
receivable............ -- -- -- -- -- -- -- --
Cancellation of notes
receivable and Series
H convertible
preferred
stock................. -- -- -- -- (7,000) -- -- --
Cumulative translation
adjustment............ -- -- -- -- -- -- (18,000) --
Net income.............. -- -- -- -- -- 846,000 -- --
--------- ------- --------- ------- ----------- ----------- -------- --------
<CAPTION>
TOTAL
STOCKHOLDERS'
NOTES EQUITY
RECEIVABLE (DEFICIT)
---------- ------------
<S> <C> <C>
BALANCE, SEPTEMBER 30,
1993.................... $ (292,000) $ (2,803,000)
Exercise of stock
options............... -- --
Accretion of Series H
and Series I
mandatorily redeemable
convertible preferred
stock to redemption
value................. -- (1,107,000)
Transfer of notes
receivable into
treasury stock........ 230,000 --
Reduction of notes
receivable............ 41,000 41,000
Cancellation of notes
receivable and Series
H convertible
preferred
stock................. 7,000 --
Cumulative translation
adjustment............ -- (18,000)
Net income.............. -- 846,000
--------- -----------
BALANCE, SEPTEMBER 30,
1994.................... 3,052,647 31,000 1,759,230 18,000 12,277,000 (15,056,000) (50,000) (247,000)
Accretion of Series H
and Series I
mandatorily redeemable
convertible preferred
stock to redemption
value................. -- -- -- -- (133,000) -- -- --
Net adjustment to
reflect the
recapitalization of
the Company........... 121,090 1,000 (1,446,553) (15,000) 2,305,000 -- -- 247,000
Cumulative translation
adjustment............ -- -- -- -- -- -- -- --
Net income.............. -- -- -- -- -- 1,688,000 -- --
--------- ------- --------- ------- ----------- ----------- -------- --------
BALANCE, SEPTEMBER 30,
1995.................... 3,173,737 32,000 312,677 3,000 14,449,000 (13,368,000) (50,000) --
Cumulative translation
adjustment............ -- -- -- -- -- -- 2,000 --
Net income.............. -- -- -- -- -- 738,000 -- --
--------- ------- --------- ------- ----------- ----------- -------- --------
BALANCE, DECEMBER 31,
1995.................... 3,173,737 32,000 312,677 3,000 14,449,000 (12,630,000) (48,000) --
Exercise of stock
options and
warrants.............. -- -- 6,833 -- 5,000 -- -- --
Cumulative translation
adjustment............ -- -- -- -- -- -- (3,000) --
Net income
(unaudited)........... -- -- -- -- -- 1,044,000 -- --
--------- ------- --------- ------- ----------- ----------- -------- --------
BALANCE, JUNE 30, 1996
(UNAUDITED)............. 3,173,737 $32,000 319,511 $ 3,000 $14,454,000 $(11,586,000) $(51,000) $ --
========= ======= ========= ======= =========== =========== ======== ========
<CAPTION>
BALANCE, SEPTEMBER 30,
Accretion of Series H
and Series I
mandatorily redeemable
convertible preferred
stock to redemption
value................. -- (133,000)
Net adjustment to
reflect the
recapitalization of
the Company........... 14,000 2,552,000
Cumulative translation
adjustment............ -- --
Net income.............. -- 1,688,000
--------- -----------
BALANCE, SEPTEMBER 30,
1995.................... -- 1,066,000
Cumulative translation
adjustment............ -- 2,000
Net income.............. -- 738,000
--------- -----------
BALANCE, DECEMBER 31,
1995.................... -- 1,806,000
Exercise of stock
options and
warrants.............. -- 5,000
Cumulative translation
adjustment............ -- (3,000)
Net income
(unaudited)........... -- 1,044,000
--------- -----------
BALANCE, JUNE 30, 1996
(UNAUDITED)............. $ -- $ 2,852,000
========= ===========
<CAPTION>
1994.................... (14,000) (3,041,000)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 57
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
THREE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, ENDED JUNE 30,
-------------------------------------- DECEMBER 31, ----------------------
1993 1994 1995 1995 1995 1996
----------- ----------- ---------- ------------ --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss).............................. $(4,805,000) $ 846,000 $1,688,000 $ 738,000 $ 849,000 $1,044,000
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities --
Depreciation and amortization................ 780,000 476,000 214,000 36,000 115,000 108,000
Deferred income tax benefit.................. -- -- -- (600,000) -- (158,000)
Net loss (gain) on disposal of property and
equipment.................................. 50,000 51,000 (14,000) (22,000) -- --
Issuance of common stock for services
rendered................................... -- -- 108,000 -- 108,000 --
Changes in assets and liabilities --
Accounts receivable........................ 714,000 1,272,000 (754,000) (613,000) (604,000) (299,000)
Long-term and extended plan accounts
receivable............................... 139,000 (277,000) 96,000 205,000 (238,000) (416,000)
Other assets............................... 1,930,000 554,000 24,000 (34,000) 65,000 (139,000)
Accounts payable........................... 187,000 (2,553,000) (453,000) (333,000) (161,000) (63,000)
Accrued expenses........................... (524,000) (30,000) (661,000) 319,000 (139,000) 82,000
----------- ----------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities............................... (1,529,000) 339,000 248,000 (304,000) (5,000) 159,000
----------- ----------- --------- --------- --------- ---------
Cash Flows from Investing Activities:
Purchase of property and equipment, net........ (272,000) (68,000) (197,000) (140,000) (76,000) (453,000)
Proceeds from sale of property and equipment... -- -- 60,000 24,000 -- 23,000
Decrease in other assets....................... 246,000 3,000 -- 1,000 -- --
----------- ----------- --------- --------- --------- ---------
Net cash used in investing activities.... (26,000) (65,000) (137,000) (115,000) (76,000) (430,000)
----------- ----------- --------- --------- --------- ---------
Cash Flows from Financing Activities:
Proceeds from long-term debt................... -- -- -- 300,000 -- --
Payments on line of credit..................... (606,000) (194,000) -- -- -- (150,000)
Payments of long-term debt and capital lease
obligations.................................. (353,000) (496,000) (244,000) (26,000) (63,000) (74,000)
Proceeds from debt to stockholders............. -- -- -- -- -- 600,000
Increase in capital lease obligations.......... 178,000 -- -- -- 191,000
Change in other long-term liabilities.......... (4,000) (3,000) 2,000 12,000 4,000 (5,000)
Proceeds from the issuance of convertible and
mandatorily redeemable preferred stock....... 3,058,000 -- -- -- -- --
Receipts of payments on notes receivable....... 3,000 5,000 -- -- -- --
Proceeds from the exercise of stock options and
warrants..................................... -- -- -- -- -- 5,000
----------- ----------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities............................. 2,276,000 (688,000) (242,000) 286,000 (59,000) 567,000
----------- ----------- --------- --------- --------- ---------
Net Increase (Decrease) in Cash and Cash
Equivalents.................................... 721,000 (414,000) (131,000) (133,000) (140,000) 296,000
Cash and Cash Equivalents, beginning of period... 347,000 1,068,000 654,000 523,000 652,000 390,000
----------- ----------- --------- --------- --------- ---------
Cash and Cash Equivalents, end of period......... $ 1,068,000 $ 654,000 $ 523,000 $ 390,000 $ 512,000 $ 686,000
=========== =========== ========= ========= ========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest......................... $ 275,000 $ 72,000 $ 16,000 $ 6,000 $ 18,000 $ 29,000
=========== =========== ========= ========= ========= =========
Cash paid for income taxes..................... $ 2,000 $ -- $ 5,000 $ 93,000 $ 40,000 $ 91,000
=========== =========== ========= ========= ========= =========
Supplemental Disclosure of Noncash Transactions:
Increase in property and equipment and capital
lease
obligations.................................. $ 15,000 $ -- $ 114,000 $ 124,000 -- $ 191,000
=========== =========== ========= ========= ========= =========
Decrease in additional paid-in capital due to
accretion of mandatorily redeemable preferred
stock........................................ $ 404,000 $ 1,107,000 $ 133,000 $ -- $ 66,000 $ --
=========== =========== ========= ========= ========= =========
Retirement of fully depreciated property and
equipment.................................... $ 270,000 $ 5,193,000 $ 25,000 $ 6,000 $ -- $ 2,000
=========== =========== ========= ========= ========= =========
Transfer of equipment under capital lease to
property and equipment owned by the
Company...................................... $ -- $ -- $ 374,000 $ -- $ -- $ --
=========== =========== ========= ========= ========= =========
Transfer of notes receivable into treasury
stock........................................ $ -- $ 230,000 $ -- $ -- $ -- $ --
=========== =========== ========= ========= ========= =========
Cancellation of notes receivable in exchange
for return of mandatorily redeemable
preferred stock.............................. $ -- $ 7,000 $ -- $ -- $ -- $ --
=========== =========== ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 58
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Bitstream Inc. and subsidiaries (the "Company") develops and markets
software products and technologies to enhance the creation, transport, viewing
and printing of electronic documents.
The Company primarily licenses its products and technologies to OEMs and
ISVs for inclusion in their output devices, embedded systems, applications,
Internet authoring tools, World Wide Web browsers and other products. The
Company generally enters into a license with such customers and charges a
combination of licensing fees and royalty payments. In addition, Bitstream sells
custom and other type products directly to end users such a graphic artists,
desktop publishers and corporations.
In fiscal year 1993, the Company decided to curtail product distribution
through the computer software reseller channel and to concentrate the efforts of
the Company on the development and sale of technology and products to OEM and
ISV customers. In conjunction with this shift in strategic focus, the Company
reorganized its operations, changed its senior management and restructured the
Company's type design group. During November 1994 the Company consummated a plan
of recapitalization (see Note 10(a)).
The Company is subject to risks common to technology-based companies,
including dependence on key personnel, the ability to raise equity capital,
rapid technological change, competition from alternative product offerings and
larger companies, and challenges to the development and marketing of commercial
products and services.
The accompanying consolidated financial statements reflect the application
of certain accounting policies as described in this note and elsewhere in the
accompanying consolidated financial statements and notes. The preparation of the
accompanying consolidated financial statements required the use of certain
estimates by management in determining the Company's assets, liabilities,
revenues and expenses.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Bitstream World Trade, Inc. (a
Delaware corporation), a holding company for Bitstream, B.V. (a Dutch
corporation); Bitstream S.A.R.L. (a French corporation); Bitstream Pacific Pty.
Ltd. (an Australian corporation); and Bitstream B.V. France (a French
corporation). All material intercompany transactions and balances have been
eliminated in consolidation.
(b) Interim Financial Presentation
The accompanying consolidated balance sheet as of June 30, 1996, the
accompanying consolidated statements of operations and cash flows for the six
months ended June 30, 1995 and 1996 and the accompanying consolidated statement
of stockholders' equity (deficit) for the six months ended June 30, 1996 are
unaudited but, in the opinion of management, include all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of
results for these interim periods. The results of operations for the six months
ended June 30, 1996 are not necessarily indicative of the results to be expected
for the entire fiscal year.
(c) Revenue Recognition
The Company recognizes revenue in accordance with the provisions of
Statement of Position No. 91-1 (SOP 91-1), Software Revenue Recognition. The
Company generates revenue from licensing the rights to include its software
products in the products and software of original equipment manufacturers
("OEMs"), and independent software vendors ("ISVs") as well as the licensing of
its software products to end users through direct and indirect sales channels.
Certain OEM and ISV customers irrevocably contract to pay a
F-7
<PAGE> 59
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
minimum royalty amount over a defined period in exchange for the right to
sublicense a certain number of the Company's software products over a specified
period. Other OEMs and ISVs elect to pay royalties on a pay-as-you-go basis
based on the sublicensing of the Company's software products to end users.
Revenue from guaranteed minimum royalty licenses is recognized upon
delivery of the software, while revenue on pay-as-you-go licenses is recognized
in the period when sublicenses to end users are reported to the Company by the
OEM or ISV customer. In certain guaranteed minimum royalty licenses, the Company
will enter into extended payment programs with creditworthy customers. If the
payments from the customer are to be received over a period greater than one
year, revenue is discounted to the present value of future minimum payments. To
date, the Company has not experienced any material collection difficulties with
the extended payment program receivables.
Revenue from end user product sales is recognized upon delivery of the
software, net of estimated returns and allowances, if there are no significant
postdelivery obligations and if collection is probable.
Cost of revenues consists of costs to distribute the product, including the
cost of the media on which it is delivered, internal production costs incurred
in the fulfillment of custom orders and fees paid to third parties for the
development of unique typeface designs.
(d) Research and Development Expenses
The Company has evaluated the establishment of technological feasibility of
its products in accordance with Statement of Financial Accounting Standards
(SFAS) No. 86, Accounting for the Costs of Computer Software To Be Sold, Leased
or Otherwise Marketed. The Company sells products in a market that is subject to
rapid technological change, new product development and changing customer needs.
The time period during which costs could be capitalized from the point of
reaching technological feasibility until the time of general product release is
very short, and consequently, the amounts that could be capitalized are not
material to the Company's financial position or results of operation. Therefore,
the Company has charged all such costs to research and development in the period
incurred.
(e) Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less at the time of acquisition to be cash
equivalents and records such investments at cost. Effective October 1, 1994, the
Company adopted SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities. The adoption of this pronouncement did not have a material
impact on the Company's financial position or operations.
F-8
<PAGE> 60
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(f) Property and Equipment, Net
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Property and equipment, net, consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------- DECEMBER 31, JUNE 30,
1994 1995 1995 1996
---------- ---------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Equipment and computer software......... $1,328,000 $1,876,000 $2,047,000 $ 2,106,000
Equipment and computer software under
capital lease......................... 636,000 262,000 292,000 433,000
Furniture and fixtures.................. 187,000 239,000 239,000 236,000
Leasehold improvements.................. 200,000 200,000 200,000 432,000
---------- ---------- ---------- ----------
2,351,000 2,577,000 2,778,000 3,207,000
Less -- Accumulated depreciation and
amortization.......................... 2,098,000 2,273,000 2,248,000 2,356,000
---------- ---------- ---------- ----------
$ 253,000 $ 304,000 $ 530,000 $ 851,000
========== ========== ========== ==========
</TABLE>
Depreciation is provided on a straight-line basis over the estimated useful
lives of the related assets principally as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
--------------------------------------------------------------- --------------
<S> <C>
Equipment and computer software................................ 3 Years
Equipment and computer software under capital lease............ Life of lease
Furniture and fixtures......................................... 5 Years
Leasehold improvements......................................... Life of lease
</TABLE>
(g) Financial Instruments
The estimated fair value of the Company's financial instruments, which
include cash equivalents, accounts receivable and long-term debt, approximates
their carrying value. The accounts receivable balances in the accompanying
consolidated financial statements are presented net of the following allowances
for doubtful accounts and sales returns:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------- DECEMBER 31, JUNE 30,
1994 1995 1995 1996
-------- -------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Accounts receivable.................. $452,000 $247,000 $137,000 $ 322,000
Current portion of long-term accounts
receivable and extended plan
accounts receivable................ 32,000 31,000 31,000 53,000
-------- -------- -------- --------
$484,000 $278,000 $168,000 $ 375,000
======== ======== ======== ========
</TABLE>
(h) Foreign Currency Translation
The financial statements of the Company's foreign operations are translated
in accordance with SFAS No. 52, Foreign Currency Translation.
F-9
<PAGE> 61
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(i) Postretirement Benefits
The Company had no obligations under SFAS No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions, as it does not currently offer
such benefits.
(j) Concentration of Credit Risk
The Company has no significant off-balance-sheet concentration of credit
risk such as foreign exchange contracts, option contracts or other foreign
hedging arrangements.
For the fiscal year ended September 30, 1993, one customer represented
approximately 13% of revenues. No single customer represented 10% or greater of
revenues for fiscal years ended September 30, 1994 or 1995. For the three-month
period ended December 31, 1995, one customer represented 16% of revenues. For
the six-month period ended June 30, 1996, one customer accounted for 10% of the
Company's revenues.
(k) Delaware Reincorporation
On May 21, 1996, Bitstream Inc. was reincorporated in the State of
Delaware. Every three shares of common and convertible preferred stock of the
Massachusetts company were exchanged for two shares of common and convertible
preferred stock, respectively, of the Delaware company. The authorized capital
stock of the Company consists of 30,500,000 shares of Common Stock, $0.01 par
value, (30,000,000 of which are authorized shares of Class A Common Stock and
500,000 of which are authorized shares of Class B Common Stock), and 10,000,000
shares of preferred stock, $0.01 par value, (6,000,000 shares of which are
authorized shares of Preferred Stock, 3,000,000 of which are authorized shares
of Class A Preferred Stock, and 1,000,000 shares of which are authorized shares
of Class B Preferred Stock). All share and per share information has been
restated to reflect this transaction.
(l) Restructuring Charge
In the first quarter of fiscal 1994, the Company undertook a plan of
reorganization and recorded a restructuring charge of $365,000 in the
accompanying consolidated statement of operations for the year ended September
30, 1994. The restructuring charge consists of severance pay for terminated
employees and loss recognized on the disposition of certain property and
equipment. Except for the recapitalization discussed in Note 10(a), the plan of
reorganization was completed by September 30, 1994.
(m) New Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation, which is effective for fiscal
1996. The Company has determined that it will elect the disclosure-only
alternative for employee stock-based compensation. The Company will be required
to disclose the pro forma net income or loss and per share amounts in the notes
to financial statements using the fair-value-based method for fiscal years
beginning in fiscal 1996, with comparable disclosures for fiscal 1995. The
Company has not determined the impact of these pro forma adjustments.
F-10
<PAGE> 62
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(2) FISCAL YEAR CHANGE
Effective December 31, 1995, the Company changed its financial reporting
year-end from September 30 to December 31.
The condensed consolidated statements of operations for the three months
ended December 31, 1994 and 1995 are presented in the following table for
comparative purposes:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1994 1995
----------- ----------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $2,276,000 $2,355,000
Gross profit................................................ 2,003,000 1,944,000
Operating expenses.......................................... 1,261,000 1,694,000
Income before provision for (benefit from) income taxes..... 740,000 267,000
Income tax provision (benefit).............................. 17,000 (471,000)
---------- ----------
Net income........................................ $ 723,000 $ 738,000
========== ==========
</TABLE>
(3) PRO FORMA NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Pro forma net income per common and common equivalent share for the year
ended September 30, 1995, the three months ended December 31, 1995, and the six
months ended June 30, 1996 have been determined in accordance with the modified
treasury stock method by dividing (i) net income increased by the effect of
reduced interest expense associated with the assumed repayment of certain
indebtedness as of the beginning of the period and by the effect of increased
interest income associated with the assumed investment in U.S. Government
securities as of the beginning of the period with the assumed proceeds from the
exercise of outstanding options and warrants by (ii) the pro forma weighted
average number of common and common equivalent shares outstanding, including the
dilutive effect of options and warrants and the number of shares of common stock
issuable upon conversion of Class A and Class B preferred stock and Class B
common stock. As required by the rules promulgated by the Securities and
Exchange Commission, shares, options or warrants issued at prices below the
offering price in the year before the Company's initial public offering have
been included in the calculation as if outstanding for all periods presented
using the treasury stock method.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED
SEPTEMBER 30, DECEMBER 31, JUNE 30,
1995 1995 1996
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Preferred stock, convertible........................ 3,155,496 3,173,737 3,173,737
Common stock, Class A............................... 471,052 281,813 283,062
Common stock, Class B convertible................... 26,213 30,864 30,864
Common stock, Class C convertible................... 33,398 -- --
Mandatorily redeemable convertible preferred
stock............................................. 79,129 -- --
---------- ---------- ----------
Pro forma weighted average common shares
outstanding during the period........... 3,765,288 3,486,414 3,487,663
Dilutive effect of options granted within one year
of filing initial public offering registration
statement......................................... 34,841 34,841 34,841
Dilutive effect of common stock options and warrants
granted prior to one year from filing of initial
public offering registration statement............ 1,183,550 1,183,550 1,222,788
---------- ---------- ----------
</TABLE>
F-11
<PAGE> 63
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED
SEPTEMBER 30, DECEMBER 31, JUNE 30,
1995 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Pro forma weighted average common and
common equivalent shares outstanding.... 4,983,678 4,704,805 4,745,292
========== ========== ==========
Net income, adjusted for assumed interest expense
savings and incremental interest income........... $ 1,918,000 $ 796,000 $1,131,832
========== ========== ==========
Pro forma net income per common and common
equivalent share.................................. $ 0.38 $ 0.17 $ 0.24
========== ========== ==========
</TABLE>
(4) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. A reconciliation between the provision for income
taxes computed at statutory rates and the amount reflected in the accompanying
consolidated statements of operations is as follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, ENDED JUNE 30,
----------------------------------- DECEMBER 31, ---------------------
1993 1994 1995 1995 1995 1996
----------- --------- --------- ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Computed expected federal tax
(benefit) provision.............. $(1,525,000) $ 333,000 $ 614,000 $ 91,000 $ 317,000 $ 326,000
State income taxes, net of federal
benefit.......................... (219,000) 96,000 112,000 29,000 80,000 78,000
State net operating loss
carryforwards.................... 228,000 (97,000) (102,000) (23,000) (75,000) (71,000)
Foreign losses not benefited....... 282,000 209,000 19,000 71,000 137,000 119,000
Foreign withholding taxes.......... 310,000 134,000 108,000 92,000 77,000 42,000
Domestic net operating loss
carryforwards.................... 1,243,000 (542,000) (633,000) (131,000) (453,000) (422,000)
Change in valuation allowance...... -- -- -- (600,000) -- (158,000)
----------- --------- --------- --------- --------- ---------
$ 319,000 $ 133,000 $ 118,000 $ (471,000) $ 83,000 $ (86,000)
=========== ========= ========= ========= ========= =========
</TABLE>
F-12
<PAGE> 64
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
The following is a summary of the provision for (benefit from) income
taxes.
