<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1996.
REGISTRATION NO. 333-11519
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BITSTREAM INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7371 04-2744890
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) INDUSTRIAL CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
215 FIRST STREET
CAMBRIDGE, MASSACHUSETTS 02142
(617) 497-6222
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
C. RAYMOND BOELIG
PRESIDENT AND CHIEF EXECUTIVE OFFICER
BITSTREAM INC.
215 FIRST STREET
CAMBRIDGE, MASSACHUSETTS 02142
(617) 497-6222
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
PAUL A. GAJER, ESQ. GORDON H. HAYES, JR., ESQ.
RUBIN BAUM LEVIN CONSTANT & FRIEDMAN TESTA, HURWITZ & THIBEAULT, LLP
30 ROCKEFELLER PLAZA HIGH STREET TOWER
NEW YORK, NY 10112 125 HIGH STREET
TELEPHONE: (212) 698-7700 BOSTON, MASSACHUSETTS 02110
FACSIMILE: (212) 698-7825 TELEPHONE: (617) 248-7000
FACSIMILE: (617) 248-7100
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
<TABLE>
CALCULATION OF REGISTRATION FEE
==================================================================================================================
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO AMOUNT TO OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
BE REGISTERED BE REGISTERED(1) PER SECURITY(2) PRICE(2) REGISTRATION FEE(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock................. 2,415,000 $7.00 $16,905,000 $11,897
===================================================================================================================
<FN>
(1) Includes 315,000 shares which the Underwriters have the option to purchase
from the Company to cover over-allotments, if any.
(2) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 29, 1996
2,100,000 SHARES
[BITSSTREAM LOGO]
CLASS A COMMON STOCK
------------------------
The 2,100,000 shares of Class A Common Stock offered hereby (the
"Offering") are being offered by Bitstream Inc. ("Bitstream" or the "Company").
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 $7.00 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. The Class A Common Stock has been approved
for quotation on the Nasdaq National Market under the symbol "BITS."
------------------------
THE CLASS A COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 5-9.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
=======================================================================================================
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share...................... $ $ $
- -------------------------------------------------------------------------------------------------------
Total(3)....................... $ $ $
=======================================================================================================
<FN>
(1) The Company has 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 has granted the Underwriters a 30-day option to purchase up to
315,000 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 and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
</TABLE>
------------------------
The shares of Class A Common Stock are offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that the certificates for the shares of Class A Common Stock will be
available for delivery at the offices of Volpe, Welty & Company, One Maritime
Plaza, San Francisco, California, on or about , 1996.
VOLPE, WELTY & COMPANY ADVEST, INC.
The date of this Prospectus is , 1996
<PAGE> 3
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> 4
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> 5
- --------------------------------------------------------------------------------
<TABLE>
THE OFFERING
<S> <C>
Class A Common Stock offered hereby.......... 2,100,000 shares
Class A and Class B Common Stock to be
outstanding after the Offering............. 5,593,247 shares(1)
Use of proceeds.............................. Repayment of indebtedness, working capital
and other general corporate purposes,
including product development and potential
acquisitions.
Proposed Nasdaq National Market symbol....... BITS
<FN>
- ---------------
(1) Excludes 1,922,436 shares of Class A Common Stock or Class B Common Stock
issuable upon exercise of outstanding options and warrants. See
"Management -- Stock Plans" and "Description of Capital Stock."
</TABLE>
<TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,(1) JUNE 30,
---------------------------------------------- -------------------- ---------------
1991 1992 1993 1994 1995 1994 1995 1995 1996
-------- ------- ------- ------ ------ ------- ------- ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues............................... $ 25,093 $20,548 $17,430 $9,832 $8,970 $2,276 $2,355 $4,774 $5,411
Gross profit........................... 17,196 15,115 11,154 7,533 7,391 2,003 1,944 3,980 4,603
Operating income (loss)................ (9,819) (3,339) (4,468) 1,019 1,795 742 250 969 1,002
-------- ------- ------- ------ ------ ------ ------ ------ ------
Net income (loss)...................... $(10,262) $(3,624) $(4,805) $ 846 $1,688 $ 723 $ 738 $ 849 $1,044
======== ======= ======= ====== ====== ====== ====== ====== ======
Pro forma net income per common and
common equivalent share(2)........... $ .38 $ .17 $ .24
====== ====== ======
Pro forma weighted average common and
common equivalent shares
outstanding(2)....................... 4,984 4,705 4,745
====== ====== ======
<CAPTION>
AS OF JUNE 30, 1996
-------------------------
ACTUAL AS ADJUSTED(3)
------ --------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................................................. $ 686 $12,334
Working capital........................................................................... 1,729 14,318
Total assets.............................................................................. 5,957 17,464
Long-term obligations..................................................................... 292 23(4)
Stockholders' equity...................................................................... 2,852 15,573
<FN>
- ---------------
(1) Effective December 31, 1995, the Company changed its fiscal year end from
September 30 to December 31. The information reflected represents results
for the three months ended December 31, 1994 and December 31, 1995. The
Company's current fiscal year commenced January 1, 1996.
(2) Calculated on the basis described in Note 3 of the Notes to the Consolidated
Financial Statements.
(3) Adjusted to give effect to the sale of 2,100,000 shares of Class A Common
Stock offered by the Company hereby at an assumed initial public offering
price of $7.00 per share, and the application of the net proceeds therefrom.
(4) Does not include $941,000 of short-term indebtedness outstanding as of June
30, 1996 to be repaid by the Company with a portion of the proceeds of this
Offering. See "Use of Proceeds" and "Capitalization."
</TABLE>
------------------------
Except for the historical information contained herein, the discussion in
this Prospectus contains forward-looking statements relating to future events or
future financial performance of the Company that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed in the forward-looking statements. Factors which could cause or
contribute to such differences include, but are not limited to, those discussed
in the sections entitled "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," as well as those
discussed elsewhere in this Prospectus.
------------------------
Bitstream[Registered Trademark] and TrueDoc[Registered Trademark] are
federally registered trademarks of the Company; the Company claims trademark
rights in Cyberbit[Trademark]. All other trademarks, service marks or tradenames
referred to in this Prospectus are the property of their respective owners.
- --------------------------------------------------------------------------------
4
<PAGE> 6
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> 7
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> 8
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> 9
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
61.4% 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 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 5,593,247
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). Of these shares, the 2,100,000 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 3,493,247 shares of Class A Common Stock outstanding or issuable on
conversion of outstanding Class B Common Stock, 86,465 shares of Class A Common
Stock are not subject to the lock-up agreements described in
8
<PAGE> 10
"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)"). 355,045 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 $7.00 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 3,406,783 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 $4.24 per share in net
tangible book value per share as of June 30, 1996, based on an assumed initial
public offering price of $7.00 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 $7.00 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 $4.68. 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> 11
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.
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 $7.00 per share are estimated to be approximately $12,721,000,
after deducting the underwriting discounts and commissions and estimated
offering expenses ($14,772,000 if the Underwriter's over-allotment option is
exercised in full).
