<PAGE> 1
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.
Filed pursuant to Rule 424(a)
Registration No. 333-11519
SUBJECT TO COMPLETION, DATED SEPTEMBER 30, 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>
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2) SELLING STOCKHOLDERS
- ---------------------------------------------------------------------------------------------------------
Per Share................. $ $ $ $
- ---------------------------------------------------------------------------------------------------------
Total(3).................. $ $ $ $
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(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."
------------------------
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> 2
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> 3
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> 4
THE OFFERING
<TABLE>
<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............. 5,783,689 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
</TABLE>
- ---------------
(1) Excludes 1,731,994 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."
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,(1) JUNE 30,
---------------------------------------------- -------------------- ---------------
1991 1992 1993 1994 1995 1995 1995 1996
-------- ------- ------- ------ ------ 1994 ------ ------ ------
-----------
(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
</TABLE>
- ---------------
(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."
------------------------
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(R) and TrueDoc(R) are federally registered trademarks of the
Company; the Company claims trademark rights in Cyberbit.(TM) All other
trademarks, service marks or tradenames referred to in this Prospectus are the
property of their respective owners.
4
<PAGE> 5
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> 6
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> 7
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> 8
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
46.5% 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 5,783,689
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 190,442 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 2,783,689 shares of Class A Common Stock outstanding or issuable on
8
<PAGE> 9
conversion of outstanding Class B Common Stock, 48,846 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)"). 164,879 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 2,734,843 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> 10
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
October 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> 11
CAPITALIZATION
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."
<TABLE>
<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, 5,361,663
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
======== ========
</TABLE>
- ---------------
(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 190,442 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."
11
<PAGE> 12
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> 13
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 SIX MONTHS
ENDED DECEMBER 31, ENDED JUNE 30,
---------------------- -----------------
1994(1) 1995(1) 1995 1996
--------- --------- ------ ------
(UNAUDITED) (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
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
Stockholders' equity (deficit)........................... 1,806 2,852
</TABLE>
- ---------------
(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.
13
<PAGE> 14
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> 15
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> 16
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> 17
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> 18
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.
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<PAGE> 19
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.
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<PAGE> 20
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> 21
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> 22
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
22
<PAGE> 23
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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<PAGE> 25
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
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. 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.
<TABLE>
<CAPTION>
<S> <C> <C>
---------------------------------------------------------------------------------------------
ISVS
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.
---------------------------------------------------------------------------------------------
OEMS
Printer Companies Broadcast Television
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.
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 235 in early 1993 to approximately 60 in late 1994; (ii) the
closing of the Company's disk duplication and
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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 62 persons, including 26 in sales
and marketing, 16 in research and development and 20 in general administrative
functions. Of the Company's 62 employees, 61 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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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.
32
<PAGE> 33
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> 34
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> 35
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> 36
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> 37
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 included Messrs. Kaminski
($24,000 Bridge Loan), Lubrano ($18,000 Bridge Loan), Beitzel ($11,500 Bridge
Loan), The Beitzel Family Trust ($11,500 Bridge Loan), JHI Development Capital
Limited ($155,000 Bridge Loan), and BancBoston Ventures, Inc. ($83,000 Bridge
Loan).
37
<PAGE> 38
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. On
August 22, 1996, the Company entered into an amendment to the Bridge Loan
Agreement with each Bridge Lender, pursuant to which the maturity date of the
Bridge Loans was extended to October 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> 39
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> 40
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.
(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 and
Privest II, 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.
(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.
(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 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
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<PAGE> 41
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.
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<PAGE> 42
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 5,361,663 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
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<PAGE> 43
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
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<PAGE> 44
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."
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<PAGE> 45
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 5,783,689 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 190,442 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 2,783,689 shares of Class A Common
Stock outstanding or issuable on the conversion of outstanding Class B Common
Stock, 48,846 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). 164,879 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 2,734,843
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 5,783,689
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 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."
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<PAGE> 46
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 or warrants granted under its stock plans.
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.
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<PAGE> 47
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
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<PAGE> 48
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
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<PAGE> 49
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.
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<PAGE> 50
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> 51
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> 52
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
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> 59
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> 60
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> 61
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> 62
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> 63
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> 64
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
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:
<TABLE>
<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. These notes are subordinate to
all other debt facilities.
F-15
<PAGE> 65
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(7) OPERATING LEASES
The Company conducts its operations in leased facilities and is obligated
to pay monthly rent plus real estate taxes and certain operating expenses
through October 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:
<TABLE>
<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.
The Company believes that its available insurance will cover any liability
incurred by the Company 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 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 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.
F-16
<PAGE> 66
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> 67
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> 68
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> 69
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> 70
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> 71
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(14) GEOGRAPHICAL INFORMATION
The Company's export sales from the United States to customers in foreign
countries are as follows:
<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>
Europe......... $2,325,000 $2,344,000 $2,407,000 $ 775,000 $1,266,000 $1,606,000
Asia........... 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> 72
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> 73
===============================================================================
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 OF CONTENTS
<TABLE>
<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
[BITSSTREAM LOGO]
CLASS A COMMON STOCK
--------------------
PROSPECTUS
, 1996
--------------------
VOLPE, WELTY & COMPANY
ADVEST, INC.
===============================================================================