<TABLE>
<CAPTION>
THREE
MONTHS SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, ENDED JUNE 30,
------------------------------ DECEMBER 31, -------------------
1993 1994 1995 1995 1995 1996
-------- -------- -------- ------------ ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Federal --
Current......................... $ 7,000 $ -- $ 8,000 $ 31,000 $26,000 $ 23,000
Deferred........................ -- -- -- (510,000) (22,000) (134,000)
---------- --------
- -
--------- --------- --------- ---------
7,000 -- 8,000 (479,000) 4,000 (111,000)
---------- --------
- -
--------- --------- --------- ---------
State --
Current......................... 2,000 (1,000) 2,000 6,000 8,000 7,000
Deferred........................ -- -- -- (90,000) (6,000) (24,000)
---------- --------
- -
--------- --------- --------- ---------
2,000 (1,000) 2,000 (84,000) 2,000 (17,000)
---------- --------
- -
--------- --------- --------- ---------
Foreign --
Current......................... 310,000 134,000 108,000 92,000 77,000 42,000
Deferred........................ -- -- -- -- -- --
---------- --------
- -
--------- --------- --------- ---------
310,000 134,000 108,000 92,000 77,000 42,000
---------- --------
- -
--------- --------- --------- ---------
$319,000 $133,000 $118,000 $ (471,000) $83,000 $ (86,000)
=========== ========= ========= ========= ========= =========
</TABLE>
The significant items comprising the deferred tax asset are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER
-------------------------- 31, JUNE 30,
1994 1995 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Assets --
Net operating loss carryforwards...... $ 4,876,000 $ 4,135,000 $ 3,873,000 $ 3,341,000
Tax credit carryforwards.............. 1,940,000 2,047,000 2,131,000 2,173,000
Other temporary differences........... 445,000 470,000 404,000 475,000
----------- ----------- ----------- -----------
Gross deferred tax asset...... 7,261,000 6,652,000 6,408,000 5,989,000
Valuation allowance................... (7,261,000) (6,652,000) (5,808,000) (5,231,000)
----------- ----------- ----------- -----------
Net deferred tax asset........ $ -- $ -- $ 600,000 $ 758,000
=========== =========== =========== ===========
</TABLE>
F-13
<PAGE> 65
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
At December 31, 1995, the Company has available federal and state net
operating loss carryforwards for income tax purposes and federal tax credit
carryforwards to reduce future federal income taxes, if any. These net operating
loss and tax credit carryforwards are subject to review and possible adjustment
by the Internal Revenue Service and expire as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
CREDIT NOLS
---------- ----------
<S> <C> <C>
1996......................................................... $ -- $ --
1997......................................................... 65,000 --
1998......................................................... 2,000 --
1999......................................................... 4,000 --
2000......................................................... 40,000 --
2001......................................................... 96,000 --
2002......................................................... 192,000 --
2003......................................................... 250,000 --
2004......................................................... 265,000 --
2005......................................................... 101,000 --
2006......................................................... 366,000 402,000
2007......................................................... 113,000 834,000
2008......................................................... 311,000 7,340,000
2009......................................................... 135,000 1,075,000
2010......................................................... 107,000 --
2011......................................................... 84,000 --
---------- ----------
$2,131,000 $9,651,000
========== ==========
</TABLE>
The Tax Reform Act of 1986 (the Reform Act) limits the amount of net
operating loss and credit carryforwards which companies may utilize in any one
year in the event of cumulative changes in ownership over a three-year period in
excess of 50%. The Company has assessed its status with respect to these
ownership changes which have occurred over the last three years, as well as the
change of ownership interests to be experienced with the proposed initial public
offering, and believes that its ability to utilize its existing net operating
loss and credit carryforwards will not be limited as a result of these changes
in ownership interests.
The Company has established a valuation allowance against its deferred tax
asset to the extent that it believes it is more likely than not these assets
will not be realized. In determining the amount of valuation allowance required,
the Company considers numerous factors, including historical profitability,
estimated future taxable income and the volatility of the industry in which it
operates.
(5) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------ DECEMBER 31, JUNE 30,
1994 1995 1995 1996
---------- ---------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Accrued royalties................... $1,018,000 $ 569,000 $ 592,000 $ 561,000
Payroll and other compensation...... 460,000 123,000 357,000 304,000
Commissions......................... 90,000 79,000 91,000 122,000
Other............................... 186,000 322,000 372,000 507,000
---------- ---------- ---------- ----------
$1,754,000 $1,093,000 $1,412,000 $ 1,494,000
========== ========== ========== ==========
</TABLE>
F-14
<PAGE> 66
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(6) DEBT
(a) Line of Credit
On March 18, 1996, the Company amended its July 14, 1995 working capital
line-of-credit agreement with a bank to provide for borrowings up to $1,000,000
based on a percentage of qualified accounts receivable, as defined. This line
bears interest at various per annum rates between the prime rate (8.25% as of
June 30, 1996) plus 1% to 2%, depending on the occurrence of certain events, as
defined. As a component of this agreement, the Company can obtain up to $250,000
in letters of credit. Substantially all of the Company's assets are
collateralized under this agreement. The balance outstanding under this line was
$300,000 and $150,000, respectively as of December 31, 1995 and June 30, 1996.
The Company also amended and increased its $400,000 equipment term loan
agreement to $500,000 on March 18, 1996. This term loan bears interest at the
prime rate (8.25% as of June 30, 1996) plus 1.5% per annum or, if the Company so
chooses prior to September 1996, at a fixed rate based on the lender's current
market rate. The assets purchased with the use of these funds are collateralized
under this agreement. As of June 30, 1996, the Company has approximately
$274,000 outstanding under this term loan agreement, with 30 equal monthly
payments of principal and interest scheduled to be made beginning in October
1996.
(b) Capital Leases
<TABLE>
The Company leases certain equipment under capital leases expiring through
fiscal 1998. These capital lease payments are due in equal monthly installments
and bear interest at rates ranging from 8% to 10.75%. Future minimum lease
payments under the capital lease obligations as of December 31, 1995 are as
follows:
<CAPTION>
FISCAL YEAR AMOUNT
----------- --------
<S> <C>
1996............................................................ $153,000
1997............................................................ 86,000
1998............................................................ 58,000
1999............................................................ 31,000
2000............................................................ 39,000
--------
Total minimum lease payments............................ 367,000
Less -- Amount representing interest......................... 49,000
--------
Capital lease obligations............................ 318,000
Less -- Current portion...................................... 134,000
--------
$184,000
========
</TABLE>
(c) Subordinated Notes Payable to Stockholders
On February 22, 1996, the Company entered into agreements with certain
parties including certain directors and principal stockholders, pursuant to
which the Company borrowed an aggregate amount of $600,000. In connection with
these note payable agreements, the Company agreed to pay the principal amount
borrowed plus simple interest at 12% per annum on August 22, 1996. On August 22,
1996, the Company entered into an amendment to the notes pursuant to which the
maturity date was extended to October 22, 1996. On October 9, 1996, the Company
entered into a further amendment to the notes pursuant to which the maturity
date was extended to December 22, 1996. These notes are subordinate to all other
debt facilities.
F-15
<PAGE> 67
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(7) OPERATING LEASES
<TABLE>
The Company conducts its operations in leased facilities and is obligated
to pay monthly rent plus real estate taxes and certain operating expenses
through October 1998. Rent expense charged to operations for the years ended
September 30, 1993, 1994 and 1995 and the three months ended December 31, 1995
and the six months ended June 30, 1996 was approximately $704,000, $229,000,
$244,000, $54,000 and $134,000, respectively. Future minimum annual rent
commitments as of December 31, 1995 under the Company's leased facilities are as
follows:
<CAPTION>
YEAR AMOUNT
---- --------
<S> <C>
1996.............................................................. $189,000
1997.............................................................. 189,000
1998.............................................................. 142,000
--------
$520,000
========
</TABLE>
(8) CONTINGENT LIABILITIES
On May 26, 1995, The Friends of the Museum of Printing, Inc. (the
plaintiff) filed a lawsuit in the Middlesex County Superior Court of
Massachusetts against the Company in connection with a letter agreement dated
July 23, 1992 from the Company to the Museum concerning storage of certain font
materials for the Museum. The letter provided that the Company would store and
maintain the font materials for a period of two years from the date of the
letter and that the Company would have no liability to the Museum, over and
above the proceeds of insurance, for damage or loss of any of the font
materials, and that neither the Company nor the Museum would incur any liability
to the other for any loss or damage arising out of their respective rights and
obligations set forth in the letter. The Museum alleges that after the two-year
storage period had expired, the Company disposed of the font materials.
Although the Company cannot determine an estimate of the possible loss
associated with this matter, it believes that its available insurance will cover
any liability incurred in connection with the lawsuit, except for certain
potential liabilities, up to a maximum of $1.01 million, subject to a $10,000
deductible. The Company further believes that in the event that the claim
exceeds $1.01 million its available insurance will cover one-half of any
liability incurred by the Company in excess of $1.01 million up to a maximum of
$1.8 million. The Company's insurer is currently paying all of the costs
incurred by the Company in defending this lawsuit.
The Company has reserved the $10,000 deductible in the accompanying
consolidated financial statements as of June 30, 1996.
Pursuant to a letter dated May 6, 1996, a former director and officer of
the Company asserted that the Company has breached certain obligations he
alleges are due to him under a severance agreement dated May 22, 1991 (the
"Severance Agreement") between him and the Company. The former director and
officer claims that a provision in the Severance Agreement entitles him to
additional shares of Class A Common Stock and a reduction in the exercise price
of options to purchase Class A Common Stock held by him. The Company believes
that these claims are without merit and intends vigorously to contest their
validity. As of June 30, 1996, this former director and officer has not
commenced an action in any court in respect of the claims he has asserted
against the Company under the Severance Agreement.
The Company is self-insured for health costs to its employees up to an
annual aggregate amount of approximately $270,000, after which the Company's
insurance carrier pays for all additional claims.
F-16
<PAGE> 68
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(9) MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
Mandatorily redeemable convertible preferred stock at September 30, 1994
consisted of the following:
<TABLE>
<S> <C>
Mandatorily redeemable convertible preferred stock, Class H, $.01
par value --
Authorized -- 666,667 shares
Issued and outstanding -- 453,793 shares....................... $2,022,000
Mandatorily redeemable convertible preferred stock,
Class I, $.01 par value --
Authorized, issued and outstanding -- 66,667 shares............ 289,000
----------
Total mandatorily redeemable convertible preferred
stock................................................ $2,311,000
==========
</TABLE>
As of October 31, 1994, the Company was required to pay $2,042,000 to the
Class H preferred stockholders but was unable to meet its payment obligation.
The Class H stockholders ultimately agreed to exchange their mandatorily
redeemable convertible preferred stock in the Company's plan of recapitalization
(see Note 10(a)).
(10) STOCKHOLDERS' EQUITY
(a) Recapitalization
As a result of the reorganization of the Company's operations (see Note 1),
on November 21, 1994, the Company filed an amendment to its articles of
incorporation pursuant to a recapitalization plan approved by the Company's
Board of Directors and stockholders. Pursuant to the recapitalization, the
Company authorized 20,000,000 shares of Class A convertible common stock (Class
A Common Stock), 1,333,333 shares of Class B convertible common stock (Class B
Common Stock), 2,792,580 shares of Class A convertible preferred stock (Class A
Preferred Stock) and 391,162 shares of Class B convertible preferred stock
(Class B Preferred Stock) all having a par value of $.01 per share. In
connection with this recapitalization, (i) all outstanding shares of existing
Class A Common Stock, Class B Common Stock and Class A, B, C and D Convertible
Preferred Stock were converted into 281,813 shares of Class A Common Stock; (ii)
all outstanding shares of Class C Convertible Common Stock and Class E
Convertible Preferred Stock were converted into 30,864 shares of Class B Common
Stock; (iii) all outstanding shares of Class F Convertible Preferred Stock and
Class H and I Mandatorily Redeemable Convertible Preferred Stock were converted
into 2,782,575 shares of Class A Preferred Stock; and (iv) all outstanding
shares of Class G Convertible Preferred Stock were converted into 391,162 shares
of Class B Preferred Stock. In addition, the Board of Directors received 120,000
shares of Class A Common Stock valued at $108,000. These shares were issued as
compensation for prior services performed, and the value of the shares was
expensed to general and administrative expense in the accompanying consolidated
statement of operations for the year ended September 30, 1994.
F-17
<PAGE> 69
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
Upon consummation of an underwritten public offering of common stock which
results in aggregate net cash proceeds to the Company of not less than
$5,000,000 and a minimum per share price of $3.00, all shares of Class A and B
Preferred Stock will be automatically converted into an equal number of shares
of Class A Common Stock and Class B Common Stock, respectively. The number of
common shares issuable upon conversion is as follows:
<TABLE>
<CAPTION>
AS
OUTSTANDING CONVERTED
----------- ---------
<S> <C> <C>
Class A Common....................................... 288,646 3,071,221
Class B Common....................................... 30,864 422,026
Class A Preferred.................................... 2,782,575 --
Class B Preferred.................................... 391,162 --
</TABLE>
(b) Convertible Preferred Stock
Class A Preferred Stockholders are entitled to the number of votes
equivalent to the number of shares of Class A Common Stock into which their
stock is convertible. The Class B Preferred Stock has rights similar to Class A
Preferred Stock, except it is nonvoting. Class A and B Preferred Stock may be
converted at the option of the holder into an equal number of shares of Class A
and B Common Stock, respectively.
The Class A and B Preferred Stockholders have a preference in liquidation
of $0.94 per share over Class A and B Common Stockholders. The Class A and B
Preferred Stockholders have the right to participate in dividends, if and when
declared by the Board of Directors, as though their shares had been converted
into common stock.
Convertible preferred stock consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------- DECEMBER 31, JUNE 30,
1994 1995 1995 1996
------- ------- ------------ ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Convertible preferred stock, Class A, $.01 par
value -- Authorized -- 2,792,580 shares at
June 30, 1996
Issued and outstanding -- 636,787 shares in
1994 and 2,782,575 shares in 1995 and
1996....................................... $ 6,000 $28,000 $ 28,000 $28,000
Convertible preferred stock, Class B, $.01 par
value --
Authorized -- 391,162 shares at June 30, 1996
Issued and outstanding -- no shares in 1994
and 391,162 shares in 1995 and 1996........ -- 4,000 4,000 4,000
Convertible preferred stock, Class C, $.01 par
value --
Authorized -- no shares at June 30, 1996
Issued and outstanding -- 459,301 shares in
1994 and no shares in 1995 and 1996........ 5,000 -- -- --
Convertible preferred stock, Class D, $.01 par
value --
Authorized -- no shares at June 30, 1996
Issued and outstanding -- 102,881 shares in
1994 and no shares in 1995 and 1996........ 1,000 -- -- --
Convertible preferred stock, Class E, $.01 par
value --
Authorized -- no shares at June 30, 1996
Issued and outstanding -- 241,322 shares in
1994 and no shares in 1995 and 1996........ 3,000 -- -- --
Convertible preferred stock, Class F, $.01 par
value --
Authorized -- no shares at June 30, 1996
Issued and outstanding -- 1,221,200 shares in
1994 and no shares in 1995 and 1996........ 12,000 -- -- --
</TABLE>
F-18
<PAGE> 70
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, JUNE 30,
1994 1995 1995 1996
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Convertible preferred stock, Class G, $.01 par
value --
Authorized -- no shares at June 30, 1996
Issued and outstanding -- 391,163 shares in
1994 and no shares in 1995 and 1996........ 4,000 -- -- --
------- ------- ------- -------
$31,000 $32,000 $ 32,000 $32,000
======= ======= ======= =======
</TABLE>
(c) Common Stock
Class A Common Stockholders have full voting rights and vote together with
the holders of Class A Preferred Stock. Class A Common Stockholders have the
option, at any time, to convert any or all shares of Class A Common Stock held
into an equal number of shares of Class B Common Stock. The Class B Common Stock
has rights similar to Class A Common Stock, except it is nonvoting. The Class B
Common Stockholders have the option to convert any or all shares of Class B
Common Stock held into an equal number of shares of Class A Common Stock.
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------------------------------------
CLASS A CLASS B CLASS C
---------------------- --------------------- ---------------------
NUMBER $.01 NUMBER $.01 NUMBER $.01
OF SHARES PAR VALUE OF SHARES PAR VALUE OF SHARES PAR VALUE
---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
September 30, 1993................. 1,537,522 $ 15,000 -- $-- 221,641 $ 3,000
Exercise of stock options........ 67 -- -- -- -- --
---------- -------- ------ --- -------- -------
September 30, 1994................. 1,537,589 15,000 -- -- 221,641 3,000
Net adjustment to reflect the
recapitalization of the
Company....................... (1,255,776) (12,000) 30,864 -- (226,641) (3,000)
---------- -------- ------ --- -------- -------
September 30, 1995, December 31,
1995............................. 281,813 3,000 30,864 -- -- --
Exercise of stock options........ 6,833 -- -- -- -- --
---------- -------- ------ --- -------- -------
June 30, 1996 (unaudited).......... 288,646 $ 3,000 30,864 $-- -- $ --
========== ======== ====== === ======== =======
</TABLE>
(d) Stock Option Plans
On December 7, 1992, the Company adopted the 1993 Nonqualified Stock Option
Plan (the 1993 Plan). Options outstanding under the 1993 Plan as of June 30,
1996 are exercisable immediately, expire no later than 10 years from the date of
grant and were granted at no less than the fair market value on the date of
grant, as determined by the Board of Directors. Since the date of the
recapitalization, the Company has not granted, and does not intend to grant, any
additional options under the 1993 Plan.
In connection with the recapitalization, the Board of Directors approved
the 1994 Stock Plan (the 1994 Plan) under which the Company is authorized to
grant incentive stock options and nonqualified stock options (including
warrants) to purchase up to 1,833,333 shares of Class A Common Stock. Incentive
stock options granted under the 1994 Plan must be granted at no less than fair
market value of the shares at the date of grant, expire no later than 10 years
from the date of grant and vest over periods of up to three years.
As a result of the recapitalization, certain former employees holding stock
options for the purchase of an aggregate of 300,645 shares of Class A Common
Stock, at a price range of $.75 to $5.63 per share, had their existing options
adjusted to purchase an aggregate of 20,043 shares of Class A Common Stock, at a
price range of $11.25 to $84.38 per share. In addition, certain then current
employees who held stock options agreed
F-19
<PAGE> 71
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
to cancel their options to purchase 221,188 shares of Class A Common Stock at
$.75 per share, in exchange for the issuance of new options to purchase
1,371,811 shares of Class A Common Stock at $.90 per share.
Information concerning activity under these plans is as follows:
<TABLE>
<CAPTION>
NUMBER
OF SHARES OPTION PRICE
--------- ---------------
<S> <C> <C>
Outstanding, September 30, 1993........................ 779,319 $ 1.75
Exercised............................................ (67) .75
Canceled............................................. (257,219) .75
--------- ----------------
Outstanding, September 30, 1994........................ 522,053 .75
Decrease for adjusted options........................ (300,845) .75 -- 5.63
Increase for adjusted options........................ 20,043 11.25 -- 84.38
Canceled............................................. (221,188) .75
Granted.............................................. 1,425,811 .90 -- 1.50
--------- ----------------
Outstanding, September 30, 1995........................ 1,445,854 .90 -- 84.38
Canceled............................................. (7,627) 1.50
Granted.............................................. 21,000 3.00
--------- ----------------
Outstanding, December 31, 1995......................... 1,459,227 .90 -- 84.38
Exercised............................................ (1,333) .90
Canceled............................................. (3,333) 1.50 -- 84.38
Granted.............................................. 21,266 3.00
--------- ----------------
Outstanding, June 30, 1996 (Unaudited)................. 1,475,827 $ .90 -- $84.38
========= ================
Exercisable, June 30, 1996 (Unaudited)................. 1,415,303 $ .90 -- $84.38
========= ================
</TABLE>
As of June 30, 1996 the Company had available for issuance stock options
and warrants to purchase 62 shares of Class A Common Stock pursuant to the 1994
Stock Plan.
On May 1, 1996, the Board of Directors adopted the 1996 Stock Plan under
which the Company is authorized to grant incentive stock options and
nonqualified stock options to purchase shares of Class A Common Stock. Options
granted under this plan shall be no less than 100% of the fair market value of
the shares on the date of grant and expire no later than 10 years from the date
of grant. In addition, the 1996 Stock Plan provides that options granted
thereunder, subject to future vesting, shall immediately vest upon the
occurrence of certain events, such as the sale of all or substantially all of
the assets of the Company or a change in control of the Company. To date, no
options have been granted under the 1996 Stock Plan. A total of 666,667 shares
of Class A Common Stock has been reserved for issuance under the 1996 Stock
Plan.
F-20
<PAGE> 72
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(e) Warrants
All warrants issued prior to the recapitalization remained outstanding,
subject to their initial vesting and expiration terms. Shares purchasable upon
the exercise of these warrants have been adjusted to reflect the effect of the
recapitalization. Additionally, the Company issued new warrants under the 1994
Plan for the purchase of 376,154 shares of Class A Common Stock at $0.90 to
$3.00 per share to several members of the Company's management team and Board of
Directors. Warrants to purchase 229,490 shares of Class A Common Stock were
fully vested upon issuance, and the warrants to purchase the remaining 136,667
shares vest in annual increments over a three-year period. As of June 30, 1996,
warrants to purchase the following classes of stock remained outstanding:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES WARRANTS
STOCK CLASS PURCHASABLE EXERCISABLE EXERCISE PRICE
------------------------------------------- ----------- --------- ----------------
<S> <C> <C> <C>
Class A Common Stock....................... 433,571 342,462 $.90 -- $111.15
Class B Common Stock....................... 13,038 13,038 $22.50
</TABLE>
(11) EMPLOYEE BENEFIT PLAN
The Company has an employee benefit plan under Section 401(k) of the
Internal Revenue Code. The plan allows employees to make contributions up to a
specified percentage of their compensation. Under the plan, the Company may, but
is not obligated to, match a portion of the employee's contribution up to a
defined maximum. The Company contributed $47,000, $16,000, $26,000, $6,000 and
$15,000 during the years ended September 30, 1993, 1994 and 1995, the
three-month periods ended December 31, 1995 and the six months ended June 30,
1996, respectively.