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
$1,400,000, will be used to repay all of the Company's outstanding long-term and
short-term borrowings and capitalized leases. As of June 30, 1996, such
indebtedness included (i) a bank line of credit with $150,000 outstanding,
bearing interest at a per annum rate equal to BayBank's "prime rate" ("Prime")
+1.50% and maturing on June 15, 1997; (ii) an equipment line with $191,000
outstanding, bearing interest at a per annum rate of Prime +1.50% and maturing
on March 18, 1999, the proceeds of which were used to purchase computer
equipment and software; (iii) an equipment term loan with $83,000 outstanding,
bearing interest at a per annum rate of Prime +2.00% and maturing on July 14,
1998; (iv) three capital leases with $3,000, $41,000 and $111,000 outstanding,
respectively, bearing interest at a per annum rate of 8.00%, 8.64% and 9.00%,
respectively, and expiring on August 1, 1996, February 10, 1997 and December 15,
2000, respectively; and (v) loans (the "Bridge Loans") from certain entities,
including certain directors and principal stockholders of the Company
(collectively, the "Bridge Lenders"), with $626,000 outstanding, including
accrued interest, bearing interest at a per annum rate of 12.00% and maturing on
December 22, 1996. See "Certain Transactions--Bridge Loans."
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain earnings, if any, to support its growth
strategy and does not anticipate paying cash dividends on its capital stock in
the foreseeable future.
10
<PAGE> 12
CAPITALIZATION
<TABLE>
The following table sets forth the short-term debt and capitalization of
the Company as of June 30, 1996 (i) on an actual basis, and (ii) as adjusted to
reflect the estimated net proceeds from the sale of 2,100,000 shares of Class A
Common Stock offered by the Company hereby at an assumed initial public offering
price of $7.00 per share and the application of the net proceeds therefrom. This
table should be read in conjunction with the Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus. See "Use of Proceeds."
<CAPTION>
AS OF JUNE 30, 1996
----------------------------
ACTUAL AS ADJUSTED(1)(2)
-------- -----------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Short-term debt.................................................... $ 916 $ --
======== ========
Long-term debt..................................................... $ 292 $ 23
Stockholders' equity:
Preferred stock, $.01 par value, no shares authorized, issued or
outstanding; 6,000,000 shares authorized, no shares issued or
outstanding, as adjusted...................................... -- --
Convertible preferred stock, $.01 par value(1) --
Class A -- 3,000,000 shares authorized, 2,782,575 shares
issued and outstanding; 217,425 shares authorized, no shares
issued or outstanding, as adjusted........................... 28 --
Class B -- 1,000,000 shares authorized, 391,162 shares issued
and outstanding; 608,838 shares authorized, no shares issued
or outstanding, as adjusted.................................. 4 --
Common Stock, $.01 par value --
Class A -- 30,000,000 shares authorized, 288,646 shares issued
and outstanding; 30,000,000 shares authorized, 5,171,221
shares issued and outstanding, as adjusted................... 3 52
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 27,154
Accumulated deficit.............................................. (11,586) (11,586)
Cumulative translation adjustment................................ (51) (51)
-------- --------
Total stockholders' equity............................... 2,852 15,573
-------- --------
Total capitalization..................................... $ 3,144 $ 15,596
======== ========
<FN>
- ---------------
(1) After giving effect to the automatic conversion of all outstanding shares of
Class A Preferred Stock and Class B Preferred Stock into 2,782,575 shares of
Class A Common Stock and 391,162 shares of Class B Common Stock,
respectively, on the date of this Prospectus. See "Description of Capital
Stock."
(2) Excludes 666,667 shares reserved for issuance pursuant to the 1996 Stock
Plan. See "Management -- 1996 Stock Plan" and "Description of Capital
Stock."
</TABLE>
11
<PAGE> 13
DILUTION
<TABLE>
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 $7.00 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 $15,432,000, or
$2.76 per share. This represents an immediate increase in pro forma net tangible
book value of $1.98 per share to existing stockholders and an immediate dilution
of $4.24 per share to new investors purchasing shares of Class A Common Stock in
this Offering. The following table illustrates this dilution:
<S> <C> <C>
Assumed initial public offering price per share...................... $7.00
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................................... 1.98
-----
Pro forma net tangible book value per share after Offering........... 2.76
-----
Pro forma net tangible book value dilution per share to new
investors.......................................................... $4.24
=====
</TABLE>
<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 $7.00
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.
<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 50.8% $4.35
New investors......................... 2,100,000 37.5 14,700,000 49.2% 7.00
--------- ----- ----------- -----
Total................................. 5,593,247 100.0% $29,901,000 100.0%
========= ===== =========== =====
</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 $7.00 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 $4.68. 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 53.6% 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> 14
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of September
30, 1994 and 1995 and December 31, 1995 and for each of the three years in the
period ended September 30, 1995 and for the three months ended December 31,
1995, have been derived from, and are qualified by reference to, the Company's
consolidated financial statements which have been audited by Arthur Andersen
LLP, independent public accountants, whose report thereon is included elsewhere
in this Prospectus. The selected consolidated financial data presented below as
of September 30, 1991, 1992 and 1993 and for each of the two years in the period
ended September 30, 1992 have been derived from, and are qualified by reference
to, the Company's audited financial statements, which are not included in this
Prospectus. The selected consolidated financial data as of June 30, 1996 and for
the six month periods ended June 30, 1995 and June 30, 1996 have been derived
from the unaudited consolidated financial statements of the Company included
elsewhere in this Prospectus. The selected consolidated statement of operations
data for the three months ended December 31, 1994 have been derived from the
unaudited consolidated financial statements of the Company, which are not
included in this Prospectus. In the opinion of management, the unaudited
financial statements of the Company have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of financial position and results of operations for these periods.
Results for the six months ended June 30, 1996 are not necessarily indicative of
results to be expected for the fiscal year ending December 31, 1996 or for any
future period. The selected consolidated financial data set forth below should
be read in conjunction with, and are qualified by reference to, the Consolidated
Financial Statements of the Company and Notes thereto, with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus, and other financial data appearing
elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------
1991 1992 1993 1994 1995
-------- ------- ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues................................................... $ 25,093 $20,548 $17,430 $9,832 $8,970
Cost of revenues........................................... 7,897 5,433 6,276 2,299 1,579
-------- ------- ------- ------ ------
Gross profit.............................................. 17,196 15,115 11,154 7,533 7,391
-------- ------- ------- ------ ------
Operating expenses:
Marketing and selling..................................... 12,086 10,530 9,080 3,334 3,264
Research and development.................................. 5,512 5,686 3,536 1,534 1,071
General and administrative................................ 2,799 2,237 3,006 1,281 1,261
Restructuring charge...................................... 6,618 -- -- 365 --
-------- ------- ------- ------ ------
Total operating expenses............................ 27,015 18,454 15,622 6,514 5,596
-------- ------- ------- ------ ------
Operating income (loss).................................... (9,819) (3,339) (4,468) 1,019 1,795
-------- ------- ------- ------ ------
Other income (expense), net................................ (514) (107) (18) (40) 11
-------- ------- ------- ------ ------
Provision for (benefit from) income taxes.................. (71) 178 319 133 118
-------- ------- ------- ------ ------
Net income (loss).......................................... $(10,262) $(3,624) $(4,805) $ 846 $1,688
======== ======= ======= ====== ======
Pro forma net income per common and common equivalent
share(2).................................................. $ .38
======
Pro forma weighted average common and
common equivalent shares outstanding(2)................... 4,984
======
<CAPTION>
THREE MONTHS
ENDED DECEMBER 31, SIX MONTHS
---------------------- ENDED JUNE 30,
1994(1) -----------------
----------- 1995(1) 1995 1996
------ ------ ------
(UNAUDITED)
<S> <<C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues................................................... $ 2,276 $2,355 $4,774 $5,411
Cost of revenues........................................... 273 411 794 808
------- ------ ------ ------
Gross profit.............................................. 2,003 1,944 3,980 4,603
------- ------ ------ ------
Operating expenses:
Marketing and selling..................................... 740 978 1,691 2,145
Research and development.................................. 255 331 547 680
General and administrative................................ 266 385 773 776
Restructuring charge...................................... -- -- -- --
------- ------ ------ ------
Total operating expenses............................ 1,261 1,694 3,011 3,601
------- ------ ------ ------
Operating income (loss).................................... 742 250 969 1,002
------- ------ ------ ------
Other income (expense), net................................ (2) 17 (37) (44)
------- ------ ------ ------
Provision for (benefit from) income taxes.................. 17 (471) 83 (86)
------- ------ ------ ------
Net income (loss).......................................... $ 723 $ 738 $ 849 $1,044
======= ====== ====== ======
Pro forma net income per common and common equivalent
share(2).................................................. $ .17 $ .24
====== ======
Pro forma weighted average common and
common equivalent shares outstanding(2)................... 4,705 4,745
====== ======
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
---------------------------------------------------------
1991 1992 1993 1994 1995
------- ------ ------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 1,347 $ 347 $ 1,068 $ 654 $ 523
Working capital (deficit)................................ 2,804 (976) (2,266) (920) 881
Total assets............................................. 11,347 7,895 5,029 2,640 3,194
Long-term obligations.................................... 1,049 566 17 125 124
Mandatorily redeemable convertible preferred stock....... -- -- 1,204 2,311 --
Stockholders' equity (deficit)........................... 3,760 153 (2,803) (3,041) 1,066
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
1995(1) 1996
------------------ ---------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 390 $ 686
Working capital (deficit)................................ 1,254 1,729
Total assets............................................. 4,328 5,957
Long-term obligations.................................... 210 292
Mandatorily redeemable convertible preferred stock....... -- --
Stockholders' equity (deficit)........................... 1,806 2,852
<FN>
- ---------------
(1) Effective December 31, 1995, the Company changed its fiscal year end from a
fiscal year end of September 30 to a calendar year end. The current fiscal
year commenced January 1, 1996. Because of this change in fiscal year, the
Company is presenting certain consolidated statement of operations data for
the three months ended December 31, 1994 and December 31, 1995, as well as
consolidated balance sheet data as of December 31, 1995.
(2) Calculated on the basis described in Note 3 of Notes to the Consolidated
Financial Statements.
</TABLE>
13
<PAGE> 15
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> 16
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> 17
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> 18
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.
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> 19
efforts of the Company on the development and sale of technology and products to
OEM and ISV customers and to curtail product distribution through the computer
software reseller channel. In conjunction with this shift in strategic focus,
the Company reorganized its operations, reduced its workforce, changed senior
management and restructured its type design group.
Gross Profit. Gross profit for the fiscal year ended September 30, 1994
decreased by approximately $3.6 million, or 32.5%, to approximately $7.5
million, compared to approximately $11.2 million for the fiscal year ended
September 30, 1993, as a result of the corresponding decrease in revenues. Gross
profit as a percentage of revenues for the fiscal year ended September 30, 1994
increased to 76.6%, compared to 64.0% for the fiscal year ended September 30,
1993, reflecting sales of a substantial amount of end user inventories through
the domestic computer software reseller channel during fiscal 1993 at sharply
discounted levels. The increase in gross profit as a percentage of revenues was
offset, in part, by minimum royalty commitments due to third party licensors in
the fiscal year ended September 30, 1994.
Marketing and Selling. Marketing and selling expenses for the fiscal year
ended September 30, 1994 decreased by approximately $5.7 million, or 63.3%, to
approximately $3.3 million, compared to approximately $9.1 million for the
fiscal year ended September 30, 1993, as a result of the Company's curtailment
of product distribution through the computer software reseller channel, which
had accounted for the majority of sales and marketing personnel, as well as
advertising and promotional costs.
Research and Development. Research and development expenses for the fiscal
year ended September 30, 1994 decreased by approximately $2.0 million, or 56.6%,
to approximately $1.5 million, compared to approximately $3.5 million for the
fiscal year ended September 30, 1993. The decrease in research and development
costs was due to the Company's decision to restructure its type design group as
part of its shift in strategic focus.
General and Administrative. General and administrative expenses for the
fiscal year ended September 30, 1994 decreased by approximately $1.7 million, or
57.4%, to approximately $1.3 million, from approximately $3.0 million for the
fiscal year ended September 30, 1993, reflecting the reduction in the number of
administrative personnel which occurred in connection with the Company's
business reorganization.
During the fiscal year ended September 30, 1994, the Company recorded a
restructuring charge totalling $365,000 relating to the reorganization of its
operations, principally consisting of severance pay for terminated employees,
and a loss of $53,000 recognized on the disposition of certain property and
equipment.
The Company's effective tax rate for the fiscal year ended September 30,
1994 was 13.6% compared to 7.1% for the fiscal year ended September 30, 1993,
reflecting foreign withholding tax and its utilization of available net
operating loss and tax credit carryforwards for federal and state income tax
purposes. At September 30, 1994 the Company had available net operating loss
carryforwards of approximately $12 million, and federal tax credit carryforwards
of approximately $1.9 million.