(12) RELATED PARTY TRANSACTIONS
An employee of a company which is an affiliate of the chairman of the
Company's Board of Directors (the Affiliate) rendered financial advisory
services to the Company on an as-needed basis. As compensation for the services
rendered, the Company paid the Affiliate a monthly fee and reimbursed the
Affiliate for reasonable expenses incurred by the Affiliate and/or the employee
in connection with the performance of services to the Company. Effective May 1,
1996, the employee became an employee of the Company. From July 1, 1993 through
December 31, 1995, the Company paid the Affiliate $5,000 per month for such
services; from January 1, 1996 through April 30, 1996, the Company paid $10,000
per month.
(13) OTHER INCOME (EXPENSE), NET
Other income (expense), net, consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
YEARS ENDED SEPTEMBER 30, DECEMBER 31, JUNE 30,
------------------------------- ------------ -------------------
1993 1994 1995 1995 1995 1996
--------- -------- -------- ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Interest income................. $ 39,000 $ 10,000 $ 11,000 $ 2,000 $ 9,000 $ 13,000
Interest expense................ (275,000) (72,000) (16,000) (7,000) (22,000) (54,000)
Other........................... 218,000 22,000 16,000 22,000 (24,000) (3,000)
--------- -------- -------- ------- -------- --------
$ (18,000) $(40,000) $ 11,000 $ 17,000 $(37,000) $(44,000)
========= ======== ======== ======= ======== ========
</TABLE>
F-21
<PAGE> 73
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(14) GEOGRAPHICAL INFORMATION
<TABLE>
The Company's export sales from the United States to customers in foreign
countries are as follows:
<CAPTION>
THREE SIX MONTHS
MONTHS ENDED
YEARS ENDED SEPTEMBER 30, ENDED JUNE 30,
---------------------------------------- DECEMBER 31, -------------------------
1993 1994 1995 1995 1995 1996
---------- ---------- ---------- ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Europe......... $2,325,000 $2,344,000 $2,407,000 $ 775,000 $1,266,000 $1,606,000
Japan.......... 1,951,000 1,485,000 1,177,000 548,000 779,000 344,000
Canada......... -- 149,000 894,000 28,000 597,000 794,000
Other.......... -- 94,000 73,000 7,000 24,000 82,000
---------- ---------- ---------- ---------- ---------- ----------
$4,276,000 $4,072,000 $4,551,000 $1,358,000 $2,666,000 $2,826,000
========== ========== ========== ========== ========== ==========
</TABLE>
F-22
<PAGE> 74
GRAPHIC ON INSIDE BACK COVER PAGE OF THE PROSPECTUS
Beneath a rectangular box containing a general statement of the Company's
business is a graphic illustration of how the Company's TrueDoc technology
operates on the Internet and corporate intranets. In the center of the top half
of the page is a computer screen containing a document created with a web
authoring tool containing a TrueDoc recorder. Each line of the document depicted
has letters and numbers exemplifying a different, and in some cases unusual,
typeface. A brief description of the Company's TrueDoc technology is set forth
to the left of the computer screen and a brief description of how the recorder
component of TrueDoc operates is set forth to the right of the computer screen.
On the bottom half of the page are two computer screens which depict how the
document set forth in the top screen might appear after being transported on the
Internet or corporate intranet. One of the computer screens illustrates how the
document depicted above might appear through a web browser containing the viewer
component of TrueDoc and the other illustrates how the document might appear
through a web browser without the viewer component of TrueDoc. The typefaces
contained on the computer screen without the TrueDoc viewer appear different
from that in the original document, intending to illustrate that a standard web
browser may not have the capability of displaying typefaces contained in the
original document because they are not installed on the viewer's system, and the
typefaces in the screen containing the TrueDoc viewer are, in all material
respects, exactly as they appear in the original document, intending to
illustrate that a browser with a TrueDoc viewer is able to display the typefaces
contained in the original document with true fidelity even when such typefaces
are not installed on the viewer's system. Directly beneath each screen at the
bottom of the page is a brief explanation of what the screen above it is
intending to illustrate.
<PAGE> 75
===============================================================================
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES, OR AN OFFER
TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
------------------------
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 5
The Company............................... 10
Use of Proceeds........................... 10
Dividend Policy........................... 10
Capitalization............................ 11
Dilution.................................. 12
Selected Consolidated Financial Data...... 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 14
Business.................................. 21
Management................................ 31
Certain Transactions...................... 37
Principal and Selling Stockholders........ 39
Description of Capital Stock.............. 42
Shares Eligible for Future Sale........... 45
Underwriting.............................. 47
Legal Matters............................. 48
Experts................................... 48
Additional Information.................... 48
Consolidated Financial Statements......... F-1
</TABLE>
------------------------
UNTIL , 1996, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
===============================================================================
===============================================================================
3,000,000 SHARES
[BITSTREAM LOGO]
CLASS A COMMON STOCK
--------------------
PROSPECTUS
, 1996
--------------------
VOLPE, WELTY & COMPANY
ADVEST, INC.
===============================================================================
<PAGE> 76
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate (except for the Securities and Exchange
Commission Registration Fee, the NASD Filing Fee, and the Nasdaq Filing Fee) of
the fees and expanses all of which are payable by the Registrant, other than
underwriting discounts and commissions, in connection with the registration and
sale of the Class A Common Stock being registered:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee....................... $ 11,897
NASD Filing Fee........................................................... 3,950
Nasdaq Filing Fee......................................................... 31,710
Fees of Registrar and Transfer Agent...................................... 5,000
Printing and Engraving.................................................... 125,000
Blue Sky Fees and Expenses................................................ 20,000
Legal Fees................................................................ 425,000
Accounting Fees and expenses.............................................. 175,000
Directors' and Officers' Insurance........................................ 75,000
Miscellaneous............................................................. 77,443
--------
Total........................................................... $950,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the DGCL provides that a corporation may indemnify its
directors and officers, with respect to suits or proceedings arising out of
their capacity or status as directors and officers, if such person shall have
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, in any criminal
proceeding, if such person had no reasonable cause to believe his conduct was
unlawful; provided that, in the case of actions brought by or in the right of
the corporation, no indemnification shall be made with respect to any matter as
to which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the adjudicating court determines that such
indemnification is proper under the circumstances.
The Company's Certificate of Incorporation provides that to the extent not
prohibited by law, and to the fullest extent authorized by the DGCL, the Company
shall indemnify any person who is or was made, or threatened to be made, a party
to any threatened, pending or completed action, suit or proceeding (a
"Proceeding"), whether civil, criminal, administrative or investigative,
including, without limitation, an action by or in the right of the Company to
procure a judgment in its favor, by reason of the fact that such person, or a
person of whom such person is the legal representative, is or was a director or
officer of the Company, or is or was serving in any capacity at the request of
the Company for any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise against judgments, fines, penalties,
excise taxes, amounts paid in settlement and costs, charges and expenses
(including attorneys' fees and disbursements. Rights to indemnification and
reimbursement or advancement of expenses shall continue as to a person who has
ceased to be a director or officer (or other person indemnified) and shall inure
to the benefit of the executors, administrators, legatees and distributees of
such person. The Certificate of Incorporation further provides that the right to
indemnification is a contract right and includes the right to be reimbursed or
advanced the funds necessary for payment of expenses, including attorneys' fees
and disbursements, incurred in connection with any Proceeding, in advance of the
final disposition of such Proceeding; provided, however, that, if required by
the DGCL, such expenses incurred by or on behalf of any director or officer or
other person may be paid in advance of the final disposition of a Proceeding
only upon receipt by the Company of an undertaking, by or on behalf of such
director or officer (or other person indemnified hereunder), to repay any such
amount so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right of appeal that such director,
officer or other person is not entitled to be indemnified for such expenses.
II-1
<PAGE> 77
The Company has entered into a separate indemnification agreement with each
of its directors which provides for mandatory indemnification arrangements
broader than that specifically provided by current Delaware law, including the
advancement of expenses incurred to defend actions brought against him or her in
his or her capacity as a director or agent of the Company.
Under the form of Underwriting Agreement filed as Exhibit 1.1 hereto, the
Underwriter is obligated, under certain circumstances, to indemnify directors
and officers of the Company against or otherwise certain liabilities, including
liabilities under the Securities Act.
The Company intends to purchase a general liability insurance policy which
covers certain liabilities of directors and officers of the Company arising out
of claims based on acts or omissions in their capacity as directors or officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
From June 1993 to June 30, 1996, the Company granted options and warrants
to purchase an aggregate of 1,833,271 shares of the Company's Class A Common
Stock to employees and directors with exercise prices ranging from $0.90 to
$3.00. During the fiscal quarter ended June 30, 1996, the Company issued an
aggregate of 6,833 shares of Class A Common Stock in connection with the
exercise of 6,833 vested options and warrants issued under the 1994 Stock Plan.
Of such options and warrants granted which remain outstanding, options and
warrants to purchase 1,674,805 shares are fully exercisable as of June 30, 1996,
and the remaining options and warrants to purchase 151,633 shares are subject to
further vesting. Additionally, on November 30, 1994, the Company issued 40,000
shares of Class A Common Stock to each of the three members of the Board in
discharge of $60,000 of unpaid directors fees due to each director for fiscal
years 1992 through 1994. (All numbers of Common Stock and prices per share
listed above have been adjusted for the 2-for-3 conversion effected in
connection with the Delaware Reincorporation.)
Except for the shares issued to the members of the Board, the sales and
issuances of securities in the transactions described above are deemed to be
exempt from registration under the Securities Act by virtue of Rule 701
promulgated thereunder, in that they were issued either pursuant to written
compensatory benefits plans or pursuant to a written contract relating to
compensation, as provided by Rule 701. The issuance of shares to the members of
the Board described above are deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) thereof as transactions by an issuer
not involving any public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
(a) Exhibits. The following is a list of exhibits filed as part of the
Registration Statement.
<S> <C>
1 Underwriting Agreement
*1.1 Underwriting Agreement
3 Certificate of Incorporation and Bylaws
*3.1 Certificate of Incorporation of the Company
*3.2 Bylaws of the Company.
4 Instruments Defining the Rights of Security Holders
*4.1 Specimen Common Stock Certificate.
5 Opinion Regarding Legality
++5.1 Opinion of Rubin Baum Levin Constant & Friedman
10 Material Contracts
*10.1 1996 Stock Plan
*10.2 1994 Stock Plan
*10.3 Agreement and Plan of Recapitalization dated October 28, 1994
*10.4 Lease between Athenaeum Group and the Registrant dated
March 17, 1992
*10.4.1 First Lease Amendment between Athenaeum Group and the Registrant
dated September 7, 1993
*10.4.2 Second Lease Amendment between Athenaeum Group and the Registrant
dated July 13, 1994
*10.4.3 Third Lease Amendment between Athenaeum Group and the Registrant
dated July 15, 1996
</TABLE>
II-2
<PAGE> 78
<TABLE>
<C> <S>
*10.5 Bridge Loan Agreement, dated February 22, 1996 among the
Registrant and certain bridge lenders named therein
*10.5.1 Amendment to Loan Agreement and to Waiver and Subordination
Agreements dated August 22, 1996 among the Registrant and
certain bridge lenders named therein
++10.5.2 Amendment No. 2 to Loan Agreement and to Waiver and
Subordination Agreements dated October 9, 1996 among the
Registrant and certain bridge lenders named therein
#10.6 Software License Agreement between Novell, Inc. and the
Registrant, dated as of September 6, 1996
#10.7 Agreement between Tumbleweed Software Corporation and the
Registrant dated as of June 10, 1996
*10.8 Agreement dated as of May 1, 1996 among the Registrant and
James D. Hart
++10.9 Form of Indemnification Agreement between the Registrant, its
directors and certain of its officers
21 Subsidiaries of Registrant
*21.1 Subsidiaries of the Registrant
23 Consents of Experts and Counsel
++23.1 Consent of Arthur Andersen LLP
23.2 Consent of Rubin Baum Levin Constant & Friedman (included in Item 5)
24 Power of Attorney
*24.1 Power of Attorney (included on signature page)
27 Financial Data Schedule
++27.1 Financial Data Schedule
<FN>
- ---------------
++ Filed herewith.
* Previously filed.
# Filed herewith in redacted form subject to a request for confidential
treatment pursuant to Rule 406 under the Securities Act. The confidential
information that has been omitted has been filed separately with the Securities
and Exchange Commission with the request for confidential treatment.
</TABLE>
(b) Financial statement schedule.
Schedule I. Valuation and Qualifying Accounts.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities rising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the Certificate of Incorporation, Bylaws, and indemnity
agreements, or otherwise, the Company has been advised that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the Company in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h)
II-3
<PAGE> 79
under the Act shall be deemed to be part of this Registration Statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 80
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Pre-Effective Amendment No. 1 to Registration
Statement No. 333-11519 on Form S-1, to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts on this 15th day of October, 1996.
BITSTREAM INC.
By: /s/ C. RAYMOND BOELIG
---------------------------------
C. Raymond Boelig
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Pre-Effective Amendment No. 1 to Registration Statement No. 333-11519 on
Form S-1 has been signed by the following persons in the capacities indicated
below on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
* Chairman of the Board and October 15, 1996
- --------------------------- Director
Amos Kaminski
/s/ C. RAYMOND BOELIG President, Chief Executive October 15, 1996
- --------------------------- Officer and Director
C. Raymond Boelig (Principal Executive Officer)
/s/ JAMES D. HART Vice President, Finance and October 15, 1996
- --------------------------- Administration, Treasurer
James D. Hart and Chief Financial Officer
(Principal Financial and
Accounting Officer)
* Director October 15, 1996
- ----------------------------
David G. Lubrano
* Director October 15, 1996
- ----------------------------
George B. Beitzel
*By: /S/ C. RAYMOND BOELIG
-----------------------------------
C. Raymond Boelig, Attorney-in-Fact
II-5
<PAGE> 81
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Bitstream Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Bitstream Inc. and subsidiaries
included in this registration statement and have issued our report thereon dated
April 30, 1996 (except with respect to the matters discussed in Note 1(k) and
Note 10(d), as to which the date is May 21, 1996). Our audit was made for the
purpose of forming an opinion on the basic consolidated financial statements
taken as a whole. The schedule for the Valuation and Qualifying Accounts
included herein is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic consolidated financial statements and, in our opinion,
fairly states, in all material respects, the financial data required to be set
forth therein, in relation to the basic consolidated financial statements taken
as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 30, 1996 (except with respect
to the matters discussed in Note 1(k)
and Note 10(d), as to which the
date is May 21, 1996)
S-1
<PAGE> 82
SCHEDULE I
BITSTREAM INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995
AND THE THREE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
NET
BALANCE, PROVISIONS DEDUCTIONS
BEGINNING OF CHARGED TO FROM BALANCE, END
DESCRIPTION PERIOD OPERATIONS ALLOWANCES OF PERIOD
- ------------------------------------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Year Ended September 30, 1993 --
Bad debt reserve........................ $ 779,000 $ 80,000 $ (676,000) $ 91,000
Sales returns and allowances reserve.... 4,500,000 -- (3,613,000) 887,000
Self-insurance reserve.................. 117,000 588,000 (571,000) 134,000
Year Ended September 30, 1994 --
Bad debt reserve........................ 183,000 302,000 (252,000) 233,000
Sales returns and allowances reserve.... 887,000 -- (636,000) 251,000
Self-insurance reserve.................. 134,000 188,000 (261,000) 61,000
Year Ended September 30, 1995 --
Bad debt reserve........................ 233,000 (25,000) (27,000) 181,000
Sales returns and allowances reserve.... 251,000 -- (154,000) 97,000
Self-insurance reserve.................. 61,000 168,000 (176,000) 53,000
Three Months Ended December 31, 1995 --
Bad debt reserve........................ 181,000 12,000 (60,000) 133,000
Sales returns and allowances reserve.... 97,000 136,000 (198,000) 35,000
Self-insurance reserve.................. 53,000 58,000 (45,000) 66,000
</TABLE>
S-2
<PAGE> 83
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. PAGE
----- -----
<C> <S> <C>
1 Underwriting Agreement
*1.1 Underwriting Agreement
3 Certificate of Incorporation and Bylaws
*3.1 Certificate of Incorporation of the Company
*3.2 Bylaws of the Company
4 Instruments Defining the Rights of Security Holders
*4.1 Specimen Common Stock Certificate.
5 Opinion Regarding Legality
++5.1 Opinion of Rubin Baum Levin Constant & Friedman
10 Material Contracts
*10.1 1996 Stock Plan
*10.2 1994 Stock Plan
*10.3 Agreement and Plan of Recapitalization dated October 28, 1994
*10.4 Lease between Athenaeum Group and the Registrant dated March 17, 1992
*10.4.1 First Lease Amendment between Athenaeum Group and the Registrant dated
September 7, 1993
*10.4.2 Second Lease Amendment between Athenaeum Group and the Registrant dated
July 13, 1994
*10.4.3 Third Lease Amendment between Athenaeum Group and the Registrant dated
July 15, 1996
*10.5 Bridge Loan Agreement, dated February 22, 1996 among the Registrant and
certain bridge lenders named therein
*10.5.1 Amendment to Loan Agreement and to Waiver and Subordination Agreements
dated August 22, 1996 among the Registrant and certain bridge lenders
named therein
++10.5.2 Amendment No. 2 to Loan Agreement and to Waiver and Subordination
Agreements dated October 9, 1996 among the Registrant and certain bridge
lenders named therein
#10.6 Software License Agreement between Novell, Inc. and the Registrant, dated
as of September 6, 1996
#10.7 Agreement between Tumbleweed Software Corporation and the Registrant dated
as of June 10, 1996
*10.8 Agreement dated as of May 1, 1996 among the Registrant and James D. Hart
++10.9 Form of Indemnification Agreement between the Registrant, its directors
and certain of its officers
21 Subsidiaries of Registrant
*21.1 Subsidiaries of the Registrant
23 Consents of Experts and Counsel
++23.1 Consent of Arthur Andersen LLP
23.2 Consent of Rubin Baum Levin Constant & Friedman (included in Item 5)
24 Power of Attorney
*24.1 Power of Attorney (included on signature page)
27 Financial Data Schedule
++27.1 Financial Data Schedule
</TABLE>
- ---------------
++ Filed herewith.
* Previously filed.
# Filed herewith in redacted form subject to a request for confidential
treatment pursuant to Rule 406 under the Securities Act. The confidential
information that has been omitted has been filed separately with the Securities
and Exchange Commission with the request for confidential treatment.
<PAGE> 1
[RUBIN BAUM LEVIN CONSTANT & FRIEDMAN LETTERHEAD]
October 11, 1996
Bitstream Inc.
215 First Street
Cambridge, Massachusetts 02142
Ladies and Gentlemen:
We refer to the Registration Statement on Form S-1, File No. 333-11519
(the "Registration Statement"), filed by Bitstream Inc. (the "Company") with
the Securities and Exchange Commission for the purpose of registering under the
Securities Act of 1933, as amended, 3,450,000 shares of the Company's Class A
Common Stock, par value $0.01 per share (the "Class A Common Stock"), for sale
by the Company and the Selling Stockholders in an underwritten public offering,
which includes amounts to be sold to cover over-allotments. Except as otherwise
defined herein, all capitalized terms used herein shall have the meaning
assigned thereto in the Registration Statement.
As counsel to the Company and the Selling Stockholders, we have examined
such corporate records, documents, agreements and such matters of law as we have
considered necessary or appropriate for the purpose of this opinion. Upon the
basis of such examination, we advise you that in our opinion, the Class A Common
Stock to be sold by the Company and the Selling Stockholders to the Underwriters
(including, in the case of certain Selling Stockholders, shares of Class A
Common Stock issued or issuable to such Selling Stockholders on the exercise of
options or warrants and included among the shares registered under the
Registration Statement), if and when paid for and issued in accordance with the
terms of the underwriting agreement between the Company and the Selling
Stockholders and the Underwriters in the form of Exhibit 1.1 to the
Registration Statement, will be validly issued, fully paid and nonassessable.
We are members of the New York Bar, and the opinions expressed herein are
limited to questions arising under the laws of the State of New York and the
Federal law of the United States, and we disclaim any opinion whatsoever with
respect to matters governed by the laws of any other jurisdiction.
<PAGE> 2
RUBIN BAUM, LEVIN CONSTANT & FRIEDMAN
Bitstream Inc.
October 11,1996
Page 2
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the references to this firm under the caption "Legal Matters"
in the Prospectus which is a part of the Registration Statement.
Very truly yours,
/s/ Rubin Baum Levin Constant & Friedman
RUBIN BAUM LEVIN CONSTANT & FRIEDMAN
<PAGE> 1
EXHIBIT 10.5.2
AMENDMENT NO. 2
TO
LOAN AGREEMENT
AND TO
WAIVER AND SUBORDINATION AGREEMENTS
This is an amendment to the loan agreement dated February 22, 1996, as
amended August 22, 1996 (the "Loan Agreement"), by and among Bitstream Inc., a
Massachusetts corporation, having its principal executive office at 215 First
Street, Cambridge, Mass. 02142 (the "Company"), and the undersigned lenders of
the Company pursuant to the Loan Agreement ("Lenders"), and to the Waiver and
Subordination Agreements, also dated February 22, 1996, as amended August 22,
1996 (the "Subordination Agreements"), by and among the Lenders, the Company,
and BayBank, N.A. ("BayBank"). The effective date of this Amendment is October
9, 1996.