18
<PAGE> 20
QUARTERLY RESULTS
The following table sets forth certain consolidated statements of
operations data for each of the Company's last ten quarters during the period
ended June 30, 1996. This quarterly information has been prepared on the same
basis as the annual information presented elsewhere in this Prospectus and, in
management's opinion, reflects all adjustments, consisting only of normally
recurring adjustments, necessary for the fair presentation of financial
condition and results of operations for these periods. The operating results for
any quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------------------------------
MARCH SEPT. MARCH SEPT. MARCH
31, JUNE 30, 30, DEC. 31, 31, JUNE 30, 30, DEC. 31, 31, JUNE 30,
1994 1994 1994 1994 1995 1995 1995 1995 1996 1996
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $2,995 $2,853 $2,222 $2,276 $2,352 $ 2,422 $1,920 $2,355 $2,706 $2,705
Cost of
revenues 732 641 591 273 457 337 512 411 356 452
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Gross
profit 2,263 2,212 1,631 2,003 1,895 2,085 1,408 1,944 2,350 2,253
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Operating
expenses:
Marketing
and
selling 753 686 863 740 808 883 833 978 1,106 1,039
Research
and
development 351 294 322 255 264 283 269 331 333 347
General and
administrative 278 349 325 266 369 404 222 385 399 377
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total
operating
expenses 1,382 1,329 1,510 1,261 1,441 1,570 1,324 1,694 1,838 1,763
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Operating
income
(loss) 881 883 121 742 454 515 84 250 512 490
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Other income
(expense),
net (15) (13) (1) (2) (14) (23) 50 17 (9) (35)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Provision for
(benefit
from)
income
taxes 55 7 57 17 40 43 18 (471) (37) (49)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income
(loss) $ 811 $ 863 $ 63 $ 723 $ 400 $ 449 $ 116 $ 738 $ 540 $ 504
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The Company's European business is significant and has historically been
negatively affected during the three months ended September 30 due to the summer
closing or slowdown of several European customers. In addition, the timing of
OEM and ISV revenues is difficult to forecast and may vary from quarter to
quarter due to a number of factors including new product developments,
announcements of products by the Company, announcements of its competitors, or
its customers, and delays in customer purchases in anticipation of industry
developments. Moreover, the Company does not operate with a significant backlog
and often tends to realize a disproportionate share of its revenues in the last
few weeks of a fiscal quarter, thereby impairing the Company's ability to
accurately forecast quarter-to-quarter sales results. Due to the foregoing
factors, it is likely that in one or more future fiscal quarters the Company's
operating results may be below the expectations of public market analysts and
investors. Such an event would have a material adverse effect on the market
price of the Class A Common Stock.
The Company believes that quarter to quarter comparisons of its financial
results are not necessarily meaningful and should not be relied upon as an
indication of future performance.
19
<PAGE> 21
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> 22
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> 23
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> 24
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> 26
Macintosh platforms. Thus, users can create Envoy documents on a Macintosh and
share them with Windows 3.1 or Windows 95 users or vice versa.
Tumbleweed's Publishing Essentials is a set of enhancements to Envoy that
provides advanced document publishers and viewers with more sophisticated
document processing, formatting and navigation capabilities. These include the
ability to (i) generate indices for the content of Envoy documents; (ii) perform
searches through Envoy documents; (iii) automatically generate outlines of Envoy
documents; (iv) convert other portable documents to Envoy format; and (v)
generate hypertext links between Envoy documents and to Hypertext Markup
Language ("HTML") documents that allow viewers to navigate through them.
The Envoy License grants the Company the exclusive right to distribute
Envoy portable document technology to companies that incorporate Envoy in their
own products, such as OEMs and ISVs (other than Corel Systems Corporation, as to
which Novell also has the rights to distribute Envoy). The Envoy License also
grants the Company non-exclusive rights to distribute Envoy to end users.
The Envoy License expires on November 1, 2001, and renews on a year-to-year
basis thereafter unless terminated by either party after November 1, 2001 on 90
days' written notice. The Envoy License is subject to earlier termination in the
event of breach by the Company, if the Company develops, markets or sells a
software product that directly competes with Envoy, if there is a "change of
control" (as defined in the Envoy License) of the Company, or in the event that
Novell determines that Envoy infringes another party's patent, trademark or
copyright rights. Bitstream pays Novell a royalty based on a percentage of
revenues, with a required annual minimum royalty. In addition, the Envoy License
may be terminated upon one year prior written notice given after Novell sells
Envoy or determines to discontinue the Envoy product. In the event, however,
that Novell determines to sell or discontinue Envoy it must make a proposal to
the Company to purchase Envoy, which must remain open for 10 business days. If
the Company does not accept such proposal to purchase within such period, Novell
shall be free to offer Envoy to other parties. However, if Novell offers to sell
or engages in discussions to sell Envoy to other parties on terms materially
different than those set forth in the original proposal made to the Company,
Novell is obligated to engage the Company in good faith negotiations regarding
the purchase by the Company of Envoy.
The Company is responsible for funding required future development costs
for Envoy. The Company expects to commence commercial shipments of Envoy in the
first half of 1997, although there can be no assurance in this regard.
In June 1996, the Company obtained a non-exclusive license from Tumbleweed
to market and distribute Tumbleweed Publishing Essentials and several other
products and technologies which enhance Envoy-based applications (the
"Tumbleweed License"). The Tumbleweed License is for a term of three years and
provides for an initial minimum royalty payment, which is credited against
future royalties. Royalties are based in part on revenues generated from sales
of Envoy by the Company to OEM and ISV customers. The Tumbleweed License can be
terminated by either party on 30 days' prior notice.
Future Products
The Company has identified other emerging and complementary areas for which
it believes its products will be well suited. Bitstream is currently developing
products to enhance the performance of text-based document creation, transport,
viewing and printing within such markets. Products under development and future
markets being addressed include:
- Server-based products that supply typefaces and enabling technologies to
network devices including workstations and printers. Such products are
being developed to simplify network maintenance, improve application and
network performance and help simplify copyright compliance. The first of
these products, expected to commence shipment in late 1997, is the
Bitstream Advanced Font Services for Networks ("AFSN") product. This
product is expected to work with the Netware Direct Print Services
("NDPS") features of the "Green River" release of Novell's Netware
network operating system. Green River is expected to ship in late 1996.
NDPS is expected to ship in mid 1997.
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- TrueDoc-based utilities for the graphic arts market that address font
portability issues in the electronic delivery of desktop publishing
documents.
- Type products, enabling technologies and versions of TrueDoc for
integration into new products and applications such as set-top boxes,
personal digital assistants and other information applications based on
new programming languages or operating systems, such as Sun Microsystems,
Inc.'s Java.
The Company has not determined the approximate time when such future products,
if completed, may be released for future sale, if at all. There can be no
assurance that any of the Company's planned or contemplated products will reach
commercialization or, if released for sale, will gain market acceptance, or that
the markets targeted by the Company will develop as anticipated.
MARKETING AND SALES
The principal objective of the Company's marketing strategy is to continue
to expand the sale of the Company's products and technologies to OEMs and ISVs
who integrate the Company's software into their own products. OEM and ISV
relationships range from the license of a small group of typefaces to agreements
whereby an entire range of type products and/or technologies are incorporated
into the customer's hardware or software products. As new opportunities arise,
particularly in the newly emerging areas of corporate intranets and portable
document software, the Company intends to evaluate other marketing approaches.
This may include marketing through the value added reseller channel serving the
networking market or increased direct corporate and international marketing.
The Company's sales organization, as of June 30, 1996, consisted of 10
people focused on OEM and ISV sales and six people focused on corporate direct
sales. The Company's sales efforts are managed from its corporate headquarters
in Cambridge, Massachusetts. In addition, the Company maintains a European sales
headquarters in Amsterdam, The Netherlands and sales offices in Burlingame,
California, Beaune, France and Reading, England. Finally, the Company has a
sales agent based in Tokyo to facilitate OEM sales to Japanese hardware
manufacturers. The Company's direct sales personnel receive a base salary plus
commissions based on meeting annual sales targets, with additional commissions
for sales in excess of annual targets.
The Company seeks to enhance its relationships with existing customers
through a four-person technical support team that works with customers or
prospects to support sales and to facilitate the implementation and use of the
Company's software products and technologies. Marketing activities are carried
out by a team of six people located at the Company's headquarters in Cambridge,
Massachusetts. In addition, the Company promotes its products through attendance
and exhibition at major industry trade shows. The Company intends to expand its
sales and marketing efforts in the future.
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CUSTOMERS
<TABLE>
The Company licenses type products, enabling technologies and TrueDoc to a
wide variety of OEM and ISV customers. In addition, the Company sells custom and
other type products directly to corporate customers. No single Bitstream
customer accounted for 10% or more of the Company's revenues for any of the
three fiscal years ended September 30, 1995, except for one customer which
accounted for approximately 13% of revenues in fiscal 1993. From time to time,
product sales to large customers during a single fiscal quarter may constitute
more than 10% of Company revenues for such quarter. See Note 14 to Notes to
Consolidated Financial Statements for information as to revenues derived by the
Company from sales outside of the United States. In the future, the Company
intends to broaden its customer base through expanded product offerings and
increased marketing efforts of current and planned products. Customers which are
representative of the various industry groups served by the Company include
those listed below.
<CAPTION>
---------------------------------------------------------------------------------------------
ISVS
---------------------------------------------------------------------------------------------
<S> <C> <C>
Application Developers Graphic Arts Operating Systems
Accent Software International Ltd. Barco Graphics N.V. Apple Computer, Inc.
Corel Systems Corporation DaiNippon Screen QNX Software
Hummingbird Communications Inc. Manufacturing Co., Systems Ltd.
Macromedia, Inc. Ltd. Intergraph Silicon Graphics, Inc.
Corporation Sun Microsystems, Inc.
Interleaf, Inc.
<CAPTION>
---------------------------------------------------------------------------------------------
OEMS
---------------------------------------------------------------------------------------------
Printer Companies Broadcast Television
<S> <C> <C>
Hewlett-Packard Company Seiko Epson Corporation Victor Company of Japan (JVC)
Kyocera Corp. Sharp Electronics Corporation The Walt Disney Company
---------------------------------------------------------------------------------------------
CORPORATE END USERS
---------------------------------------------------------------------------------------------
CNA Insurance Company Kemper Financial Services TV Guide
Deluxe Corporation Price Waterhouse L.L.P.
---------------------------------------------------------------------------------------------
</TABLE>
RESEARCH AND PRODUCT DEVELOPMENT
Bitstream is committed to developing innovative software to enhance
electronic document creation, transport, viewing and printing. To accomplish
this goal, the Company has invested, and expects to continue to invest,
significant resources in research and development. The Company's research and
development activities are centered around advancing the Company's software
products for its OEM, ISV and corporate customers. The Company maintains
specific expertise in the areas of font formats, multi-lingual fonts, font
portability, font compression and font processing technology.
The Company emphasizes cross-platform portability, small file and
application size and extensibility to new technologies in its software
development. To support these design objectives, the Company employs advanced
software development techniques. For example, the Company is developing software
using the Java programming language to adapt its products to devices and
software applications written to take advantage of Java's advanced structure and
cross-platform portability.
As of June 30, 1996, the Company employed 16 individuals who engage in
research and development activities. Of these, 11 focus on type product
development and five work on developing enabling technologies and TrueDoc. For
the fiscal years ended September 30, 1993, 1994 and 1995, the Company's research
and development expenditures were $3.5 million, $1.5 million, and $1.1 million,
respectively.
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COMPETITION
The markets in which the Company participates are intensely competitive,
evolving and subject to rapid technological change. The Company expects
competition to persist and increase in the future. Certain of the Company's
competitors, including Adobe Systems Corporation ("Adobe") and Agfa Division,
Miles Inc. ("Agfa"), have greater name recognition, a larger customer base and
significantly greater financial, technical and marketing resources than the
Company. The Company's products compete with the solutions offered by a variety
of companies, including other suppliers of enabling technologies, software
application developers, and vendors of computer operating systems. Moreover, the
market for the Company's enabling technologies and products may be adversely
impacted to the extent that computer hardware, operating system and application
software vendors incorporate similar functionality or bundle competitive
offerings with their products and thereby reduce the market for the Company's
technology or products. The Company's markets are the subject of intense
industry activity, and it is likely that a number of software developers are
devoting significant resources to developing and marketing technology and
products that may compete with the Company's technology and products.
The competition for the Company's sales of type products to OEM and ISV
customers generally comes from a number of comparably sized or smaller companies
offering their own type libraries and custom type services. Competition to the
Company's enabling technologies principally comes from Agfa with its Universal
Font Scaling Technology ("UFST"). UFST has a similar architecture to the
Company's 4-in-1 enabling technology product.
The competition for TrueDoc includes software from Ares Software Corp.,
recently acquired by Adobe, and Agfa, which offer compression features for
platform-independent electronic documents. When Bitstream begins to market
TrueDoc-enhanced Envoy portable document products, the Company expects that it
will face competition from Adobe's Acrobat products.
The Company also faces competition in its efforts to have TrueDoc accepted
and supported by Internet-browser companies. In March 1995, Adobe and Netscape
Communications Corporation ("Netscape") announced their intention to integrate
Adobe technology into Netscape products, including plans for a future version of
Netscape's Internet browser product, Netscape Navigator, that will include the
capability to view documents created by Adobe's Acrobat portable document
software product.
Future sales of the Company's products will depend upon the Company's
ability to develop or acquire, on a timely basis, new products or enhanced
versions of its existing products that compete successfully with products
offered by developers of competing technologies. There can be no assurance that
the Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, financial condition and results of
operations.
SHIFT IN STRATEGIC FOCUS
Following development of the Company's first font scaling technology in
1990, the Company pursued a strategy of initially licensing such technology for
relatively nominal initial cost to OEMs and ISVs with the goal of establishing
it as a standard in DOS-based software applications. The Company's principal
marketing strategy at that time was to sell font products as well as
enhancements and extensions, directly to end-users, through the computer
software reseller channel. However, due principally to intense competition, the
Company experienced a significant buildup of retail inventories that had been
shipped to domestic distributors during 1992 and 1993 and later were returned to
the Company. A substantial amount of such returned inventory was sold at sharply
discounted levels during fiscal year 1993.
In fiscal year 1993, the Board decided to curtail product distribution
through the computer software reseller channel and to concentrate the efforts of
the Company on the development and sale of technology and products to OEM and
ISV customers. In conjunction with this shift in strategic focus, the Board
reorganized the Company's operations, changed senior management and restructured
the Company's type design group. The reorganization of operations included,
among other things: (i) the elimination and consolidation of departments, which
resulted in a reduction in the total number of Company employees from
approximately
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235 in early 1993 to approximately 60 in late 1994; (ii) the closing of the
Company's disk duplication and distribution facility in Clinton, Massachusetts;
(iii) the recapitalization of its financial structure; and (iv) a shift in
product development and marketing emphasis away from the design of new type
styles to the development of enabling technologies, such as TrueDoc. This shift
in strategic focus took place over a period from approximately July 1993 through
September 1994.