A. The Loan Agreement provided for the Lenders to loan to the Company
various sums comprising a total amount of $600,000, and the Company gave each of
the Lenders a promissory note (the "Note" or, collectively, the "Notes") for
each sum providing for all principal and interest under each Note to fall due
and payable on August 22, 1996;
B. The Subordination Agreements among the parties were premised on the said
August 22, 1996 due date under the Notes;
C. All of the parties to the Loan Agreement and the Subordination
Agreements agreed to extend the due date under the Notes to October 22, 1996
pursuant to an Amendment to Loan Agreement and to Waiver and Subordination
Agreements dated August 22, 1996; and
D. All of the parties to the Loan Agreement and the Subordination
Agreements wish to extend the due date for the Company to repay the Notes to
December 22, 1996.
NOW THEREFORE, for good and valuable consideration, the Company, the
Lenders and BayBank hereby agree as follows:
1. Loan Agreement.
1.1 Each of the undersigned Lenders hereby waives the October 22, 1996
payment due date under the Note given to him or it by the Company, and agrees to
extend the said due date to December 22, 1996.
1.2 The Company hereby agrees to honor and abide by the said extended
due date of December 22, 1996, agrees that all other terms of all Notes shall
remain unchanged, including that the prepayment penalties provided therein shall
apply to the said extended date.
<PAGE> 2
Amendment No. 2 to Loan Agreement and to Page 2
Waiver and Subordination Agreements October 9, 1996
2. Subordination Agreements.
2.1 BayBank hereby consents and agrees to the said extended due date
with respect to each Subordination Agreement, such that all rights, remedies,
and penalties provided for therein shall apply to the said date as though that
were the repayment date originally contemplated by the parties.
2.2 Each of the Lenders and the Company hereby reaffirm to BayBank
their obligations under each of their respective Subordination Agreements as
they apply to the said extended due date.
3. All other provisions of the Loan Agreement and the Subordination
Agreements shall remain unchanged hereby.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement under
seal as of the effective date.
JHI DEVELOPMENT CAPITAL GOTTHARD BANK (NASSAU BRANCH)
LIMITED ACTING FOR THE ACCOUNT OF CERTAIN OF
ITS CLIENTS AND THEIR RESPECTIVE
REGISTERED ASSIGNS
By: By:
---------------------------------- ----------------------------------
BANCBOSTON VENTURES, INC. BVB GRANTOR RETAINED INCOME TRUST I
By: By:
---------------------------------- ----------------------------------
- ------------------------------------- -------------------------------------
Amos Kaminski George B. Beitzel
- ------------------------------------- -------------------------------------
David G. Lubrano Morton E. Goulder
BITSTREAM, INC. BAYBANK, N.A.
By: By:
---------------------------------- ----------------------------------
-2-
<PAGE> 1
Exhibit 10.6
CONFIDENTIAL NOVELL, INC
- --------------------------------------------------------------------------------
NOVELL, INC.
SOFTWARE LICENSE AGREEMENT
This Software License Agreement ("Agreement"), having an Effective Date of
September 6, 1996, is agreed to by Novell, Inc., a Delaware corporation, with a
place of business at 1555 North Technology Way, Orerm, Utah 84057 ("Novell"),
and Bitstream Inc., a Delaware corporation, with a place of business at 215
First Street, Cambridge, Massachusetts 02142 (Licensee).
1. PREVIOUS AGREEMENT. Bitstream and Novell have executed that certain
Software License Agreement, dated February 23, 1996 (the "Existing
License"). The parties desire to amend and restate the Existing License in
its entirety. Upon its execution, this Agreement shall supersede and
replace the Existing License. Notwithstanding anything to the contrary in
the Existing License, all rights and obligations under tile Existing
License shall terminate and be replaced by file rights and obligations
under this Agreement.
2. PURPOSE. Novell has developed and is the owner of, or otherwise has
authority to license the Envoy technology. Novell and Licensee are
interested in satisfying the needs of their respective customers and in
increasing use and commercialization of the Envoy technology. Subject to
payment of royalties, Licensee will then be able to license customized
development tools for the Envoy technology and value added solutions
developed from the Envoy technology to Licensee's OEMs. Licensee will also
be able to bundle Novell's generally available Envoy Application Product
with Licensee's products as well as sell the Envoy Application Product on a
stand-alone basis. This Agreement describes the relative rights and
obligations of Novell and Licensee with respect to development, use, and
distribution of the Envoy Technology by Licensee.
3. BITSTREAM FONTS. As part of the consideration for this Agreement, Novell
and Licensee shall execute Amendment I to the Bitstream License Agreement
immediately upon execution of this Agreement, a copy of which amendment is
attached hereto as Exhibit A.
4. DEFINITIONS. Capitalized terms in this Agreement have the meanings stated
below or defined elsewhere in this Agreement. A reference to a particular
exhibit is to an exhibit to this Agreement and a reference to a particular
section is to a section of this Agreement unless stated otherwise.
a. Annual Royalty Period shall mean each sequential one year period from
the earlier of (i) the date of first customer ship of the Level 2 SDK,
or (ii) November 1, 1996.
b. Bundled Products means (i) the combination of the Envoy Application
Product and Licensee's hardware or software products that Licensee
will market and sell as a single product offering, and (ii) the
combination of the Envoy Application Product and the hardware or
software products of Licensee's OEMs that Licensee's OEM will market
and sell as a single product offering.
c. Binary Code shall mean Code that loads and executes without further
processing by a software compiler or linker or that results when
Source Code is processed by a software compiler.
SEPTEMBER 5, 1996
1
<PAGE> 2
CONFIDENTIAL NOVELL, INC
- --------------------------------------------------------------------------------
d. Code means computer programming code. Unless specifically stated
otherwise, Code shall include Binary Code, Source Code, and any
Maintenance Modifications to Code or Enhancements to Code in existence
from time to time.
e. Confidential Information. "Confidential Information" means the terms
of this agreement and any information and materials which are marked
or identified by Novell as confidential or proprietary, and any trade
secrets or know-how of Novell disclosed to Licensee under this
Agreement, but does not include information that has been publicly
known or available without breach of this Agreement or independently
developed without reference to Confidential Information.
f. Core Libraries means the compiled binary library file(s), supporting
dlls and header files that expose Envoy API functions through static
or latent bindings.
g. Derivative Works means a work that is based on one or more preexisting
works (such as a revision, enhancement, modification, translation,
abridgement, condensation, expansion, or any other form in which such
preexisting work may be recast, transformed, or adapted) and that, if
prepared without authorization of the copyright owner of such
preexisting work, would constitute copyright infringement under US
law.
h. End User means an entity who acquires a product for internal use. "End
User" does not include an entity which resells, sells, licenses,
rents or leases products to other parties in the regular course of
business.
i. Enhancement means changes, additions or new releases, other than
Maintenance Modifications, to Code and to related documentation that
improve functions, add new functions, or improve performance by
changes to system design or coding.
j. Envoy Application Product means Novell's Envoy product on all
platforms available (including Envoy 7 for Windows 95), including any
accompanying documentation and any updates, upgrades, and interim
releases that Novell makes generally available to the public during
the term of this Agreement. Envoy Application Product includes both
the Envoy Viewer and the Envoy Driver.
k. Envoy Driver means the printer driver that is designed to function
only with the standard system print calls, such as the Graphical
Driver Interface (GDI) in the MS Windows operating systems, to enable
applications to create Envoy Files on disk, save to a runtime
executable, spool the print process, and launch the Envoy Viewer.
1. Envoy Files means files in Envoy format usually identified with a .evy
extension.
m. Envoy Viewer means a viewer that allows a user to view and manipulate
Envoy Files and/or the runtime viewer that, when bound to an Envoy
File, creates an executable that enables the user to view Envoy Files.
2
September 5, 1996
<PAGE> 3
CONFIDENTIAL NOVELL, INC
- --------------------------------------------------------------------------------
n. Envoy API Layer means the Envoy application programming interface
(API) to which programmers develop programs that communicate with the
Core Libraries to create, modify, save, or render Envoy Files.
o. Level 2 SDK means the software developer kit that identifies and
contains all the Envoy API calls to view an Envoy File as well as to
create an Envoy File using the Envoy Driver functions and includes
sample source code, and information that enables a developer to (i)
create customized Envoy Viewers for distribution with electronic
content, (ii) embed the Envoy Viewer technology into the developer's
applications, and (iii) embed the Envoy Driver technology for creating
Envoy Files into the developer's application.
p. Licensee Products means Licensee's software products that Licensee
makes available from time to time.
q. Maintenance Modification means any modification or revision to Code or
to documentation, other than an Enhancement, that corrects an error or
provides another incidental correction.
r. Minimum Guaranteed Payment shall mean the minimum royalty amounts set
forth in Section 12.e that Licensee will be required to pay Novell for
each Annual Royalty Period.
s. Novell Products means collectively Level 2 SDK and Envoy Application
Product.
t. OEM means any legal entity or person that receives from Licensee the
right to bundle the Novell Products with products of OEM and
distribute the Bundled Product to End-Users directly or through other
OEMs.
u. Payment Target shall mean an amount equal to [*]
for the corresponding Annual Royalty Period.
v. Revenues shall mean gross revenues derived from the Novell Products
(or Bundled Product if so specified), minus returns (and the related
uncollectible receivable), without deduction for costs of product,
rebates or collection or adjustments.
w. Source Code shall mean the human-readable form or the Code and related
system documentation, including all comments and any procedural
language.
5. SDK DISTRIBUTION.
a. DISTRIBUTION LICENSE GRANT. Subject to the terms and conditions of
this Agreement and payment of the royalties and fees identified in
Section 12, Novell hereby grants Licensee a world-wide,
non-transferable, exclusive (except as to any licenses Novell has
granted or may grant to Corel Corporation) license under copyright
during the term of this Agreement to reproduce and distribute to OEMs,
by any method or medium of distribution, either directly or through
distributors, copies of Level 2 SDKs.
- ---------
* Certain confidential information has been omitted and filed separately with
the Securities and Exchange Commission pursuant to a Request for Confidential
Treatment.
3
SEPTEMBER 5, 1996
<PAGE> 4
CONFIDENTIAL NOVELL, INC
- --------------------------------------------------------------------------------
The exclusivity of this license is expressly conditioned upon the
following requirements. Should Licensee fail to substantially achieve
the requirements set forth below, Novell may terminate the
exclusivity of this license grant upon 90 days written notice and
Licensee's license set forth in this Section 5 shall become a
non-exclusive license.
i. Licensee shall submit its formal marketing and launch program to
Novell for review and approval;
ii. On a quarterly basis, Licensee will review with Novell its
activities, goals, objectives and marketing plans for the next
calendar year quarter;
iii. Both parties will mutually agree upon Licensee's goals and
objectives in writing, which goals and objectives will be
established in such a manner that they can be quantitatively
reviewed and evaluated; and
iv. Licensee shall make all Minimum Guaranteed Payments as and when
due and payable.
b. OEM LICENSE. Licensee agrees to license each Level 2 SDK to its OEMs
by means of a written sublicense signed by both Licensee and OEM. The
license shall provide the same level of protection for Novell's
interests in the SDKs as Licensee seeks by agreement to provide for
its own software of similar nature. Notwithstanding the foregoing, the
licenses under which Licensee makes the SDKs available will provide a
level of protection which is customary for similar software in the
United States and will be provided to Novell for review and approval
prior to any distribution.
c. RESTRICTIONS. Licensee shall only distribute or sublicense Level 2
SDKs (including pre-release versions) that have been approved by
Novell as evidenced by a written letter from Novell signed by the
Project Manager stating that the SDK is approved for distribution.
Each Enhancement, update, or upgrade to the SDK's must be approved by
Novell. Novell's approval shall not be construed as an endorsement of
the product by Novell. Licensee shall not authorize OEMs to distribute
or sublicense the Level 2 SDK.
d. SUPPORT. Licensee shall provide all support to OEMs of the Level 2
SDK. Licensee shall not refer OEMs to Novell for support. Licensee
shall report to Novell in writing any bugs, coding errors, or any
general deficiency that takes away or limits the functionality of the
product as delivered. Novell will respond within five (5) working days
that it acknowledges receipt and will provide a written explanation of
its intended course of action within ten (10) working days of receipt
of the reported problem from Licensee.
e. OWNERSHIP. Novell shall own the Level 2 SDK and all modifications and
Derivative Works thereto. To the extent Licensee may own any
copyright, patent, or other interest in the above, Licensee agrees to
assign and hereby assigns to Novell, and Novell accepts, Licensee's
entire world-wide right, title and interest therein. Licensee shall
retain ownership of all value add tools Licensee bundles with the
Level 2 SDK.
f. DEVELOPMENT OF LEVEL 2 SDK. If Novell does not complete development of
the Level 2 SDK, then Licensee agrees to accept the Level 2 SDK as
currently available and complete development of the Level 2 SDK as
mutually agreed upon by the parties and in accordance with all
standards and formats associated with Envoy.
4
SEPTEMBER 5, 1996
<PAGE> 5
CONFIDENTIAL NOVELL, INC
- --------------------------------------------------------------------------------
6. ENVOY APPLICATION PRODUCT DISTRIBUTION.
a. LICENSE GRANT. Subject to the terms and conditions of this Agreement
and payment of the royalties and fees identified in Section 12, Novell
hereby grants to Licensee a non-exclusive, non-transferable license
under copyright during the term of this Agreement:
i. to reproduce and distribute externally to End Users, either
directly or through distributors, copies in Binary Code form only
of the Envoy Application Product bundled with Licensee Product
and as a stand-alone product; and
ii. to sublicense to Licensee's OEMs the right to reproduce and
distribute the Envoy Application Product bundled with OEM's
product.
b. END USER LICENSE. The End User's use of the Envoy Application Product
shall be governed by the Novell license agreements included with the
Envoy Application Product. Licensee and Licensee's OEMs shall not
modify the Envoy Application Product or the accompanying license
agreements.
c. SUPPORT. Licensee is responsible to provide support to End Users that
acquire the Envoy Application Product through Licensee or Licensee's
OEMs.
7. POINT OF SALE REPORTS. Licensee agrees to provide Novell, by no later than
the tenth (10th) day of each calendar month, a Point of Sale report for the
previous calendar month. "Point of Sale Report" means, for purposes of the
Agreement, a report provided by Licensee to Novell which is in a
Novell-specified format and which includes, among other things, (i) a list
of Novell Products sold, (ii) the regional designation required by Novell,
to the extent that Licensee and/or its OEMs can identify the regional
designation, (iii) Licensee's part numbers of the Novell Products sold, and
(iv) the amount of on-hand inventory of all Novell Products by product
number (including products listed in the POS Report and any other Novell
Products in inventory not otherwise included in the POS Report). The Point
of Sale Report may only be used by Novell to provide compensation to
Novell's sales force and to concentrate marketing activities to promote
greater sales.
8. RECORDS EXAMINATIONS. Licensee agrees to allow Novell to examine its
records to determine compliance or noncompliance with the Agreement. Any
examination will be at the expense of Novell and will be solely for the
purpose of ensuring compliance with the Agreement. Any examination will be
conducted by Novell, and will occur during regular business hours at
Licensee's offices and will not interfere unreasonably with Licensee's
business activities. Examinations will be made no more frequently than once
a year, and Novell will give Licensee ten (10) days or more prior written
notice of the date of the examination and the name of the Novell authorized
representative who will be conducting the examination. All information
obtained by the Novell authorized representative conducting the audit will
be maintained confidential by Novell. If such examination indicates that
Licensee is delinquent in assessing or paying royalties by more than 3% of
the amounts actually owed, Licensee shall pay all of Novell's expenses of
the examination.
9. AGREEMENTS WITH LICENSEES, END USERS, AND DISTRIBUTORS. Licensee will
require Licensee's distributors and Licensee's Licensees to enter into a
written agreement with Licensee prior to providing any Novell Product to
such distributor or Licensee. The agreement shall include provisions
consistent with the agreements Licensee uses with respect to the licensing
of its own
5
September 5,1996
<PAGE> 6
CONFIDENTIAL NOVELL, INC
- --------------------------------------------------------------------------------
hardware and software products. Furthermore, the agreement shall include
provisions consistent with the provisions of this Agreement and must be
materially no less protective of Novell's rights in the Novell Products
than are tile terms and conditions of this Agreement. Licensee agrees to
use commercially reasonable efforts to enforce its agreements with
Licensees and distributors to ensure compliance. Licensee shall use best
efforts to protect Novell's copyright, shall notify Novell of any breach of
a material obligation under an End User license agreement or an Licensee
agreement, and will use best efforts to cooperate with Novell in any legal
action to prevent or stop unauthorized use, reproduction or distribution of
the Novell Products.
10. RESTRICTIONS. Notwithstanding any licenses granted to Licensee herein,
Licensee shall not create, or allow others to create, a system print driver
or any technology duplicating or substantially duplicating the function of
the Envoy Driver. Furthermore, Licensee is not authorized to and shall not
modify the Envoy Driver or the Envoy Application Product. Licensee will
include and/or not alter Novell's or Novell's licenser's copyright, trade
secret, proprietary and/or other legal notices contained on or in copies of
the Novell Products.
11. TRADEMARKS. Licensee agrees to include the "Envoy" logo on all packaging
for the Novell Products and attribute ownership of the logo to Novell. All
use of the Envoy trademark and Envoy logo shall be in accordance with
Novell's then current trademark usage policies. Licensee is not authorized
to use any Novell trade names without the prior written consent of Novell.
Upon the expiration or termination of this Agreement, Licensee agrees to
cease all display, advertising and use of any and all Novell trade names
and trademarks. Licensee agrees not to alter, erase or overprint any notice
provided by Novell and not to attach any additional trademarks without the
prior written consent of Novell or affix any Novell trademarks to any
non-Novell product. Licensee recognizes Novell's ownership and title to the
trade names and trademarks and the goodwill attaching to the trade names
and trademarks. Licensee agrees that any goodwill which accrues because of
its use of the trade names and/or trademarks will become Novell's property.
Licensee agrees not to contest Novell's Marks or trade names, or make
application for registration of any Novell trademarks or trade names
without Novell's prior written consent. Licensee agrees not to use, employ
or attempt to register any trademarks or trade names which are confusingly
similar to Novell's trademarks or trade names. Prior to use, Licensee
agrees to submit a specimen or first article copy of all art, packaging and
advertising, including print advertisements, brochures, collateral, direct
mail, labels, data sheets, that makes use of any of the Novell trademarks
or trade name to Novell for approval.
12. ROYALTIES. Licensee shall pay Novell royalties at the royalty rates listed
below. Royalty payments shall be due to Novell in U.S. funds no later than
thirty (30) days after the end of each calendar quarter for all Novell
Products distributed during such quarter. Each royalty payment shall be
accompanied by a statement showing the basis on which such payment was
calculated. Payments which are more than thirty (30) days overdue shall be
subject to a late payment charge of one percent (1%) per month or any part
thereof, accrued monthly, commencing on the original date due; provided
however, that if the amount of such late payment charge exceeds the maximum
allowed by law, such charge will be automatically reduced to the maximum
legal amount.
a. LEVEL 2 SDK. Licensee will pay Novell a royalty of [*] on Revenues
received on account of or derived from any and all copies distributed
of the Level 2 SDK. Once aggregate royalties
- ----------
* Certain confidential information has been omitted and filed separately with
the Securities and Exchange Commission pursuant to a Request for Confidential
Treatment.
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- --------------------------------------------------------------------------------
paid to Novell under Sections 12.a, 12.b, 12.c, and 12.d equal the
Payment Target for that Annual Royalty Period, Licensee's royalty
percentage shall be reduced to [*] of Revenues for the duration of
that Annual Royalty Period. Upon the commencement of the next Annual
Royalty Period, Licensee's royalty percentage shall once again be [*].
b. PRODUCTS BASED ON OR DERIVED FROM THE LEVEL 2 SDK.
Licensee will pay Novell a royalty of [*] on Revenues received on
account of or derived from products based on or derived from the
Level 2 SDK. Once aggregate royalties paid to Novell under Sections
12.a, 12.b, 12.c, and 12.d equal the Payment Target for that Annual
Royalty Period, Licensee's royalty percentage shall be reduced to
[*] of Revenues for the duration of that Annual Royalty Period. Upon
the commencement of the next Annual Royalty Period, Licensee's
royalty percentage shall once again be [*].
c. STAND-ALONE ENVOY APPLICATION PRODUCT.
[*] per copy for all copies of the Envoy Application Product
created.
d. BUNDLED AND OEM ENVOY APPLICATION PRODUCT.
Licensee will pay Novell a royalty of [*] on Revenues received on
account of or derived from any and all copies of the OEM and bundled
Envoy Application Product. Once aggregate royalties paid to Novell
under Sections 12.a, 12.b, 12.c, and 12.d equal the Payment Target
for that Annual Royalty Period, Licensee's royalty percentage shall
be reduced to [*] of Revenues for the duration of that Annual
Royalty Period. Upon the commencement of the next Annual Royalty
Period, Licensee's royalty percentage shall once again be [*]. In
addition, Novell agrees to consider periodic requests for quotation
for pricing relief with respect to specific accounts.
<TABLE>
e. MINIMUM GUARANTEED PAYMENT. Licensee shall pay Novell minimum, annual,
aggregate royalties for the Envoy Application Product and the Level 2
SDK as specified below. If the aggregate royalties owed to Novell
pursuant to Sections 12.a, 12.b, 12.c, and 12.d during each Annual
Royalty Period of this Agreement amount to less than the Minimum
Guaranteed Payment, Licensee agrees to pay Novell the difference
within thirty (30) days of the end of each Annual Royalty Period.