In connection with this shift in strategic focus, on October 28, 1994, the
Company entered into an Agreement and Plan of Recapitalization (the "Plan") with
certain existing stockholders who forfeited certain liquidation preferences and
redemption rights pursuant to the terms of the Plan. Pursuant to the Plan, the
Company converted three classes of old common stock and five classes of old
preferred stock into the Class A Common Stock and the Class B Common Stock and
four classes of old preferred stock into the Class A Preferred Stock and the
Class B Preferred Stock (collectively, these transactions are hereinafter
referred to as "the Recapitalization"). See "Certain Transactions -- The 1994
Recapitalization."
INTELLECTUAL PROPERTY
The Company relies on a combination of trade secret, copyright, patent, and
trademark laws and contractual restrictions to establish and protect proprietary
rights in its technology. The Company has entered into confidentiality and
invention assignment agreements with its employees, and when obtainable, enters
into non-disclosure agreements with its suppliers, distributors and others so as
to limit access to and disclosure of its proprietary information. There can be
no assurance that these statutory and contractual arrangements will prove
sufficient to deter misappropriation of the Company's technologies or that the
Company's competitors will not independently develop non-infringing technologies
that are substantially similar to or superior to the Company's technology. The
laws of certain foreign countries in which the Company's products are or may be
developed, manufactured or licensed may not protect the Company's products or
intellectual property rights to the same extent as do the laws of the United
States and thus make the possibility of piracy of the Company's technology and
products more likely. The Company believes that, because of the rapid pace of
technological change in the software and electronic commerce markets, legal
protection for its products will be a less significant factor in the Company's
future success than the knowledge, ability and experience of the Company's
employees, the frequency of product enhancements and the ability of the Company
to satisfy its OEM and ISV customers.
The Company's policy is to apply for U.S. patents with respect to its
technology and seek copyright registration of its technology or trademark
registration of its marks from time to time when management determines that it
is competitively advantageous and cost effective to do so. The Company has
rights in three patent applications now pending before the United States Patent
and Trademark Office and each is directed to certain aspects or applications of
the Company's TrueDoc technology. Additionally, the Company has sought foreign
patent rights to certain aspects of its TrueDoc technology by filing an
International Application under the Patent Cooperation Treaty.
EMPLOYEES
As of June 30, 1996, the Company employed 61 persons, including 26 in sales
and marketing, 16 in research and development and 19 in general administrative
functions. Of the Company's 61 employees, 60 are full time and one is part time.
The Company also retains consultants from time to time to assist it with
particular projects for limited periods of time. The Company believes that its
future success will depend in part on its ability to attract, motivate and
retain highly qualified personnel. None of the Company's employees is
represented by a labor union and the Company has not experienced any work
stoppages. The Company considers its employee relations to be good.
FACILITIES
The Company's corporate headquarters is located in Cambridge, Massachusetts
where it currently leases approximately 20,000 square feet under a lease
expiring in 1998, with the right to renew for an additional five years.
Management believes that these facilities are adequate for the Company's current
needs and that
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suitable additional space, should it be needed, will be available to accommodate
expansion of the Company's operations on commercially reasonable terms.
LEGAL PROCEEDINGS
On May 26, 1995, The Friends of the Museum of Printing, Inc. ("the Museum")
filed a lawsuit in the Middlesex County Superior Court of Massachusetts against
the Company in connection with a letter dated July 23, 1992 (the "Letter") from
the Company to the Museum concerning the storage of certain font materials for
the Museum. The Letter provided that the Company would store and maintain the
font materials for a period of two years from the date of the Letter and that
the Company would have no liability to the Museum, over and above the proceeds
of insurance, for damage or loss of any of the font materials, and that neither
the Company nor the Museum would incur any liability to the other for any loss
or damage arising out of their respective rights and obligations set forth in
the Letter. The Museum alleges that after the two year storage period had
expired, the Company disposed of the font materials and that such conduct by the
Company breached the terms of the Letter and violated Chapter 93A of the
Massachusetts General Laws ("Chapter 93A"), which provides, among other things,
that persons found to have engaged in any unfair or deceptive act in the conduct
of a trade or business may be liable for double or treble damages and attorneys
fees (the "93A Claim"). The Museum further demanded an accounting of royalties
the Museum claims are due from the Company for use of the font materials.
The Company believes that its available insurance will cover liability, if
any, incurred by the Company in connection with the above-referenced lawsuit,
except for any liability in respect of the 93A Claim, up to a maximum of $1.01
million, subject to a $10,000 deductible. The Company further believes that its
available insurance will cover one half of any liability incurred by the Company
in excess of $1.01 million to a maximum of $1.8 million. The Company's insurer
is currently paying all of the costs incurred by the Company in defending this
lawsuit. The Company has established a reserve in the amount of its deductible
of $10,000 against any liability resulting from the lawsuit.
The Company cannot ensure that current reserves and insurance coverage will
be sufficient to cover any liability incurred by the Company in connection with
this lawsuit.
Pursuant to a letter dated May 6, 1996, a former director and officer of
the Company asserted that the Company has breached certain obligations he
alleges are due to him under a severance agreement dated May 22, 1991 (the
"Severance Agreement") between him and the Company. The former director and
officer claims that a provision in the Severance Agreement entitles him to
additional shares of Class A Common Stock and a reduction in the exercise price
of options to purchase Class A Common Stock held by him. The Company believes
that these claims are without merit and intends vigorously to contest their
validity. As of August 15, 1996, this former director and officer has not
commenced an action in any court in respect of the claims he has asserted
against the Company under the Severance Agreement.
Except as set forth above, as of the date hereof, the Company is not party
to any material legal proceedings and is not aware of any material threatened
litigation.
DELAWARE REINCORPORATION
The Company was reincorporated in Delaware on May 21, 1996 by merging
Bitstream Inc., a Massachusetts corporation ("Bitstream-Massachusetts") into the
Company, which was a wholly-owned subsidiary of Bitstream-Massachusetts. In
connection with the Delaware Reincorporation, each three outstanding shares of
stock of Bitstream-Massachusetts was converted into two shares of the same class
of stock of the Company. Such conversion is referred to herein as the "2-for-3
Conversion."
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MANAGEMENT
The Company's directors and executive officers and their ages as of June
30, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- ---- -------------------------------------------------
<S> <C> <C>
Amos Kaminski(1)....... 67 Chairman of the Board
C. Raymond Boelig...... 42 President, Chief Executive Officer and Director
James D. Hart.......... 38 Vice President, Finance and Administration,
Treasurer and Chief Financial Officer
John S. Collins........ 57 Vice President, Engineering and Development
Geoffrey W. Greve...... 38 Vice President, Type Operations
John S. Seguin......... 41 Vice President, Sales and Marketing
David G. Lubrano(1).... 66 Director
George B. Beitzel(1)... 68 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee and Audit Committee.
Amos Kaminski has been Chairman of the Board since 1991 and a Director of
the Company since 1985. Mr. Kaminski founded Interfid Ltd. ("Interfid"), a
private investment advisory firm, in 1984 and has served as its President and on
its Board of Directors since its formation. Mr. Kaminski is also the founder,
President and Chairman of the Board of Directors of AFA Asset Services, Inc., a
private real estate asset management company.
C. Raymond Boelig has been a director of the Company since May 1, 1996 and
President and Chief Executive Officer of the Company since September 1993. Mr.
Boelig has been employed by the Company since December 1987 and has served most
recently as Chief Operating Officer from July 1993 through September 1993, Vice
President of OEM Sales and Marketing from February 1992 through July 1993 and
Director of OEM Sales and Marketing from January 1990 through February 1992.
James D. Hart has been Vice President, Finance and Administration and Chief
Financial Officer of the Company since May 1, 1996 and Treasurer of the Company
since March 1994. From March 1994 until May 1, 1996, Mr. Hart also served as
Secretary and acting Chief Financial Officer of the Company. Prior to May 1,
1996, Mr. Hart was a Vice President of Interfid and his services were provided
to the Company on an as needed basis by Interfid. Mr. Hart was a Vice President
of Interfid from 1990 until May 1, 1996 and was responsible for selecting,
evaluating, monitoring and negotiating the terms of venture capital investments
made and proposed to be made by Interfid's clients, principally in high
technology areas. See "Certain Transactions -- Interfid."
John S. Collins has been Vice President of Engineering and Development
since 1988. Mr. Collins has been employed by the Company since 1986. Mr. Collins
was the inventor or a co-inventor in respect of a number of the patents held by
the Company relating to font imaging technology. He is the principal inventor of
the Company's TrueDoc technology. Mr. Collins holds a B.Sc. and a PhD in
Electrical Engineering from the University of London.
Geoffrey W. Greve has been Vice President of Type Operations of the Company
since May 1995. Mr. Greve has been employed by the Company since 1987 and
previously served as Director of Production Control from 1990 through May 1995.
John S. Seguin has been Vice President of Sales and Marketing since August
1994. Mr. Seguin served as Vice President and General Manager of XLI Corp., a
corporation engaged in manufacturing printer enhancements, from July 1993
through July 1994, and as Vice President of Sales and Marketing of Howtek, Inc.,
a corporation engaged in manufacturing color imaging products, from November
1987 through July 1993.
David G. Lubrano has been a director of the Company since 1987. Mr. Lubrano
retired in 1985 from Apollo Computer Inc., a corporation engaged in
manufacturing workstations, which he co-founded and where
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<PAGE> 33
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> 34
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> 35
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> 36
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."
<TABLE>
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
<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 -- $671,000 --
89,773 -- 547,615 --
John S. Collins.................................. 110,000 -- 671,000 --
39,830 -- 242,963 --
John S. Seguin................................... 66,666 -- 406,663 --
<FN>
- ---------------
(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 $7.00 per share, minus the
exercise price of $.90 per share, multiplied by the number of shares
underlying the option or warrant.
</TABLE>
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> 37
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> 38
Participants are also eligible to receive from the Company, but the Company is
not obligated to provide, matching contributions each year in an amount up to
20% of the participant's contribution up to a maximum of 5% of such
participant's annual compensation. All contributions to a participant's plan
account are subject to limitations imposed on retirement plans generally and
401(k) plans in particular. The Company's contributions vest 100% when made.
Distribution of a participant's account under the 401(k) Plan may be made at
retirement, death, permanent disability or other termination of employment in a
lump-sum form of payment. Participants may withdraw amounts from their plan
accounts after attainment of age 59 1/2 or in the event of proven financial
hardship, and may also take loans against their plan account balances.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended September 30, 1995, the then members of the
Board fulfilled all functions of the Compensation Committee with regard to
determining compensation of executive officers of the Company. For a description
of the relationship between Mr. Amos Kaminski, Chairman of the Board, Mr. James
D. Hart, Vice-President, Finance and Administration, Treasurer and Chief
Financial Officer, Interfid and certain significant principal stockholders of
the Company, see "Certain Transactions--Interfid." Mr. Amos Kaminski, Mr. David
G. Lubrano, Mr. George B. Beitzel and a trust in which Mr. Beitzel and his
family members are the beneficiaries and in which Mr. Beitzel's wife and
children share voting power (the "Beitzel Family Trust"), were among certain
directors and principal stockholders who made loans to the Company. See "Certain
Transactions--Bridge Loans."
CERTAIN TRANSACTIONS
THE 1994 RECAPITALIZATION
The Company's previously outstanding Old Class H Preferred Stock contained
a mandatory redemption provision obligating the Company to redeem such class of
preferred stock for $2,042,070 on October 31, 1994. Holders of such Old Class H
Preferred Stock had the right to elect a majority of the members of the Board to
enable them to enforce their redemption rights and held irrevocable proxies
representing in excess of two-thirds of the vote of each class of outstanding
voting stock. The holders of the Old Class H Preferred Stock included Messrs.
Kaminski, Beitzel, Lubrano and Collins and BancBoston Ventures Inc., JHI
Development Capital Limited, Privest I N.V., Privest II, N.V., Interfid Ltd. and
the Beitzel Family Trust.
The Company executed an Agreement and Plan of Recapitalization dated as of
October 28, 1994 with the holders of the Old Class H Preferred Stock and certain
other stockholders. The plan of recapitalization eliminated the liquidation
preferences and redemption rights of such stockholders and, among other things,
provided for the conversion of one share of the Old Class H and I Preferred
Stock into three shares of Class A Preferred Stock of the Company, the
conversion of one share of Old Class F and G Preferred Stock into one share of
Class A or B Preferred Stock and the conversion of one share of each other old
class of preferred or common stock into one-fifteenth of a share of Class A or B
Common Stock. Additionally, each warrant and option to purchase shares of stock
was converted into a warrant or option to purchase one-fifteenth of a share of
Class A Common Stock or Class B Common Stock, at an exercise price equal to
fifteen times the original exercise price of such option or warrant. As used
herein, each reference to an "Old Class" of Common Stock or Preferred Stock
refers to such class of Common Stock or Preferred Stock outstanding prior to the
Recapitalization. See "Description of Capital Stock."
BRIDGE LOANS
On February 22, 1996, the Company entered into a Loan Agreement (the
"Bridge Loan Agreement") with certain parties (each a "Bridge Lender"), pursuant
to which the Company borrowed an aggregate amount of $600,000 (the "Bridge
Loan") from the Bridge Lenders. The Bridge Lenders were Messrs. Kaminski
($24,000 Bridge Loan), Lubrano ($18,000 Bridge Loan), Morton E. Goulder ($16,000
Bridge Loan), Beitzel ($11,500 Bridge Loan), The Beitzel Family Trust ($11,500
Bridge Loan), Gotthard Bank (Nassau Branch), acting for the account of certain
of its clients and their respective registered assigns
37
<PAGE> 39
($281,000 Bridge Loan), JHI Development Capital Limited ($155,000 Bridge Loan),
and BancBoston Ventures, Inc. ($83,000 Bridge Loan).