<CAPTION>
MINIMUM GUARANTEED PAYMENT
<S> <C>
First Annual Royalty Period [*]
Second Annual Royalty Period [*]
Third Annual Royalty Period [*]
Fourth Annual Royalty Period [*]
Fifth Annual Royalty Period [*]
Each subsequent Annual Royalty Period: [*] increase over previous year's Minimum
Guaranteed Payment
</TABLE>
13. OWNERSHIP. No title to or ownership of the Novell Products acquired under
the Agreement or proprietary technology in hardware acquired under the
Agreement is transferred to Licensee. Notwithstanding any provision of the
Agreement to the contrary, Novell, or the licensor through which Novell
obtained the rights to distribute the Novell Products, owns and retains all
title and
- ----------
* Certain confidential information has been omitted and filed separately with
the Securities and Exchange Commission pursuant to a Request for Confidential
Treatment.
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ownership of all intellectual property rights in the Novell Products,
including all software, firmware, software master diskettes, copies of
software, master diskettes, documentation and related materials which are
acquired, produced or shipped by Novell under the Agreement, and all
modifications to and derivative works from software acquired under the
Agreement made by Licensee, Novell or any third party. Novell does not
transfer any portion of such title and ownership, or any of the associated
goodwill, to Licensee, and the Agreement should not be construed to grant
Licensee any right or license, whether by implication, estoppel or
otherwise, except as expressly provided. Licensee agrees to be bound by and
observe the proprietary nature of the Novell Products acquired under the
Agreement. Licensee agrees to take appropriate action by instruction or
agreement with its employees. agents, contractors and sublicensees who are
permitted access to the Novell Products to fulfill Licensee's obligations
under the Agreement. Except as set forth in the Agreement, or as may be
permitted in writing by Novell. Licensee agrees not to provide Novell
Products or any part or copies thereof to any third party without the prior
written consent of Novell.
All rights not explicitly granted herein shall remain solely and
exclusively in Novell. To the extent such rights are not deemed, as a
matter of law, to be the sole and exclusive property of Novell, Licensee
hereby assigns and Novell hereby receives all right, title, and interest
therein, and agrees to execute at Novell's request subsequent decimation as
further evidence of this assignment.
Upon request, Licensee shall promptly complete Novell's then current form
of Intellectual Property Rights Questionnaire ("IPRQ") for any Code or
documentation developed by or for Licensee in which ownership is held by
Novell. Licensee represents and warrants that the information contained in
any such IPRQ is accurate and complete.
14. SUPPORT. Novell shall have no support obligations to Licensee except as
expressly identified in this Agreement. Licensee shall provide support to
End Users and OEMs who acquire Novell Products by or through Licensee.
Licensee agrees that end user support is a condition of its continued
authorization by Novell. Although Novell has granted Licensee a worldwide
license to market and sell the Novell Products under the terms of this
Agreement, Licensee agrees that it will not market and sell the Novell
Products in areas where it does not have the ability to support the Novell
Products.
15. PRODUCT MANAGEMENT COUNCIL.
a. FORMATION. Novell and Licensee will form an Envoy Product Management
Council (the "Council"). The parties may add additional members to the
Council as mutually agreed. The purpose of the Council will be to
provide Licensee an opportunity to guide and direct the future
direction of the Envoy SDK and the Envoy Application Product by making
proposals to Novell. The Council will endeavor to; (i) collectively
establish a base level of compatibility amongst all parties, (ii)
establish and prioritize specific development efforts, (iii) formalize
the product management process to represent the interests of each
party, (iv) establish a means by which to measure and gauge the
progress of the product development, and (v) to establish a formal
means of communication between all parties. Notwithstanding the
foregoing, no proposals of the Council will be initiated without
Novell's prior written consent. All work performed by or for Licensee
with respect to the Envoy technology shall be done pursuant to a
separate development agreement which will grant development licenses
and allocate the rights
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of the respective parties. Among other things, such development
agreement will include provisions to the effect that all work derived
from Novell's intellectual or other proprietary property shall be
owned by Novell. This Agreement shall in no way grant any license
rights to Licensee in relation to the Council work proposed by the
Council or work created by the Council.
b. PRODUCT DEVELOPMENT. During title term of this Agreement, Licensee
will assume the funding of the development efforts agreed to by Novell
and the Council. Such funding will amount to Licensee's provision of
development services equivalent during the first year of this
Agreement to a minimum of approximately [*], where
"approximately" means [*]. Each subsequent year, the
Council will meet prior to the next fiscal year to establish an
appropriate development budget for that year. It is Licensee's
intention to contract these development activities to Tumbleweed
Software Corporation after obtaining appropriate license rights from
Novell. However, Licensee reserves the right to develop with another
vendor, including its own development team, if it so chooses.
c. FIRST DELIVERABLE. The first development deliverable to be funded by
Licensee will be the completed Level 2 SDK. Licensee will contract
such development to Tumbleweed as a work for hire to be owned by
Novell.
16. TERM, TERMINATION, RETURN OF TECHNOLOGY.
a. TERM. This Agreement shall terminate at the end of the fifth Annual
Royalty Period, unless terminated earlier by either party in
accordance with the provisions of this Section. Such term shall
automatically renew for successive one year periods unless terminated
in accordance with this Section.
b. TERMINATION FOR CONVENIENCE. Either party may terminate this Agreement
at any time, with or without cause, after the end of the fifth Annual
Royalty Period by providing the other party with 90 days prior written
notice.
c. EARLY TERMINATION. Either party may terminate the Agreement at any
time upon the other party's failure to cure a material breach of this
Agreement following thirty (30) days prior written notice of the
breach. In addition, Novell (or its permitted assignee of this
Agreement) may terminate this Agreement by providing written notice to
Licensee at any time upon occurrence of any one or more of the
following:
i. Licensee fails to pay Minimum Guaranteed Payments as and when due
and payable.
ii. Upon one year prior written notice given after Novell
discontinues the Envoy Application Product.
iii. Upon one year prior written notice given after Novell sells the
Envoy Application Product.
iv. Licensee develops, markets or sells, or materially assists in the
development, marketing or sale of, a software product that
directly competes with the Envoy Application Product, Envoy
Driver, or Level 2 SDK in the geographic areas in which such are
marketed (a "Competitive Product"); including without limitation
providing material consulting
- ----------
* Certain confidential information has been omitted and filed separately with
the Securities and Exchange Commission pursuant to a Request for Confidential
Treatment.
9
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services, owning, managing, operating, materially participating
in, controlling, or being connected as a majority stockholder,
partner, or other similiar relationship with any business,
individual or entity that creates, develops or markets a
Competitive Product. Competitive Product shall not be construed
to include complementary products that do not take away from
sales of the Envoy Application Product or Envoy Driver themselves
and shall not apply to a passive investment in another company or
entity.
v. In the event Licensee undergoes a Change of Control. For purposes
of this Section 16.c, "Change of Control" shall mean when (i)
substantially all of Licensee's assets are acquired, or (ii) any
person or group (within the meaning of Rule 13d-5 under the
Securities Exchange Act as in effect on the date hereof) shall
come to own, directly or indirectly, beneficially or of record,
voting securities representing more than 50% of the total voting
power of Licensee, or (iii) Licensee becomes a Subsidiary of some
third-party. Licensee shall be considered a Subsidiary of a third
party if(i) fifty percent (50%) of Licensee's outstanding shares
or securities (representing the right to vote for the election of
directors or other managing authority) is owned or controlled,
directly or indirectly, by another company, person, group or
entity, or (ii) if Licensee does not have outstanding shares or
securities, fifty percent (50%) of Licensee's ownership interest
representing the right to make the decisions for Licensee is
owned or controlled, directly or indirectly, by another company,
person, group or entity.
d. OTHER TERMINATION. Should the Novell Products, or the operation
thereof, become, or in Novell's option be likely to become, the
subject of infringement of any U.S. trademark, U.S. copyright or U.S.
patent, Licensee agrees to permit Novell, at its option and expense,
either to procure for Licensee the right to continue using the Novell
Products, or to replace or modify them so that they become
non-infringing, or to terminate this Agreement.
e. EFFECT OF TERMINATION. Licensee will discontinue its distribution and
use of the Novell Products following termination once its then current
inventory has been exhausted; provided, however, that if this
Agreement is terminated due to a breach by Licensee, Licensee will
cease distribution of the Novell Products immediately. No Minimum
Guaranteed Payments will be required after notice of termination of
this Agreement is given in accordance with Section 16.c.ii or Section
16.c.iii.
f. RETURN OF TECHNOLOGY. Within 30 business days after termination of
this Agreement, Licensee shall either deliver to Novell or destroy all
copies of the Novell Products (except as otherwise stated herein) and
any other materials provided by Novell to Licensee hereunder.
Notwithstanding the foregoing, and provided Licensee fulfills its
obligations specified in this Agreement, Licensee may continue to use
and retain copies of the Novell Products to the extent, but only to
the extent, necessary to support and maintain the Novell Products
rightfully distributed by Licensee prior to termination of this
Agreement. Notwithstanding the termination of this Agreement, all End
User sublicenses which have been properly granted by Licensee pursuant
to this Agreement prior to its termination shall survive.
g. BUY OUT OPPORTUNITY. In the event Novell discontinues or sells the
Envoy technology, Novell shall offer to sell the Envoy technology to
Licensee as follows. Novell will provide to Licensee's CFO and
President, in accordance with the notice provisions of this Agreement,
a
10
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- --------------------------------------------------------------------------------
written proposal of the terms and conditions for purchase of the
Envoy technology by Licensee ("Proposal"). Licensee will have ten
(10) business days to accept the Proposal in writing or to provide
Novell with a counter offer, after which time Novell shall either
accept or reject Licensee's counter offer within ten (10) business
days. During this period, Novell shall not actively engage in
negotiations with third parties regarding the sale of the Envoy
Technology. If Licensee has not accepted the Proposal as specified
within ten (10) business days, then the Proposal shall be revoked and
Novell shall be free to offer the Envoy technology to other parties.
However, if Novell offers to sell, or engages in discussions to sell,
the Envoy technology to other parties on terms materially different
than the Proposal made to Licensee, then Novell will continue to
engage Licensee in negotiations regarding the potential purchase of
the Envoy technology by Licensee to the extent Licensee's interest in
doing so continues, and Novell will evaluate in good faith any
counter-offers made by Licensee. The parties acknowledge that Novell
shall have no obligation whatsoever to give preferential treatment to
Licensee's offer to purchase the Envoy technology after
non-acceptance by Licensee of the original Proposal, and that Novell
shall be free to sell the Envoy Technology to whichever potential
buyer best meets Novell"s interests and needs, as determined by
Novell.
h. TRANSITION OPTION. In the event Novell sells the Envoy technology and
assigns this Agreement to the buyer thereof, either Novell or the
buyer may, at its option, waive the Minimum Guaranteed Payments that
Licensee would otherwise be required to make and the exclusive license
with respect to the Level 2 SDK granted to Licensee pursuant to this
Agreement shall become non-exclusive. The foregoing option may only be
exercised within 90 days of the closing date of the sale of the Envoy
technology.
17. WARRANTIES.
Performance. Novell warrants only to Licensee that the Envoy Application
Product will substantially conform to the specifications in the published
documentation for such product in effect when the Envoy Application Product
is provided to Licensee. If Licensee finds what Licensee believes to be
errors or a failure of the Envoy Application Product to meet specifications
which significantly affect performance, and promptly provides Novell with a
written report, Novell will use reasonable efforts to correct, any such
errors or failures. This is Licensee's sole and exclusive remedy for any
express or implied warranties hereunder. Novell's warranty and obligation
shall extend for a period of six months from the date Novell first delivers
the Envoy Application Product to Licensee. Novell's warranty and obligation
is solely for Licensee's benefit. Licensee has no authority to extend this
warranty to any other person or entity.
NOVELL MAKES NO OTHER WARRANTY OF ANY KIND, EITHER EXPRESSED OR IMPLIED,
INCLUDING ANY WARRANTY THAT THE NOVELL PRODUCTS ARE FREE OF ERRORS. EXCEPT
AS SPECIFICALLY PROVIDED IN THIS SECTION, NOVELL AND ITS LICENSORS DO NOT
MAKE, AND HEREBY DISCLAIM, ANY EXPRESS OR IMPLIED WARRANTIES INCLUDING, BUT
NOT LIMITED TO, THE WARRANTIES OF DESIGN, MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE, OR ARISING FROM COURSE OF DEALING, USAGE OR TRADE
PRACTICE.
18. LIMITATION OF LIABILITY.
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Notwithstanding any other provision of this Agreement, Novell's liability
for damages will be limited to the aggregate paid by Licensee to Novell
under this Agreement. IN NO EVENT WILL NOVELL OR ITS LICENSORS BE LIABLE
FOR ANY INDIRECT, INCIDENTAL, SPECIAL PUNITIVE, OR CONSEQUENTIAL DAMAGES,
LOST REVENUES OR PROFITS, DATA, OR USE, INCURRED BY EITHER PARTY OR ANY
THIRD PARTY HOWEVER CAUSED, NO MATTER WHAT THEORY OF LIABILITY, EVEN IF
LICENSEE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
19. INDEMNIFICATION BY NOVELL.
a. Novell agrees to indemnify, defend and hold Licensee harmless from any
and all damages, liabilities, costs and expenses incurred by Licensee
as a result of any claim, judgment or adjudication against Licensee
which provides that the Novell Products, trade names or the trademarks
appropriately used by Licensee in connection with marketing the Novell
Products infringe any U.S., EEC, Middle East, Japan, Korea, or Taiwan
trademark, copyright or patent of any third party, provided: (i)
Licensee promptly notifies Novell in writing of the claim; and (ii)
Licensee agrees that Novell will have the sole control of the defense
of any action and all negotiations for settlement and compromise.
b. Novell shall have no liability for any claim based upon (a) use of
other than a current unaltered version of the Novell Products, (b)
use, operation or combination of the Novell Products with non-Novell
programs, data, equipment or if such infringement would have been
avoided but for such use, operation or combination, (c) Licensee's or
its agent's activities after Novell bas notified Licensee that Novell
believes such activities may result in such infringement, or (d)
Licensee's use of any trademark or logo other than those authorized by
Novell.
c. Should the Novell Products, or the operation of the Novell Products,
become, or in Novell's opinion be likely to become, the subject of
infringement of any trademark, copyright or patent, Licensee agrees to
permit Novell, at its option and expense, either to procure for
Licensee the right to continue using the Novell Products, to replace
or modify them so that they become non-infringing, or to terminate
this Agreement upon notice to Licensee.
d. NOVELL'S AGGREGATE INDEMNIFICATION TO LICENSEE SHALL BE LIMITED TO THE
AGGREGATE SUM PAID BY LICENSEE TO NOVELL UNDER THIS AGREEMENT. THE
ABOVE STATES THE ENTIRE LIABILITY OF NOVELL WITH RESPECT TO
INFRINGEMENT OF PATENTS, COPYRIGHTS, TRADEMARKS OR ANY OTHER FORM OF
INTELLECTUAL PROPERTY BY NOVELL PRODUCTS SUPPLIED BY NOVELL UNDER THIS
AGREEMENT. NOVELL SHALL NOT BE LIABLE FOR ANY CLAIM BY LICENSEE BASED
ON ANY THIRD PARTY CLAIM, EXCEPT AS STATED IN THIS SECTION 19 OF THIS
AGREEMENT.
20. INDEMNIFICATION BY LICENSEE.
Licensee agrees to indemnify, defend and hold Novell harmless from any and
all damages, liabilities, costs and expenses incurred by Novell as a result
of any claim, judgment or adjudication
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against Licensee arising out of Licensee's distribution of the Novell
Products, except to the extent that such claims arise from intellectual
property infringement by the Novell Products.
21. GENERAL PROVISIONS.
a. Force Majeure. If either party is prevented from performing any
portion of this Agreement by causes beyond its control (excluding
payment), including labor disputes, civil commotion, war, governmental
regulations or controls, casualty, or acts of God, the defaulting
party will be excused from performance for the period of the delay and
for a reasonable time following the delay.
b. Jurisdiction. This Agreement will in all respects be governed by and
interpreted in accordance with the laws of the State of California as
applied to transactions taking place in California between California
residents. Any action or proceeding brought by either party against
the other arising out of or related to this Agreement may be brought
in a state or federal court of competent jurisdiction located within
Santa Clara County, California, and Novell and Licensee each consents
to the personal jurisdiction of those courts.
c. Waiver. No waiver of any right or remedy on one occasion by either
party will be deemed a waiver of that right or remedy on any other
occasion.
d. Entire Agreement; Amendments. This Agreement sets forth the entire
agreement and understanding between the parties as to the subject
matter of this Agreement and merges all prior discussions. Neither
party will be bound by any conditions, definitions, warranties,
understandings, or representations with respect to the subject matter
other than as expressly provided in this Agreement, or as duly set
forth on or subsequent to the Effective Date in writing and signed by
a proper and duly authorized representative of the party to be bound
thereby. No provision appearing on any form originated by either party
will be applicable unless the provision is expressly accepted in
writing by the other party.
e. Assignment. Neither party may assign its rights or delegate its duties
under this Agreement, in whole or in part, without the other's prior
written consent. Any attempted assignment without written consent will
be void. Notwithstanding, Novell may, without further consent from
Licensee, assign its rights and delegate its duties under this
Agreement in the event of a sale or spin-off of Novell's product line
that includes the Envoy Products.
f. Notice. Unless otherwise agreed to by the parties, all notices
required under this Agreement (except those relating to product
pricing, changes, and upgrades) must be (A) registered mail or
certified mail, return receipt requested, (B) overnight mail, or (C)
personal delivery addressed and sent to the address first above
written and to the attention of the party executing this Agreement or
that person's successor. Notices will be effective on the earlier of
receipt or three business days after dispatch. Either party may change
its address for receipt of notice by notifying the other party.
g. Severability. If any provision of this Agreement is declared to be
invalid, Novell and Licensee agree that the invalidity will not affect
the validity of the remaining provisions of this
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Agreement and further agree to substitute for the invalid provision a
valid provision which most closely approximates the intent and
economic effect of the invalid provision.
h. Independent Contractors. Each party acknowledges that both parties to
this Agreement are independent contractors and that neither party will
represent itself as an agent or legal representative of the other.
i. Cumulative Remedies. The remedies under this Agreement will be
cumulative and not alternative and the election of one remedy for
breach will not preclude pursuit of other remedies.
j. Attorneys' Fees. If any dispute arises between the parties with
respect to the matters covered by this Agreement which leads to a
proceeding to resolve the dispute, the prevailing party in the
proceeding will be entitled to receive its reasonable attorneys' fees,
expert witness fees, and out-of-pocket costs incurred in connection
with the proceeding, in addition to any other relief it may be
awarded.
k. Publicity. This Agreement is confidential and neither party will issue
press releases or engage in other types of publicity of any nature
dealing with commercial and legal details of this Agreement or its
subject matter without the other's prior written approval, which will
not be unreasonably withheld.
l. Compliance with Laws. Licensee will comply, at its own expense, with
all statutes, regulations, rules, ordinances, and orders of any
governmental body, department or agency which apply to or result from
Licensee's obligations under this Agreement. Licensee agrees to not
export Envoy Products directly or indirectly, separately or as part of
a system, without first obtaining proper authority to do so from the
appropriate governmental agencies or entities, as may be required by
law. In particular, Licensee, absent any required prior authorization
from the Office of Export Licensing, U.S. Department of Commerce, 14th
and Constitution Avenue, Washington, D.C. 20230, will not export or
reexport (as defined in Section 779 of the Export Administration
Regulations, as amended ("Regulations")) the Envoy Products, any
technical data or other confidential information, or direct product of
any of the foregoing, to Afghanistan, Iraq, Iran, Syria, the People's
Republic of China, Yugoslavia (Serbia and Montenegro), or any Group Q,
S, W, Y, or Z country specified in Supplement No. 1 to Section 770 of
the Regulations.
m. Survival. Sections 12, 13, 14 and 16-21 of this Agreement shall
survive expiration or termination of this Agreement and will remain in
effect.
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NOVELL, INC. BITSTREAM INC.
By: /s/ Robert A. Krauss By: /s/ C. Ray Boelig
-------------------------------- ----------------------------
Name: Robert A. Krauss Name: C. Ray Boelig
------------------------------ --------------------------
Title: Acting Vice President - ATD Title: President & CEO
----------------------------- -------------------------
Date: September 6, 1996 Date: September 6, 1996
------------------------------ --------------------------
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EXHIBIT A
AMENDMENT
********
AMENDMENT 1
TO
BITSTREAM LICENSE AGREEMENT
This Amendment amends that certain Bitstream License Agreement, dated June 30,
1995 (the "Agreement"), by and among Bitstream Inc. ("Bitstream") and Novell,
Inc. ("Novell"). This Amendment is effective when executed by authorized
representatives of both parties. Capitalized terms used but not otherwise
defined herein shall have the meanings assigned thereto in the Agreement.
The parties agree to amend the Agreement as follows:
1. In addition to the Licensed Products set forth in Exhibit A-2 of this
Agreement, Exhibit A-2 is amended to provide to Novell a total of
twenty (20) Outline fonts in both TrueType and Type One format for the
PC and Macintosh. Licensee's distribution of the font products with
its own products shall be royalty-free.
2. Notwithstanding anything to the contrary in the Agreement, all
licenses granted by the Agreement or by this Amendment shall extend to
all divisions of Novell at no further charge.
3. The three (3) year term specified in Schedule 2-B is deleted and
replaced with a term of five (5) years from August 1, 1996.
4. Section 3 of Schedule 2-B is deleted in its entirety. Licensee will
have access to and Bitstream will provide at no additional charge all
updates and upgrades to the Licensed Products.
4. The phrase "three years from the effective date" in line 3 of Section
8.1 is deleted and replaced with "five (5) years from August 1, 1996".
Except as otherwise set forth herein, all terms and conditions of the Agreement
shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the
Agreement as of the date executed by all parties below.
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NOVELL, INC. BITSTREAM INC.
By: /s/ Robert A. Krauss By: /s/ C. Ray Boelig
-------------------------------- ----------------------------
Name: Robert A. Krauss Name: C. Ray Boelig
------------------------------ --------------------------
Title: Acting Vice President - ATD Title: President & CEO
----------------------------- -------------------------
Date: September 6, 1996 Date: September 6, 1996
------------------------------ --------------------------
17
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<PAGE> 1
Exhibit 10.7
BITSTREAM INC. & TUMBLEWEED SOFTWARE CORPORATION
JOINT DEVELOPERS' AGREEMENT FOR
SALES, LICENSING, AND MARKETING OF
TUMBLEWEED'S PUBLISHING ESSENTIALS AND COMPONENTS
This Agreement is entered into and made effective as of the 10th day of June
1996 by and between BITSTREAM INC., of 215 First Street, Cambridge, MA 02142
("Bitstream") and TUMBLEWEED SOFTWARE CORPORATION ("Tumbleweed ") of 2000
Broadway, Suite 352, Redwood City, CA 94063.
WHEREAS, Bitstream has licensing rights from Novell, Inc. to market and
distribute the shrink-wrap version of Envoy Portable Document software and/or
components to OEMs;
WHEREAS, Tumbleweed has licensing rights from Novell, Inc. to market and
distribute the shrink-wrap version of Envoy Portable Document software;
WHEREAS, Tumbleweed is the owner of certain product derivatives from/for Envoy
including but not limited to Publishing Essentials; and will market and
distribute them to End-Users and Publishers;
WHEREAS, Bitstream intends to license from Tumbleweed to market and distribute
shrink-wrap versions of Publishing Essentials to Resellers and End Users in
select areas;
WHEREAS, Bitstream intends to license from Tumbleweed to market and distribute
components of Publishing Essentials to OEMs in accordance with the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and of the mutual covenants and
promises herein contained, the parties agree as follows.
1. DEFINITIONS
1.01 As used in this Agreement:
(a) "Product Components" refers individually or collectively to
those products made available to Bitstream by Tumbleweed for
sublicensing hereunder and designated in EXHIBIT A-1,
including, but not limited to, components of Tumbleweed
Publishing Essentials, Related Materials, and all Updates and
Upgrades exclusive of any new product created by either
party. If so designated, the Product Components may include
the software products listed below, all of which have been
developed and are owned by Tumbleweed (except as otherwise
specified), and shall be provided in object code form.
i. "Tumbleweed Publishing Essentials", an integrated collection
of publishing tools;
ii. "Tumbleweed Publisher" generates collections of Envoy
documents;
iii. "Link Builder" suggests and generates hypertext link sources
and destinations;
iv. "Outline Builder" provides a mechanism to build a
cross-document hierarchical outline view;
v. "Rich Text Index Builder" builds full-text indexes that
incorporate both document content and formatting;
vi. "Envoy Distributable Viewer" provides navigational tools to
move around in a document;
vii. "Tumbleweed Viewer Extensions, Workgroup 10 Pack" are
plug-in modules for the distributable viewer.
<PAGE> 2
(b) "Proprietary Rights" means all patents, copyrights, trade secrets
and all other rights in Products and Derivative Works thereof
owned by or licensed to either party whether or not such rights
are protected under patent or copyright laws;
(c) "Derivative Works" means those revisions, improvements,
alterations, adaptations, modifications, translations,
abridgments, expansions, or other form to the Product(s);
(d) "Product(s)" means the software product or products whose sale
and marketing is contemplated by this Agreement, and which may
combine some or all of the products or components described in
EXHIBIT A-1, and in section (a) above;
(e) "End User" is any person or entity who receives a right to use
the Product-- for its own use and not for resale or further
sublicensing--through a license granted by either party or an
OEM;
(f) "OEM", or "Original Equipment Manufacturer", means any legal
entity or person that receives from Bitstream the right to use
the Product and sublicense the Product to End Users in
conjunction with its own products;
(g) "Related Materials" means information in written or other
documentary form supplied by either party to the other that
relates, in whole or in part, to the installation, design, use,
operation, testing, debugging, support, maintenance or marketing
of Product;
(h) "Updates" are new revisions of the Products that improve
functionality and bear higher "Version" decimals.
(i) "Upgrades" are new releases of the Products that generally expand
the capability of the upgraded product, and bear higher "Version"
integers.
(j) "Custom Quotation" is the process whereby the OEM requires
modification to the core technology or source code. The OEM will
define the requirements with specific details and request a
quotation for the work to be completed. No obligation is
undertaken until a purchase order and deposit are secured and
accepted by Bitstream as defined in Section 8 of this Agreement.
2. LICENSE GRANTS
2.1 Tumbleweed hereby grants to Bitstream a non-transferable,
non-exclusive license, under Proprietary Rights, subject to the
restrictions set forth in this Agreement:
(i) to use, modify and copy the Product(s) listed in EXHIBIT A for
internal purposes only in connection with the Product(s)
contemplated herein; and
(ii) to reproduce, market, sublicense and distribute the Product(s)
for use in or with OEMs' systems, computers, software,
operating systems, computer hardware including but not limited
to printers, controller boards, ASIC's and ROM based
integrated circuit cartridges; and to authorize OEMs to do the
same, subject to all of the terms and conditions of this
Agreement.
2.2 Tumbleweed hereby grants Bitstream a non-transferable, non-exclusive
license, under Proprietary Rights, subject to the restrictions set
forth in this Agreement, to use and copy the Product in EXHIBIT A-1
and in Section 1(a)(i) above, Publishing Essentials, and to
reproduce, market and distribute the Product(s) via Resellers and
direct to Corporate Accounts, and End Users.
2
<PAGE> 3
3. OWNERSHIP
3.1 Tumbleweed shall continue to own the Products listed in Exhibit A-1
attached hereto, and all Proprietary Rights, Related Materials,
Updates, Upgrades, Custom Works and Derivative Works thereof. No
right, title or interest in or to such Products is conveyed to
Bitstream hereunder.
4. PAYMENTS; REPORTS; RECORDS
4.1 Bitstream shall collect and retain any access fees and royalties due
on account of its sublicensing and distribution of the Product(s) as
set forth in EXHIBITS B-1 and B-2, any Maintenance Fees as set forth
in EXHIBIT B-3, and any custom work as stated at Section 8.1.
Royalties shall be due and payable as set forth in EXHIBITS B-1 and
B-2 on all such amounts as they are actually collected.
4.2 Bitstream shall furnish written reports to Tumbleweed on a quarterly
basis, indicating the number of copies of the Product(s) for which
payment has been received during that quarter and the royalty, as
applicable, due to Tumbleweed for each hereunder. Payment of the
amount of royalty shown to be due by each report, in U.S. Dollars,
shall accompany the report within ten (10) working days of the last
business day of that quarter.
4.3 Bitstream shall maintain invoices and other records necessary to
substantiate the amount of royalty payments shown to be due by each
report submitted under this Agreement for a period of three (3)
years after the date of each report. Tumbleweed may, at its own
expense, retain an independent certified public accountant to audit
the other party's records no more frequently than once a year,
provided that such audits are conducted with reasonable notice,
during normal working hours of the party being audited, and in such
a way as not to interfere unduly with the operation of its business.
Tumbleweed agrees to keep all information obtained in the course of
any such audit confidential, and to cause its independent certified
public accountant to do likewise; and that such information shall
not be used for any purpose except to verify the amount of royalty
payable hereunder.
4.4 Royalties Payable
-----------------
In consideration of the work set forth in the License Agreement
referenced above, Bitstream shall pay to Tumbleweed a royalty for
licensing the Product(s) listed on EXHIBIT A-1 in the manner
described in Section 4 above.
5. JOINT SALES, PROMOTION, AND MARKETING.
As further consideration for the license granted herein and for the
work to be performed by both parties herein, the parties agree to
perform the following sales, promotional, and marketing activities
on behalf of the Product(s):
5.1 Both parties shall coordinate a joint strategy for all customers by
either party for the Product(s). This is intended to encourage a
consistent and cooperative sales, marketing and support effort
between Bitstream and Tumbleweed to the OEM and End-User.
5.2 Tumbleweed and Bitstream shall each use reasonable efforts to
advertise and promote the Product(s) at their own expense, using
trademarks and copyright notices as described in EXHIBIT C-1.
5.3 Tumbleweed and Bitstream shall work together to release significant
company information, timely press releases and public position
statements, including but not limited to the execution of this
Agreement.
3
<PAGE> 4
6. TRADEMARK AND COPYRIGHT.
Each Party hereby grants to the other Party the non-transferable,
non-exclusive, worldwide right, license and privilege to use the
trade name(s) and trademarks of the other in association with
promotion and sale of the Product(s), as represented in EXHIBIT C-1.
7. CONFIDENTIALITY
7.1. For purposes of this Agreement, the term "Information" shall mean
any and all information, data, know-how and documentation including
but not limited to the Novell, Inc. and Tumbleweed Products and
information related to digital typeface technology, software
products, algorithms, business, marketing and distribution plans,
the terms and conditions of this Agreement, financial statements and
financial projections, and each party's information regarding
customer information, marketing plans and product development, which
either party learns or receives from the other, excluding any
information that the receiving party can document is generally known
in the computer industry, or becomes known to the receiving party
other than through a breach by anyone under an obligation of
confidence, or is provided to the receiving party by a third party
under no obligation to keep such information confidential, or is
independently developed or discovered by the receiving party without
reference to Information of the disclosing party.
7.2 Bitstream hereby agrees to hold the licensed Products and
Information in strict confidence with at least as great a degree of
care as that used to maintain the confidentiality of its own most
confidential information, except as transfers of such Products and
Information are expressly authorized herein.
7.3. Each party agrees that it shall maintain Information and each others
Products for use only by its employees, or individuals who are on
its premises and under its direction and control, for purposes
specifically related to its permitted use of Products or
Information. Each party shall advise the other immediately in the
event that it learns or has reason to believe that any person who
has access to Products or Information, or any portion thereof, has
violated or intends to violate the terms of this Agreement; and each
party will, at its expense, cooperate with the other party in
seeking injunctive or other equitable relief in its own name or that
of the other party against that person.
8. CUSTOM WORK, MAINTENANCE
8.1. Bitstream and Tumbleweed both agree to promote and submit business
proposals for the purpose of contracting with the OEM customer for
custom work [*]. Charges for custom work may consist of a
combination of [*] . [*] charges are payable as follows: [*].
8.2. Maintenance. Tumbleweed agrees to provide Bitstream with all Updates
and Upgrades of the Licensed Products as they become available to be
marketed as stated in EXHIBIT B-3 hereto and the Maintenance
Agreement SCHEDULE 3-B attached thereto., exclusive of any Updates
and Upgrades of the Tumbleweed Plug-ins.
8.3. Bitstream shall provide reasonable technical support, at its own
expense, to its OEMs, End Users and Resellers using the Product(s).
Specific support services, processes and definitions are outlined in
Exhibit D which shall be defined and mutually agreed upon by July 1,
1996.
------------
* Certain confidential information has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a Request for
Confidential Treatment.
4
<PAGE> 5
9. TERM AND TERMINATION
9.1. This Agreement shall remain in effect from the date of execution, as
first set forth above, and run for a period of three years or until
June 10, 1999, unless first terminated in accordance with either
Section 9.2 or 9.3, or by either party upon thirty (30) days'
written notice. The term may extend an additional twelve (12) months
thereafter in the event that both parties voluntarily agree IN
WRITING to do so. The parties also may choose to enter into a new
agreement that supersedes this one.
9.2. If either party fails to comply with a material term or condition of
this Agreement, the complying party shall give the defaulting party
written notice of such failure. The defaulting party shall have
thirty (30) days after the receipt of notice to cure any indicated
failure. If the failure is not cured within that time, this
Agreement may be terminated, without further delay, by the complying
party sending written notice to the defaulting party. The parties do
not intend that the Agreement may be terminated for minimal or
technical breaches.
9.3. Either party may terminate immediately the license granted in this
Agreement by sending written notice to the other if (a) a receiver
is appointed to take possession of all or substantially all of the
assets of the other party; (b) the other party makes a general
assignment for the benefit of creditors; (c) the other party takes
or suffers any action under any insolvency or bankruptcy act; (d)
the other party sells all or substantially all of its assets,
liquidates or dissolves; or (e) the other party breaches any
provision regarding confidentiality or attempts to convey any
interest in any Product(s) or other property licensed or supplied
hereunder, other than as permitted under the terms of this
Agreement.
9.4. Upon termination of this Agreement by either party under Section 9.2
or 9.3, Bitstream shall, at its option, either return or destroy all
Products, Derivative Works and all copies thereof, in part or in
whole, and in all forms of media. Bitstream shall promptly submit an
affidavit signed by an officer of the respective company that
attests to the destruction of the materials.
9.5. Sections 1, 3, 7, 9, 10, 11 and 12 shall survive termination of this
Agreement.
9.6. Upon Termination any outstanding royalties associated with this
agreement will be paid in accordance with section 4 of this
agreement.
10. WARRANTIES AND OTHER REPRESENTATIONS
10.1. Tumbleweed warrants that its Products, as originally delivered and
unaltered, will materially perform in accordance with its published
specifications.
10.2. Tumbleweed's exclusive remedy for breach of the warranty in Section
12.1 below shall be to report such breach in writing within thirty
(30) days after delivery, and return the Products. Upon receipt of
such report, either party shall do one of the following at its sole
option: (a) use reasonable efforts to correct such errors and
provide the other with corrected Products; or (b) replace the
Products with other materials that are similar in function.
Tumbleweed does not warrant the results of its correction services.
10.3. Each party warrants that it has the right to enter into this
Agreement, and that Tumbleweed owns and has the right to license
the products developed hereunder in EXHIBIT A-1.
11. INFRINGEMENT
Tumbleweed (the "defending party") will defend Bitstream (the
"nondefending party") against any action at its own expense and pay
the costs and damages awarded against the nondefending party or its
customer as a result of any action (and all prior related claims)
alleging that such nondefending party's or its customer's use or
sublicensing of the Products licensed hereunder (the Tumbleweed
Products) infringes a patent, copyright, trademark, or other
intellectual property right, provided that the defending party is
notified promptly of such action, and that it shall enjoy sole
control of its defense, and of all negotiations for its settlement
or compromise. The nondefending party shall, at any time, enjoy the
right to participate in the defense of such action at its own
expense. If a final injunction is
5
<PAGE> 6
obtained in such action against the nondefending party's or its
customers' use of the Product(s) or, if in the reasonable opinion of
the nondefending party, the Product(s) is likely to become the
subject of a claim of infringement, the defending party will at its
option and expense either (i) procure for the nondefending party or
its customer the right to continue to use the product; or (ii)
replace or modify the product so that it becomes non-infringing; or
if neither (i) of (ii) above proves practical, terminate this
Agreement without liability to the defending party, except that
these indemnification obligations shall survive.
12. DISCLAIMER AND LIMITATION OF LIABILITY
12.1 Except as expressly stated in Section 10 above, EACH PARTY DISCLAIMS
ALL OTHER WARRANTIES EXPRESS AND IMPLIED, INCLUDING WITHOUT
LIMITATION THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR
A PARTICULAR PURPOSE. No representation or other affirmation of
fact, including but not limited to statements regarding capacity,
quality, suitability for use or performance, whether made by a
party's employees or otherwise, shall be deemed a warranty by that
party for any purpose or give rise to any liability of that party
whatsoever unless contained in this Agreement.
12.2 IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR INCIDENTAL, INDIRECT,
SPECIAL OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES WHATSOEVER RESULTING
FROM LOSS OF USE, DATA OR PROFITS, ARISING OUT OF OR IN CONNECTION
WITH THIS AGREEMENT OR THE USE OR PERFORMANCE OF THE PRODUCT(S) OR
THE BITSTREAM PRODUCTS, WHETHER IN AN ACTION OF CONTRACT OR TORT
INCLUDING BUT NOT LIMITED TO NEGLIGENCE.
13. GENERAL
13.1. Amendment. This Agreement may be modified, changed or amended only
in a writing signed by both parties. No employee of either party
other than an authorized officer of that party shall have any actual
or apparent authority to modify the terms of this Agreement.
13.2. No Waiver. No delay or failure of any party to exercise any right
provided herein shall in any way affect its right to enforce that
right or any other right under this Agreement at a later time. No
waiver shall be effective unless in writing signed by the waiving
party.
13.3. Severability. If any provision of this Agreement is declared invalid
by any lawful tribunal, then it shall be adjusted to conform to
legal requirements of that tribunal and that modification shall
automatically become a part of the Agreement. Or, if no adjustment
can be made, the provision shall be deleted as though never included
in the Agreement and its remaining provisions shall remain in full
force and effect.
13.4. No Partnership or Agency. Bitstream and Tumbleweed are independent
contractors, and neither party shall be, nor represent itself to be,
the joint venturer, franchiser, franchisee, partner, broker,
employee, or servant of the other party for any purpose. Neither
party shall be responsible for the acts or omissions of the other,
and neither party shall bear authority to make any representation or
incur any obligation on behalf of the other party unless expressly
authorized herein.
13.5. No Assignment. Neither this Agreement nor individual transactions
nor rights under it shall be assigned nor shall any obligation be
delegated by either party without the prior written consent of the
other. Any such attempted assignment or delegation without such
prior written approval shall be void. In the event of a sale of all
or substantially all of either party's assets, such approval shall
not be unreasonably withheld by the other party.
6
<PAGE> 7
13.6. Force Majeure. Neither party will be liable for any failure or delay
in performance due, in whole or in part, to any cause beyond its
reasonable control.
13.7. Notices. Any notice under this Agreement shall be effective upon
initial receipt by the addressee regardless of whether notice is
rejected if in writing, signed by an authorized representative of
the noticing party, and sent by registered or certified mail, return
receipt requested, postage prepaid to the recipient's address as
stated at the beginning of this Agreement or as updated by either
party from time to time. Each notice shall be effective upon initial
receipt by the addressee regardless of whether notice is rejected.
13.8. Limitation of Actions. No action, regardless of form, may be brought
by either party more than twelve (12) months after the cause of
action has arisen, except that an action for non-payment may be
brought within twelve (12) months of the last payment, and either
party may bring an action relating to its intellectual property
rights at any time.
13.9 Governing Law. This Agreement, all Exhibits and amendments hereto
and all purchase orders issued hereunder, shall be governed in all
respects by the laws of the Commonwealth of Massachusetts, United
States, excluding its conflict of laws rules.
13.10. Entire Agreement. This Agreement and its Exhibits constitute the
complete and exclusive statement of the agreement between the
parties and supersede all prior oral and written agreements,
communications, representations, statements, negotiations and
undertakings relating to the subject matter herein.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives as of the date first set forth above.
BITSTREAM INC. TUMBLEWEED SOFTWARE CORPORATION
By: /s/ C. Ray Boelig By: /s/ Jeff Smith
------------------------------ ----------------------------------
Print Name: C. Ray Boelig Print Name: Jeff Smith
Title: President & CEO Title: President
Date: June 10, 1996 Date: June 11, 1996
---------------------------- ---------------------------------
7
<PAGE> 8
EXHIBIT A-1
BITSTREAM INC. & TUMBLEWEED SOFTWARE CORPORATION
JOINT DEVELOPERS AGREEMENT FOR
SALES, LICENSING, AND MARKETING OF
TUMBLEWEED'S PUBLISHING ESSENTIALS AND COMPONENTS
DATED JUNE 10, 1996
This EXHIBIT A-1 is effective as of the 10th day of June 1996 and is part of and
shall be governed by the License Agreement made effective on June 10, 1996 by
and between BITSTREAM INC. ("Bitstream") and TUMBLEWEED SOFTWARE CORPORATION
("Tumbleweed"). The products listed below are owned and developed by Tumbleweed
and licensed by Tumbleweed to Bitstream under the terms and conditions of the
License Agreement referenced above. Additional products may or will be released
periodically by Tumbleweed and such products will be made available to Bitstream
at the sole discretion of Tumbleweed.
i. "Publishing Essentials" is an integrated collection of publishing tools
incorporating Novell's Envoy and items (ii) through (vii) below;
ii. "Tumbleweed Publisher" generates collections of Envoy documents with a
single click. It provides batch conversion of PostScript, Encapsulated
PostScript, Acrobat PDF, and any other file format associated with a
printing application and enables publishers to embed any Type 1 PostScript
or TrueType font with minimal impact on file size;
iii. "Link Builder" suggests and generates hypertext link sources and
destinations to help automate the process of setting up links within and
between documents;
iv. "Outline Builder" cross-documents a hierarchical outline view, employing
user defined templates to automatically construct an outline view from
multiple documents;
v. "Rich Text Index Builder" builds full text indexes that incorporate both
the text content and formatting of Envoy documents. RTR indexes are fast,
small and optimized to take advantage of the unique properties of portable
documents;
vi. "Envoy Distributable Viewer" is any enhanced Envoy viewer that supports
advanced font embedding and navigation features provided by the Tumbleweed
Publishing Essentials;
vii. "Tumbleweed Viewer Extensions, Workgroup 10-Pack" are end user viewing
components that add functionality to Novell's Envoy Viewer. Enhanced
viewer features include the Rich Text Retrieval client search engine,
cross-document hypertext capabilities, and a presentation mode for slide
shows. The package includes a ten-user license for the Tumbleweed Viewer
Extensions, so that a workgroup can navigate Envoy document collections.
viii. "Tumbleweed Plug-ins" provide direct compatibility for viewing Envoy
documents within Internet web browser products that support Netscape's
plug-in interfaces.
8
<PAGE> 9
ix. Tumbleweed Extensions include "Pages, Presentation, Outline Viewer, RTR
Search, Web Linking, Hyper-Command Linking, Cross Document Hypertext".
x. Tumbleweed Freely Distributable Extensions include "Document Information,
Cross Document Hypertext (Run Time Only), Hyper Command Linking (Run Time
Only), Web Linking (Run Time Only)."
BITSTREAM INC. TUMBLEWEED SOFTWARE CORPORATION
By: /s/ C. Ray Boelig By: /s/ Jeff Smith
---------------------------------- --------------------------------
Print Name: C. Ray Boelig Print Name: Jeff Smith
Title: President & CEO Title: President
9
<PAGE> 10
EXHIBIT B-1
Bitstream Inc. & Tumbleweed Software Corporation
Joint Developers' Agreement for Sales, Licensing and Marketing of
Tumbleweed's Publishing Essentials and Components
PAYMENT--COMPONENT SOFTWARE
This EXHIBIT B-1 is effective as of the 10th of June 1996 and is part of and
shall be governed by the License Agreement made effective on June 10th, 1996 by
and between TUMBLEWEED SOFTWARE CORPORATION ("Tumbleweed") and BITSTREAM INC.
("Bitstream").
1. ACCESS FEES FOR COMPONENT SOFTWARE TO OEMS
<TABLE>
The access fee due according to Section 4 of the Agreement by OEMs for
Component Software, which shall be due and payable to Bitstream within thirty
(30) days of delivery of the Component Software, is as follows: (See $Unit
Price in 3. Below)
<S> <C>
PostScript Converter [*]
PDF Converter [*]
Rich Text Retrieval Indexing Engine [*]
Rich Test Retrieval Search Engine [*]
</TABLE>
1.A. Upon consummation of this agreement Bitstream agrees to pay Tumbleweed
[*] which will be credited against future royalties due to Tumbleweed at a rate
of [*]. Should this agreement be terminated by Tumbleweed, the balance of the
unused credit will be returned to Bitstream within 60 days of said termination.
No repayment shall be due as a result of a termination by Bitstream. Payment to
Tumbleweed will be made in accordance with the following schedule: [*] upon
contract signing, [*] upon completion of liquidity event scheduled to occur
prior to July 31, 1996.
1.B. Bitstream agrees to pay to Tumbleweed a [*] royalty on revenues generated
from OEM sales of the Envoy SDK. Bitstream and Tumbleweed will attempt to gain
additional royalty relief from Novell. In addition, any royalty relief gained
from Novell by Bitstream up to and including [*] will be paid to
Tumbleweed, providing:
1) that Novell states in writing that no royalty is being provided to
Tumbleweed;
2) if Tumbleweed receives royalty relief of [*] or more from
Novell, then Bitstream's sole obligation will be a [*] royalty on
revenue generated.
Any relief in excess of [*] will be retained by Bitstream.
2. SHIPPING CHARGES
Licensee shall be responsible for the payment of the freight charges. All
purchase orders shall state F.O.B. Bitstream Inc.
3. ROYALTY RATES FOR COMPONENT SOFTWARE TO OEMS
The Tumbleweed OEM products may be licensed to Envoy API customers under the
following minimum pricing guidelines. For OEM opportunities that fall outside of
these guidelines, Tumbleweed will work with Bitstream to provide an RFQ on a
deal-by-deal basis.
- ----------
* Certain confidential information has been omitted and filed separately with
the Securities and Exchange Commission pursuant to a Request for Confidential
Treatment.
10
<PAGE> 11
<TABLE>
POSTSCRIPT CONVERTER
- -------------------------------------------------------------------------
<CAPTION>
Tumbleweed Revenue Minimum Payment To
Share Tumbleweed
- -------------------------------------------------------------------------
<S> <C> <C>
Access Fee [*] [*]
- -------------------------------------------------------------------------
Annual Product Volume:
- -------------------------------------------------------------------------
[*] [*] [*]
- -------------------------------------------------------------------------
[*] [*] [*]
- -------------------------------------------------------------------------
[*] [*] [*]
- -------------------------------------------------------------------------
[*] [*] [*]
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
PDF CONVERTER
- -------------------------------------------------------------------------
<CAPTION>
Tumbleweed Royalty Minimum Payment To
Tumbleweed
- -------------------------------------------------------------------------
<S> <C> <C>
Access Fee [*] [*]
- -------------------------------------------------------------------------
Annual Product Volume:
- -------------------------------------------------------------------------
[*] [*] [*]
- -------------------------------------------------------------------------
[*] [*] [*]
- -------------------------------------------------------------------------
[*] [*] [*]
- -------------------------------------------------------------------------
[*] [*] [*]
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
RICH TEXT RETRIEVAL INDEXING ENGINE
- -------------------------------------------------------------------------
<CAPTION>
Tumbleweed Royalty Minimum Payment To
Tumbleweed
- -------------------------------------------------------------------------
<S> <C> <C>
Access Fee [*] [*]
- -------------------------------------------------------------------------
Annual Product Volume:
- -------------------------------------------------------------------------
[*] [*] [*]
- -------------------------------------------------------------------------
[*] [*] [*]
- -------------------------------------------------------------------------
[*] [*] [*]
- -------------------------------------------------------------------------
[*] [*] [*]
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
RICH TEXT RETRIEVAL SEARCH ENGINE
- -------------------------------------------------------------------------
<CAPTION>
Tumbleweed Royalty MINIMUM PAYMENT TO
TUMBLEWEED
- -------------------------------------------------------------------------
<S> <C> <C>
Access Fee [*] [*]
- -------------------------------------------------------------------------
Annual Product Volume:
- -------------------------------------------------------------------------
[*] [*] [*]
- -------------------------------------------------------------------------
[*] [*] [*]
- -------------------------------------------------------------------------
[*] [*] [*]
- -------------------------------------------------------------------------
[*] [*] [*]
- -------------------------------------------------------------------------
</TABLE>
- ------------
* Certain confidential information has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a Request for
Confidential Treatment.
11
<PAGE> 12
<TABLE>
TUMBLEWEED PLUG-INS VERSION 1.0
- -------------------------------------------------------------------------
<CAPTION>
Tumbleweed Royalty Minimum Payment To
Tumbleweed
- -------------------------------------------------------------------------
<S> <C> <C>
OEM [*] [*]
- -------------------------------------------------------------------------
RETAIL VERSION [*] [*]
- -------------------------------------------------------------------------
FUTURE VERSION [*] [*]
- -------------------------------------------------------------------------
</TABLE>
4. PAYMENT OF ROYALTIES TO TUMBLEWEED SOFTWARE
Bitstream Inc. will pay to Tumbleweed Software a [*] royalty on the OEM
components outlined in EXHIBIT A-1 and in Section 3 of this EXHIBIT B-1.
Royalties will be reported and paid to Tumbleweed Software as specified in
Section 4 of the Agreement.
BITSTREAM INC. TUMBLEWEED SOFTWARE CORPORATION
By: /s/ C. Ray Boelig By: /s/ Jeff Smith
------------------------------- ------------------------------
Print Name: C. Ray Boelig Print Name: Jeff Smith
Title: President & CEO Title: President
- ------------
* Certain confidential information has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a Request for
Confidential Treatment.
12
<PAGE> 13
EXHIBIT B-2
Bitstream Inc. & Tumbleweed Software Corporation
Joint Developers' Agreement for Sales, Licensing and Marketing of
Tumbleweed's Publishing Essentials and Components
PAYMENT
This EXHIBIT B-2 is effective as of the 10th of June 1996 and is part of and
shall be governed by the License Agreement made effective on June 10, 1996 by
and between TUMBLEWEED SOFTWARE CORPORATION ("Tumbleweed") and BITSTREAM INC.
("Bitstream").
1. PER COPY FEE/UNIT FEE
The per copy fee due according to Section 4 of the Agreement which shall be due
and payable to Tumbleweed (less Bitstream's agreed upon percentage):
o Tumbleweed Publishing Essentials Software SRP: [*]
o Tumbleweed Publisher Software SRP: [*]
2. SHIPPING CHARGES
Licensee shall be responsible for the payment of the freight charges. All
purchase orders shall state F.O.B. Bitstream Inc.
3. VOLUME DISCOUNT RATES FOR PUBLISHING ESSENTIALS AND TUMBLEWEED PUBLISHER
The Tumbleweed Products may be licensed on a world-wide basis to End Users,
Corporate Accounts and Resellers.
<TABLE>
a. TUMBLEWEED PUBLISHING ESSENTIALS: CORPORATE ACCOUNTS
- -------------------------------------------------------------------------
<CAPTION>
Minimum Payment
Quantity SRP Maximum Discount To Tumbleweed
- -------------------------------------------------------------------------
<C> <C> <C> <C>
[*] [*] [*] [*]
- -------------------------------------------------------------------------
[*] [*] [*] [*]
- -------------------------------------------------------------------------
[*] [*] [*] [*]
- -------------------------------------------------------------------------
[*] [*] [*] [*]
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
b. TUMBLEWEED PUBLISHER: CORPORATE ACCOUNTS
- -------------------------------------------------------------------------
<CAPTION>
Minimum Payment
Quantity SRP Maximum Discount To Tumbleweed
- -------------------------------------------------------------------------
<C> <C> <C> <C>
[*] [*] [*] [*]
- -------------------------------------------------------------------------
[*] [*] [*] [*]
- -------------------------------------------------------------------------
[*] [*] [*] [*]
- -------------------------------------------------------------------------
[*] [*] [*] [*]
- -------------------------------------------------------------------------
</TABLE>
- ------------
* Certain confidential information has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a Request for
Confidential Treatment.
13
<PAGE> 14
<TABLE>
C. TUMBLEWEED PUBLISHING ESSENTIALS AND PUBLISHER: RESELLERS
<CAPTION>
- -------------------------------------------------------------------------
Minimum Transfer Minimum Payment
Product Price To Reseller SRP To Tumbleweed
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Publishing [*] [*] [*]
Essentials
- -------------------------------------------------------------------------
Publisher [*] [*] [*]
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
D. TUMBLEWEED PUBLISHING ESSENTIALS AND PUBLISHER: END-USERS
<CAPTION>
-------------------------------------------------------
Payment To
Product SRP Tumbleweed
-------------------------------------------------------
<S> <C> <C>
Publishing [*] [*]
Essentials
-------------------------------------------------------
Publisher [*] [*]
-------------------------------------------------------
</TABLE>
Tumbleweed Viewer Extensions as defined in EXHIBIT A-1 will be made available to
Bitstream for inclusion with the Envoy stand alone product at a rate of [*] of
Bitstream's revenue The freely distributable Extensions will be made available
to Bitstream for inclusion with the Envoy stand alone viewer at a fixed rate of
[*] per unit shipped. Both the Tumbleweed Viewer Extensions and the freely
distributable Extensions will be made available to OEM's via [*].
4. PAYMENT OF ROYALTIES TO TUMBLEWEED SOFTWARE
Bitstream Inc. shall pay to Tumbleweed Software the Royalties for Products
referenced in EXHIBIT A-1 in the amount specified within Section 3 of this
EXHIBIT B-2. Royalties will be reported and paid to Tumbleweed Software as
specified in Section 4 of the Agreement.
BITSTREAM INC. TUMBLEWEED SOFTWARE CORPORATION
By: /s/ C. Ray Boelig By: /s/ Jeff Smith
------------------------------- ------------------------------
Print Name: C. Ray Boelig Print Name: Jeff Smith
Title: President & CEO Title: President
- ------------
* Certain confidential information has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a Request for
Confidential Treatment.
14
<PAGE> 15
EXHIBIT B-3
Bitstream Inc. & Tumbleweed Software Corporation
Joint Developers' Agreement for Sales, Licensing and Marketing of
Tumbleweed's Publishing Essentials and Components
COMPONENT SOFTWARE MAINTENANCE
This EXHIBIT B-3 is effective as of the 10th of June 1996 and is part of and
shall be governed by the License Agreement made effective on June 10, 1996 by
and between TUMBLEWEED SOFTWARE CORPORATION ("Tumbleweed") and BITSTREAM INC.
("Bitstream").
1. LICENSED PRODUCT(S)
o PostScript Converter and/or PDF Converter
o Rich Text Retrieval Indexing and/or Search Engine
2. MAINTENANCE FEE
Bitstream shall provide Licensee with maintenance of the Licensed Product(s)
under the terms and conditions stated on the attached SCHEDULE 3-B, in return
for an annual maintenance fee of [*] per Licensed Product(s).
<TABLE>
3. ROYALTY RATES FOR MAINTENANCE OF COMPONENTS
<CAPTION>
---------------------------------------------------------------
Product Maintenance Fee Royalty To Tumbleweed
---------------------------------------------------------------
<S> <C> <C>
PostScript Converter [*] [*]
---------------------------------------------------------------
PDF Converter [*] [*]
---------------------------------------------------------------
Rich Text Retrieval [*] [*]
Indexing
---------------------------------------------------------------
Rich Text Retrieval [*] [*]
Search Engine
---------------------------------------------------------------
</TABLE>
4. PAYMENT OF MAINTENANCE ROYALTIES TO TUMBLEWEED SOFTWARE FOR COMPONENTS
Bitstream Inc. will pay to Tumbleweed Software the Maintenance Royalties on
the products in EXHIBIT A-1 and within Section 3 of this EXHIBIT B-3.
Royalties will be reported and paid to Tumbleweed Software as specified in
Section 4 of the Agreement.
BITSTREAM INC. TUMBLEWEED SOFTWARE CORPORATION
By: /s/ C. Ray Boelig By: /s/ Jeff Smith
------------------------------- ------------------------------
Print Name: C. Ray Boelig Print Name: Jeff Smith
Title: President & CEO Title: President
- ----------
* Certain confidential information has been omitted and filed separately with
the Securities and Exchange Commission pursuant to a Request for Confidential
Treatment.
15
<PAGE> 16
SCHEDULE 3-B
Bitstream Inc. & Tumbleweed Software Corporation
Joint Developers' Agreement for Sales, Licensing and Marketing of
Tumbleweed's Publishing Essentials and Components
COMPONENT SOFTWARE
MAINTENANCE AGREEMENT--TERMS AND CONDITIONS
1. DEFINITIONS
1.1 "Updates" are new revisions of the Licensed Source Code that improve
functionality and that Bitstream designates by decimal "Version" numbers.
1.2 "Upgrades" are new releases of the Licensed Source Code bearing higher
Bitstream Version integers and that generally expand the capability of the
upgraded product.
2. TERM
This Maintenance Agreement shall begin as of the effective date of this
Agreement and continue for a term of one year. Licensee will be charged the
appropriate amount as designated in EXHIBIT B-3, Section 2. Thereafter, the
Agreement Term shall renew automatically for successive one year periods unless
and until terminated pursuant to Section 3. hereof.
3. SERVICE FEES
3.1 Annual Service Fee. Licensee may elect to pay Bitstream to extend the term
of this Agreement past the initial period in return for payment of an annual
service fee, paid at the start of any applicable term, for each of the Licensed
Products covered by this Agreement.
3.2 Fee Amount. The initial fee amount is stated in EXHIBIT B-3, to which this
schedule is attached, and the full rate shall be payable each successive twelve
(12) month period thereafter. 3.3 Timing of Renewals. Payment of the annual
renewal fees shall be billable by Bitstream thirty (30) days prior to the
anniversary of the effective date each year.
4. MAINTENANCE SERVICES
4.1 Services Provided. Bitstream shall provide Licensee with the following
services during the term, or any renewal term, of this Agreement for each of the
Licensed Products covered under this Agreement:
4.1.1 Priority One telephone and fax diagnostics and assistance (Tel:
617-497-6222; Fax: 617/868-0784 within Massachusetts) during normal, weekday
business hours, excluding all holidays observed by Bitstream, to correct
programming errors in the Licensed Products or defects that prevent the Licensed
Products from operating in accordance with the Documentation;
4.1.2 Delivery of new Updates upon their release;
4.1.3 Delivery of new Upgrades upon their release; and
4.1.4 One day on-site training at Bitstream for Licensed Source Code Product at
Licensee's expense.
4.2 Promptness of Responses. Bitstream shall use commercially reasonable efforts
to respond promptly to any reasonable service request by Licensee, but shall
determine solely the timing of its Update or Upgrade deliveries.
BITSTREAM INC.
By: /s/ C. Ray Boelig
-------------------------------
Print Name: C. Ray Boelig
Title: President & CEO
16
<PAGE> 17
EXHIBIT C-1
Bitstream Inc. & Tumbleweed Software Corporation
Joint Developers' Agreement for Sales, Licensing and Marketing of
Tumbleweed's Publishing Essentials and Components
TRADEMARK USE GUIDELINES
Please include the appropriate[Trademark] or [Registered Trademark]
symbol after the first use, along with the corresponding noun. Thereafter, the
noun should appear frequently with the trademark. The following nouns are only
suggestions; there may be other words that are equally appropriate. Do not use
trademarks as nouns; trademarks are adjectives. Appropriate uses of trademarks
identify products originating with Bitstream:
TRADE v. COMPANY NAME
o Bitstream Inc. [the company - no attribution]
o Bitstream's products [no attribution]
o Bitstream[Registered Trademark] product(s)
SOFTWARE
o Bitstream[Registered Trademark] FaceLift[Trademark]
o Bitstream[Registered Trademark] 4-in-1/TrueDoc[Registered Trademark]
Printing system
o Bitstream[Registered Trademark]TrueDoc[Registered Trademark]
o TrueDoc[Registered Trademark] PFR
o Bitstream[Registered Trademark] Font Select[Trademark]
o Bitstream[Registered Trademark] Speedo[Trademark]
TYPEFACES
Bitstream[Registered Trademark] Amerigo[Trademark]
Bitstream[Registered Trademark] Arrus[Trademark]
Bitstream[Registered Trademark] Bremen[Trademark]
Bitstream[Registered Trademark] Carmina[Trademark]
Bitstream[Registered Trademark] Cataneo[Trademark]
Bitstream[Registered Trademark] Chianti[Trademark]
Bitstream[Registered Trademark] Cooper[Trademark]
Bitstream[Registered Trademark] Iowan[Trademark] Oldstyle
Bitstream[Registered Trademark] Mister Earl[Trademark]
Bitstream[Registered Trademark] Oranda[Trademark]
Bitstream[Registered Trademark] Oz Handicraft[Trademark]
Bitstream[Registered Trademark] Snowcap[Trademark]
Dutch[Trademark]
Hammersmith[Trademark]
Mermaid[Trademark]
Old Dreadful No. 7[Trademark]
Provence[Trademark]
Slate[Trademark]
Swiss[Trademark]
Zurich[Trademark]
Tumbleweed[Registered Trademark]
Tumbleweed Publishing Essentials[Trademark]
Tumbleweed Publisher[Trademark]
Tumbleweed Rich Text Retrieval[Trademark]
SAMPLE ATTRIBUTION PARAGRAPH FOR TRADEMARKS:
Bitstream Amerigo, Bitstream Carmina, Bitstream Charter and Fontware are
registered trademarks and Speedo and Bitstream FaceLift are trademarks of
Bitstream Inc. The trademark Fontware is licensed to Bitstream Inc. in West
Germany, France and the United Kingdom by Electronic Printing Systems, Ltd.
17
<PAGE> 1
EXHIBIT 10.9
INDEMNIFICATION AGREEMENT
This agreement, made and entered into this ____ day of _______, 1996
("Agreement"), by and between Bitstream Inc., a Delaware corporation (the
"Corporation"), and ______________ ("Indemnitee"):
RECITALS
--------
WHEREAS, highly competent persons are becoming more reluctant to serve as
directors, officers or in other capacities unless they are provided with
adequate protection through insurance or adequate indemnification against
inordinate risks of claims and actions against them arising out of their service
to and activities on behalf of the Corporation; and
WHEREAS, the current difficulty of obtaining adequate insurance and the
uncertainties relating to indemnification have increased the difficulty of
attracting and retaining such persons; and
WHEREAS, the Board of Directors of the Corporation has determined that the
inability to attract and retain such persons is detrimental to the best
interests of the Corporation's stockholders and that the Corporation should act
to assure such persons that there will be increased certainty of such protection
in the future; and
WHEREAS, it is reasonable, prudent and necessary for the Corporation
contractually to obligate itself to indemnify such persons to the fullest extent
permitted by applicable law so that they will serve or continue to serve the
Corporation free from undue concern that they will not be so indemnified; and
WHEREAS, Indemnitee is willing to serve, continue to serve and to take on
additional service for or on behalf of the Corporation on the condition that
Indemnitee be so indemnified;
NOW, THEREFORE, in consideration of the premises and the covenants
contained herein, the Corporation and Indemnitee do hereby covenant and agree as
follows:
ARTICLE I
Definitions
-----------
For purposes of this Agreement, the following terms shall have the meaning
given here:
1.01 "Board" means the Board of Directors of the Corporation.
<PAGE> 2
1.02 "Change in Control" means a change in control of the Corporation
occurring after the Effective Date (as defined herein) of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of Regulation
14A (or in response to any similar item on any similar schedule or form)
promulgated under the Securities Exchange Act of 1934 (the "Act"), whether or
not the Corporation is then subject to such reporting requirement; provided,
however, that, without limitation, such a Change in Control shall be deemed to
have occurred if after the Effective Date (i) any "person" (as such term is used
in Sections 13(d) and 14(d) of the Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Act), directly or indirectly, of securities of
the Corporation representing 20% or more of the combined voting power of the
Corporation's then outstanding securities without the prior approval of at
least two-thirds of the members of the Board in office immediately prior to such
person attaining such percentage interest; (ii) the Corporation is a party to a
merger, consolidation, sale of assets or other reorganization, or a proxy
contest, as a consequence of which members of the Board in office immediately
prior to such transaction or event constitute less than a majority of the Board
thereafter; or (iii) during any period of two consecutive years, individuals who
at the beginning of such period constituted the Board (including for this
purpose any new director whose election or nomination for election by the Corpo-
ration's stockholders was approved by a vote of at least two-thirds of the
directors then still in office who were directors at the beginning of such
period) cease for any reason to constitute at least a majority of the Board.
1.03 "Corporate Status" describes the status of a person who is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation, as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
enterprise.
1.04 "Disinterested Director" means a director of the Corporation who is
not a party to, as of any time of determination thereof, the Proceeding (as
defined herein) in respect of which indemnification is sought by the Indemnitee.
1.05 "Effective Date" means the date a registration statement filed with
the Securities and Exchange Commission pursuant to the Securities Act of 1933,
as amended, registering securities issued by the Corporation, is effective.
1.06 "Enterprise" shall mean the Corporation and any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise of
which Indemnitee is or was serving at the request of the Corporation as a
director, officer, employee or agent.
-2-
<PAGE> 3
1.07 "Expenses" shall include but not be limited to all reasonable
attorneys' fees, retainers, court costs, transcript costs, fees of experts,
witness fees, travel expenses, duplicating costs, printing and binding costs,
telephone charges, postage, delivery service fees, and all other disbursements
or expenses of the types actually and reasonably incurred by him in connection
with prosecuting, defending, preparing to prosecute or defend, investigating, or
being or preparing to be a witness in a Proceeding.
1.08 "Good Faith" shall mean Indemnitee having acted in good faith and in a
manner Indemnitee reasonably believed to be in, or not opposed to, the best
interests of the Corporation, and, with respect to any criminal Proceeding,
having had no reasonable cause to believe Indemnitee's conduct was unlawful.
1.09 "Independent Counsel" means a law firm, or a member of a law firm,
that is experienced in matters of corporate law and neither presently is, nor in
the past five years has been, retained to represent: (i) the Corporation or
Indemnitee in any matter material to either such party, or (ii) any other party
to the Proceeding giving rise to a claim for indemnification hereunder.
Notwithstanding the foregoing, the term "Independent Counsel" shall not include
any person who, under the applicable standards of professional conduct then
prevailing, would have a conflict of interest in representing either the
Corporation or Indemnitee in an action to determine Indemnitee's rights under
this Agreement.
1.10 "Proceeding" includes any threatened, pending or completed action,
suit, arbitration, alternate dispute resolution mechanism, investigation,
administrative hearing or any other threatened, pending or completed proceeding
whether civil, criminal, administrative or investigative, other than one
initiated by Indemnitee. For purposes of the foregoing sentence, a "Proceeding"
shall not be deemed to have been initiated by Indemnitee where Indemnitee seeks
pursuant to Article VIII of this Agreement to enforce Indemnitee's rights under
this Agreement or his rights to indemnification under the certificate of
incorporation or bylaws of the Corporation or Delaware law, or were Indemnitee
seeks to enforce any rights he may have under any directors' and officers'
liability insurance policy maintained by the Corporation.
ARTICLE II
Term of Agreement
-----------------
This Agreement shall continue until and terminate upon the later of: (i) 10
years after the date that Indemnitee shall have ceased to serve as a director,
officer, employee and/or agent of the Enterprise; or (ii) the final termination
of all
-3-
<PAGE> 4
Proceedings commenced prior to the date referred to in (i) above in respect of
which Indemnitee is granted rights of indemnification or advancement of Expenses
hereunder and of any Proceeding commenced by Indemnitee pursuant to Article VIII
of this Agreement relating thereto.
ARTICLE III
Services by Indemnitee, Notice of Proceedings
---------------------------------------------
3.01 SERVICES. Indemnitee agrees to serve as a director and/or officer of
the Corporation. Indemnitee may at any time and for any reason resign from such
position.
3.02 NOTICE OF PROCEEDING. Indemnitee agrees promptly to notify the
Corporation in writing upon being served with any summons, citation, subpoena,
complaint, indictment, information or other document relating to any Proceeding
or matter which may be subject to indemnification or advancement of Expenses
covered hereunder.
ARTICLE IV
Indemnification
---------------
4.01 IN GENERAL. In connection with any Proceeding, the Corporation shall
indemnify, and advance Expenses to, Indemnitee as provided in this Agreement
and to the fullest extent permitted by applicable law in effect on the date
hereof and to such greater extent as applicable law may thereafter from time to
time permit.
4.02 PROCEEDINGS OTHER THAN PROCEEDINGS BY OR IN THE RIGHT OF THE
CORPORATION. Indemnitee shall be entitled to the rights of indemnification
provided in this Section 4.02 if, by reason of Indemnitee's Corporate Status,
Indemnitee was or is, or is threatened to be made, a party to any Proceeding,
other than a Proceeding by or in the right of the Corporation. Indemnitee shall
be indemnified against Expenses, judgments, fines and amounts paid in settlement
actually and reasonably incurred by Indemnitee or on Indemnitee's behalf in
connection with such Proceeding or any claim, issue or matter therein, if
Indemnitee acted in Good Faith.
4.03 PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. Indemnitee shall be
entitled to the rights of indemnification provided in this Section 4.03 if, by
reason of Indemnitee's Corporate Status, Indemnitee was or is, or is threatened
to be made, a party to any Proceeding brought by or in the right of the
Corporation to procure a judgment in its favor. Indemnitee shall be indemnified
against Expenses, judgments, fines and amounts paid in settlement, actually and
reasonably incurred by Indemni-
-4-
<PAGE> 5
tee or on Indemnitee's behalf in connection with such Proceeding or any claim,
issue or matter therein, if Indemnitee acted in Good Faith. Notwithstanding the
foregoing, no such indemnification shall be made in respect of any claim, issue
or matter in such Proceeding as to which Indemnitee shall have been adjudged to
be liable to the Corporation, unless and only to the extent that the Court of
Chancery of the State of Delaware or the court in which such Proceeding shall
have been brought that, despite the adjudication of liability but in view of all
the circumstances of the case, the Indemnitee is fairly and reasonably entitled
to indemnity for such portion of the settled amount, Expenses, judgments, and
fines as such court deems proper.
4.04 INDEMNIFICATION FOR EXPENSES OF A WITNESS. Notwithstanding any other
provision of this Agreement, to the extent that Indemnitee is, by reason of
Indemnitee's Corporate Status, a witness in any Proceeding, Indemnitee shall be
indemnified against all Expenses actually and reasonably incurred by Indemnitee
or on Indemnitee's behalf in connection therewith.
ARTICLE V
Advancement of Expenses
-----------------------
Notwithstanding any provision to the contrary in Article VI, the
Corporation shall advance all reasonable Expenses which, by reason of
Indemnitee's Corporate Status, were charged to or incurred by or on behalf of
Indemnitee in connection with any Proceeding, within twenty days after the
receipt by the Corporation of a statement or statements from Indemnitee
requesting such advance or advances whether prior to or after final disposition
of such Proceeding. Such statement or statements shall reasonably evidence the
Expenses incurred by Indemnitee and shall include or be preceded or accompanied
by an undertaking by or on behalf of Indemnitee to repay any Expenses if it
shall ultimately be determined that Indemnitee is not entitled to be indemnified
against such Expenses.
ARTICLE VI
Procedures for Determination of
Entitlement to Indemnification
------------------------------
6.01 INITIAL REQUEST. To obtain indemnification under this Agreement,
Indemnitee shall submit to the Corporation a written request, including therein
or therewith such documentation and information as is reasonably available to
Indemnitee and is reasonably necessary to determine whether and to what extent
Indemnitee is entitled to indemnification. The Secretary of the Corporation
shall promptly advise the Board in writing that Indemnitee has requested
indemnification.
-5-
<PAGE> 6
6.02 METHOD OF DETERMINATION. A determination (if required by applicable
law) with respect to Indemnitee's entitlement to indemnification shall be made
by the Board by a majority vote of the Disinterested Directors (even though less
than a quorum). In the event that there are no Disinterested Directors, or if a
majority of the Disinterested Directors so directs, the determination shall be
made by Independent Counsel in a written opinion to the Board, a copy of which
shall be delivered to Indemnitee, or by the stockholders of the Corporation, as
determined by such quorum of Disinterested Directors or by a majority of the
Board, as the case may be. If a Change in Control has occurred and Indemnitee so
requests, the determination shall be made by Independent Counsel in a written
opinion to the Board, a copy of which shall be delivered to Indemnitee.
6.03 SELECTION, PAYMENT, DISCHARGE OF INDEPENDENT COUNSEL. In the event the
determination of entitlement to indemnification is to be made by Independent
Counsel pursuant to Section 6.02 of this Agreement, the Independent Counsel
shall be selected, paid, and discharged in the following manner:
(a) The Independent Counsel shall be selected by the Board,
and the Corporation shall give written notice to
Indemnitee advising Indemnitee of the identity of the
Independent Counsel so selected.
(b) Following the initial selection described in clause (a)
of this Section 6.03, Indemnitee may, within seven days
after such written notice of selection has been given,
deliver to the Corporation a written objection to such
selection. Such objection may be asserted only on the
ground that the Independent Counsel so selected does
not meet the requirements of "Independent Counsel" as
defined in Section 1.09 of this Agreement, and the
objection shall set forth with particularity the
factual basis of such assertion. Absent a proper and
timely objection, the person so selected shall act as
Independent Counsel. If such written objection is
made, the Independent Counsel so selected may not serve
as Independent Counsel unless and until a court has
determined that such objection is without merit or
Indemnitee has delivered a written withdrawal of such
objection to the Corporation.
(c) Either the Corporation or Indemnitee may petition the
Court of Chancery of the State of Delaware or other
court of competent ju-
-6-
<PAGE> 7
risdiction if the parties have been unable to agree on
the selection of Independent Counsel (if applicable)
within 20 days after submission by Indemnitee of a
written request for indemnification pursuant to Section
6.01 of this Agreement. Such petition may request a
determination whether an objection to the party's
selection is without merit and/or seek the appointment
as Independent Counsel of a person selected by the
Court or by such other person as the Court shall
designate. A person so appointed shall act as
Independent Counsel under Section 6.02 of this
Agreement.
(d) The Corporation shall pay any and all reasonable fees
and expenses of Independent Counsel incurred by such
Independent Counsel in connection with acting
pursuant to this Agreement, and the Corporation shall
pay all reasonable fees and expenses incident to the
procedures of this Section 6.03, regardless of the
manner in which such Independent Counsel was selected
or appointed.
6.04 Cooperation. Indemnitee shall cooperate with the person, persons or
entity making the determination with respect to Indemnitee's entitlement to
indemnification under this Agreement, including providing to such person,
persons or entity upon reasonable advance request any documentation or
information which is not privileged or otherwise protected from disclosure and
which is reasonably available to Indemnitee and reasonably necessary to such
determination. Any costs or expenses (including attorneys' fees and
disbursements) incurred by Indemnitee in so cooperating with the person, persons
or entity making such determination shall be borne by the Corporation
(irrespective of the determination as to Indemnitee's entitlement to
indemnification) and the Corporation hereby indemnifies and agrees to hold
Indemnitee harmless therefrom.
6.05 PAYMENT. If it is determined that Indemnitee is entitled to
indemnification, payment to Indemnitee shall be made within ten (10) days after
such determination.
ARTICLE VII
Presumptions and Effect of Certain Proceedings
----------------------------------------------
7.01 BURDEN OF PROOF. In making a determination with respect to entitlement
to indemnification hereunder, the person or persons or entity making such
determination shall presume that Indemnitee is entitled to indemnification under
this Agreement if Indemnitee has submitted a request for indemnification in
accor-
-7-
<PAGE> 8
dance with Section 6.01 of this Agreement, and the Corporation shall have the
burden of proof to overcome that presumption in connection with the making by
any person, persons or entity of any determination contrary to that presumption.
7.02 EFFECT OF OTHER PROCEEDINGS. The termination of any Proceeding or of
any claim, issue or matter therein, by judgment, order, settlement or
conviction, or upon a plea of nolo contendere or its equivalent, shall not
(except as otherwise expressly provided in this Agreement) of itself adversely
affect the right of Indemnitee to indemnification or create a presumption that
Indemnitee did not act in Good Faith.
7.03 RELIANCE AS SAFE HARBOR. For purposes of any determination of Good
Faith, Indemnitee shall be deemed to have acted in Good Faith if Indemnitee's
action is based on the records or books of account of the Enterprise, including
financial statements, or on information supplied to Indemnitee by the officers
of the Enterprise in the course of their duties, or on the advice of legal
counsel for the Enterprise or on information or records given or reports made to
the Enterprise by an independent certified public accountant or by an appraiser
or other expert selected with reasonable care by the Enterprise. The provisions
of this Section 7.03 shall not be deemed to be exclusive or to limit in any way
the other circumstances in which the Indemnitee may be deemed to have met the
applicable standard of conduct set forth in this Agreement.
7.04 ACTIONS OF OTHERS. The knowledge and/or actions, or failure to act, of
any director, officer, agent or employee of the Enterprise shall not be imputed
to Indemnitee for purposes of determining the right to indemnification under
this Agreement.
ARTICLE VIII
Remedies of Indemnitee
----------------------
8.01 APPLICATION. This Article VIII shall apply in the event of a Dispute.
For purposes of this Article, "Dispute", shall mean any of the following events:
(a) a determination is made pursuant to Article VI of this
Agreement that Indemnitee is not entitled to
indemnification under this Agreement;
(b) advancement of Expenses is not timely made pursuant to
Article V of this Agreement;
(c) the determination of entitlement to be made pursuant to
Section 6.02 of this Agreement had not been made within
60 days after re-
-8-
<PAGE> 9
ceipt by the Corporation of the request for
indemnification;
(d) payment of indemnification is not made pursuant to
Section 4.05 of this Agreement within ten (10) days
after receipt by the Corporation of written request
therefor; or
(e) payment of indemnification is not made within ten (10)
days after a determination has been made that
Indemnitee is entitled to indemnification pursuant to
Article VI of this Agreement.
8.02 ADJUDICATION. In the event of a Dispute, Indemnitee shall be
entitled to an adjudication in the Court of Chancery of the State of Delaware or
in any other court of competent jurisdiction, of Indemnitee's entitlement to
such indemnification and advancement of Expenses. Alternatively, Indemnitee, at
Indemnitee's option, may seek an award in arbitration to be conducted by a
single arbitrator sitting in Boston, Massachusetts, pursuant to the rules of the
American Arbitration Association. The Corporation shall not oppose Indemnitee's
right to seek any such adjudication or award in arbitration.
8.03 DE NOVO REVIEW. In the event that a determination shall have been made
pursuant to Article VI of this Agreement that Indemnitee is not entitled to
indemnification, any judicial proceeding or arbitration commenced pursuant to
this Article VIII shall be conducted in all respects as a de novo trial, or
arbitration, on the merits and Indemnitee shall not be prejudiced by reason of
that adverse determination. In any such proceeding or arbitration, the
Corporation shall have the burden of proving that Indemnitee is not entitled to
indemnification or advancement of Expenses, as the case may be.
8.04 CORPORATION BOUND. If a determination shall have been made pursuant to
Article VI of this Agreement that Indemnitee is entitled to indemnification, the
Corporation shall be bound by such determination in any judicial proceeding or
arbitration absent a prohibition of such indemnification under applicable law.
8.05 PROCEDURES VALID. The Corporation shall be precluded from asserting in
any judicial proceeding or arbitration commenced pursuant to this Article VIII
that the procedures and presumptions of this Agreement are not valid, binding
and enforceable and shall stipulate in any such court or before any such
arbitrator that the Corporation is bound by all the provisions of this
Agreement.
-9-
<PAGE> 10
8.06. EXPENSES OF ADJUDICATION. In the event that Indemnitee, pursuant to
this Article VIII, seeks a judicial adjudication of or an award in arbitration
to enforce Indemnitee's rights under, or to recover damages for breach of, this
Agreement, Indemnitee shall be entitled to recover from the Corporation and
shall be indemnified by the Corporation against, any and all expenses (of the
types described in the definition of Expenses in Section 1.07 of this Agreement)
actually and reasonably incurred by Indemnitee in such adjudication or
arbitration, but only if Indemnitee prevails therein. If it shall be determined
in such adjudication or arbitration that Indemnitee is entitled to receive part
but not all of the indemnification of advancement or expenses sought, the
expenses incurred by Indemnitee in connection with such adjudication or
arbitration shall be appropriately prorated.
ARTICLE IX
Non-Exclusivity, Insurance, Subrogation
---------------------------------------
9.01 NON-EXCLUSIVITY. The rights of indemnification and to receive
advancement of Expenses as provided by this Agreement shall not be deemed
exclusive of any other rights to which Indemnitee may at any time be entitled
under applicable law, the Certificate of Incorporation, the By-Laws, any
agreement, a vote of stockholders or a resolution of Disinterested Directors, or
otherwise. No amendment, alteration, rescission or replacement of this Agreement
or any provision hereof shall be effective as to Indemnitee with respect to any
action taken or omitted by such Indemnitee in Indemnitee's Corporate Status
prior to such amendment, alteration, rescission or replacement.
9.02 INSURANCE. The Corporation may maintain an insurance policy or
policies against liability arising out of this Agreement or otherwise.
9.03 SUBROGATION. In the event of any payment under this Agreement, the
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all papers required and take
all action necessary to secure such rights, including execution of such
documents as are necessary to enable the Corporation to bring suit to enforce
such rights.
9.04 NO DUPLICATIVE PAYMENT. The Corporation shall not be liable under this
Agreement to make any payment of amounts otherwise indemnifiable hereunder if
and to the extent that Indemnitee has otherwise actually received such payment
under any insurance policy, contract, agreement or otherwise.
-10-
<PAGE> 11
ARTICLE X
General Provisions
------------------
10.01 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
Corporation and its successors and assigns and shall inure to the benefit of
Indemnitee and Indemnitee's heirs, executors and administrators.
10.02 SEVERABILITY. If any provision or provisions of this Agreement shall
be held to be invalid, illegal or unenforceable for any reason whatsoever:
(a) the validity, legality and enforceability of the
remaining provisions of this Agreement (including,
without limitation, each portion of any Section of this
Agreement containing any such provision held to be
invalid, illegal or unenforceable, that is not itself
invalid, illegal or unenforceable) shall not in any way
be affected or impaired thereby; and
(b) to the fullest extent possible, the provisions of this
Agreement (including, without limitation, each portion
of any Section of this Agreement containing any such
provision held to be invalid, illegal or unenforceable,
that is not itself invalid, illegal or unenforceable)
shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal or
unenforceable.
10.03 NO ADEQUATE REMEDY. The parties declare that it is impossible to
measure in money the damages which will accrue to either party by reason of a
failure to perform any of the obligations under this Agreement. Therefore, if
either party shall institute any action or proceeding to enforce the provisions
hereof, such party against whom such action or proceeding is brought hereby
waives the claim or defense that such party has an adequate remedy at law, and
such party shall not urge in any such action or proceeding the claim or defense
that the other party has an adequate remedy at law.
10.04 IDENTICAL COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
but all of which together shall constitute one and the same Agreement. Only one
such counterpart signed by the party against whom enforceability is sought needs
to be produced to evidence the existence of this Agreement.
-11-
<PAGE> 12
10.05 HEADINGS. The headings of the sections of this Agreement are inserted
for convenience only and shall not be deemed to constitute part of this
Agreement or to affect the construction thereof.
10.06 MODIFICATION AND WAIVER. No supplement, modification or amendment of
this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
10.07 NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if (i)
delivered by hand and receipted for by the party to whom said notice or other
communication shall have been directed, or (ii) mailed by certified or
registered mail with postage prepaid, on the third business day after the date
on which it is so mailed:
If to Indemnitee, to:
As shown with Indemnitee's signature below.
If to the Corporation, to:
Bitstream Inc.
215 First Street
Cambridge, Massachusetts 02142
Attn: President
with a copy to:
Rubin Baum Levin Constant & Friedman
30 Rockefeller Plaza
New York, New York 10112
Attn: Paul A. Gajer, Esq.
or to such other address as may have been furnished to Indemnitee by the
Corporation or to the Corporation by Indemnitee, as the case may be.
10.08 GOVERNING LAW. The parties agree that this Agreement shall be
governed by, and construed and enforced in accordance with, the laws of the
State of Delaware without application of the conflict of laws principles
thereof.
10.09 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and
understanding between the parties hereto in reference to all the matters herein
agreed upon. This Agreement replaces in full all prior indemnification
agreements or under-
-12-
<PAGE> 13
standings of the parties hereto, and any and all such prior agreements or
understandings are hereby rescinded by mutual agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
BITSTREAM INC.
By
---------------------------------------
Its
--------------------------------------
INDEMNITEE
-----------------------------------------
Print name:
Address:
---------------------------------
---------------------------------
-13-
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
To Bitstream Inc.:
As independent public accountants, we hereby consent to the use of our
reports dated April 30, 1996 (except with respect to the matters discussed in
Note 1(k) and Note 10(d), as to which the date is May 21, 1996) (and to all
references to our Firm) included in or made a part of this registration
statement.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
October 11, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SIX
MONTHS ENDED 6-30-96 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FORM S-1 REGISTRATION STATEMENT #33- .
</LEGEND>
<CIK> 0000818813
<NAME> BITSTREAM INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 686,000
<SECURITIES> 0
<RECEIVABLES> 3,700,000
<ALLOWANCES> 375,000
<INVENTORY> 0
<CURRENT-ASSETS> 4,542,000
<PP&E> 3,207,000
<DEPRECIATION> 2,356,000
<TOTAL-ASSETS> 5,957,000
<CURRENT-LIABILITIES> 2,813,000
<BONDS> 0
0
32,000
<COMMON> 3,000
<OTHER-SE> 2,817,000
<TOTAL-LIABILITY-AND-EQUITY> 5,957,000
<SALES> 5,411,000
<TOTAL-REVENUES> 5,411,000
<CGS> 808,000
<TOTAL-COSTS> 808,000
<OTHER-EXPENSES> 3,601,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,000
<INCOME-PRETAX> 1,002,000
<INCOME-TAX> (86,000)
<INCOME-CONTINUING> 1,044,000
<DISCONTINUED> 0
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