In connection with the Bridge Loan Agreement, the Company executed a
promissory note in favor of each Bridge Lender, pursuant to which the Company
agreed to pay the principal amount borrowed from such Bridge Lender, plus simple
interest at twelve percent (12%) per annum thereon, on August 22, 1996. The
Company agreed to an interest rate of 12% on the Bridge Loans given the fact
that the Bridge Loans are unsecured and subordinate to the Company's senior
indebtedness. At the time the Bridge Loan Agreement was entered into, the
interest rate on the Company's senior secured indebtedness was 10.5% per annum.
On August 22, 1996, the Company entered into an amendment extending the maturity
date of the Bridge Loans to October 22, 1996, and on October 9, 1996, the
Company entered into a further amendment extending the maturity date of the
Bridge Loans to December 22, 1996.
The Company used the proceeds of the Bridge Loans for working capital. The
proceeds of the Offering will be used to repay all amounts due to the Bridge
Lenders under the Bridge Loan Agreement. See "Use of Proceeds." As of June 30,
1996, the outstanding balance of the Bridge Loans (including accrued interest)
was $625,644.
INTERFID
As of May 1, 1996, Mr. James D. Hart became a full-time employee of the
Company. See "Management--Executive Compensation." From July 1, 1993 until April
30, 1996, the services of Mr. Hart, who, prior to May 1, 1996, was a
Vice-President of Interfid, were made available to the Company by Interfid on an
as-needed basis to render financial advisory services to the Company, and, from
March 1994 to May 1, 1996, to serve as Treasurer, Secretary and acting Chief
Financial Officer of the Company. As compensation for the services rendered by
Mr. Hart to the Company, the Company paid to Interfid $10,000 per month, with
respect to the period from January 1, 1996 until April 30, 1996, and $5,000 per
month with respect to the period from July 1, 1993 to December 31, 1995, and
reimbursed Interfid for reasonable out-of-pocket expenses incurred by Interfid
or Mr. Hart in connection with the performance of Mr. Hart's services to the
Company. There was no written agreement between the Company and Interfid in
respect of Mr. Hart's services. During the period prior to May 1, 1996, the
Company was not obligated to pay any compensation directly to Mr. Hart; his
compensation was paid by Interfid. However, the Board awarded Mr. Hart a
discretionary cash award of $20,000 for each of the fiscal years ended September
30, 1994 and September 30, 1995, respectively, and on November 30, 1994, granted
him a warrant to purchase 99,886 shares of Class A Common Stock under the 1994
Plan. Amos Kaminski, Chairman of the Board of the Company, is a director and the
controlling stockholder of Interfid. Interfid renders investment advisory
services to Premier Resources, Ltd., ("Premier"), a Bahamanian corporation.
Premier serves as an investment advisor to each of Privest I N.V. and Privest II
N.V. and may be deemed the beneficial owner of the Company's stock owned of
record by such entities. See "Principal 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> 40
PRINCIPAL STOCKHOLDERS
<TABLE>
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, and (iv) all directors and executive
officers of the Company as a group.
<CAPTION>
SHARES BENEFICIALLY SHARES TO BE
OWNED PRIOR TO BENEFICIALLY
OFFERING(1) OWNED AFTER OFFERING(1)
----------------------- -----------------------
NAME(2) NUMBER PERCENT NUMBER PERCENT
- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
PRINCIPAL STOCKHOLDERS
JHI Development Capital Limited(3) 736,616 23.9% 736,616 14.2%
St. James House,
New St. James Place
St. Helier, Jersey JE4 8WH
Channel Islands.............................
Privest I N.V.(4) 668,417 21.7 668,417 12.9
c/o Caribbean Management Company
14, John B. Gorsiraweg
Curacao, Netherland Antilles................
Privest II N.V.(4) 665,244 21.6 665,244 12.8
c/o Caribbean Management Company
14, John B. Gorsiraweg
Curacao, Netherland Antilles................
BancBoston Ventures, Inc.(5) 390,384 12.7 390,384 7.5
100 Federal Street
Boston, MA 02110............................
James W. Sole(6).............................. 168,397 5.5 168,397 3.3
DIRECTORS AND EXECUTIVE OFFICERS
C. Raymond Boelig(7).......................... 199,773 6.1 199,773 3.7
John S. Collins(8)............................ 160,829 5.0 160,829 3.0
Amos Kaminski(9) 146,263 4.7 146,263 2.8
c/o Interfid Ltd.
150 E. 58th Street, 27th Floor
New York, NY 10155-2798.....................
George Beitzel(10) 122,263 4.0 122,263 2.4
29 King Street
Chappaqua, NY 10514.........................
James D. Hart(11)............................. 100,996 3.2 100,996 1.9
David G. Lubrano(12) 97,375 3.2 97,375 1.9
94 Otis Street
Hingham, MA 02043...........................
Geoffrey W. Greve(13)......................... 73,620 2.3 73,620 1.4
John S. Seguin(14)............................ 66,666 2.1 66,666 1.3
All directors and executive officers 967,785 30.6 967,785 16.7
as a group (8 persons)(7)(8)(9)
(10)(11)(12)(13)(14)........................
<FN>
- ---------------
(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 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.
</TABLE>
39
<PAGE> 41
(2) Unless otherwise indicated, the address of the officer listed is: c/o
Bitstream Inc., 215 First Street, Cambridge, MA 02142.
(3) Includes 693,744 shares issuable upon conversion of Class A Preferred Stock
held of record by JHI Development Capital Limited and 14,234 shares
issuable to JHI Development Capital Limited upon the exercise of warrants.
JHI Development Capital Limited is a wholly owned subsidiary of James
Hardie (Holdings) Limited, a Jersey registered company, which has a
principal place of business at St. James House, New St. James Place, St.
Helier, Jersey JE4 8WH, Channel Islands. James Hardie (Holdings) Limited is
indirectly owned by James Hardie Industries Limited, an Australian publicly
held company, which has a principal place of business at 65 York Street,
Sydney NSW 2000, Australia. James Hardie Industries Limited may be deemed
the beneficial owner of the shares of the Company held by JHI Development
Capital Limited.
(4) Includes 633,333 shares and 633,333 shares of Class A Common Stock issuable
upon conversion of Class A Preferred Stock held of record by Privest I N.V.
and Privest II N.V., respectively, and 14,443 shares and 14,443 shares
issuable to Privest I and Privest II, respectively, upon the exercise of
warrants. Premier may be regarded as the beneficial owner of these shares
because it serves as an investment advisor to each of Privest I N.V. and
Privest II N.V. and has at times in the past been delegated, and may from
time to time in the future be delegated, the authority to vote or direct
the vote or to dispose or direct the disposition of these shares. Premier,
a corporation established under the laws of the Commonwealth of the
Bahamas, has a principal place of business at IBM House-East Bay Street,
Nassau, Bahamas and is a wholly owned subsidiary of Gesfid International
Ltd., a corporation established under the laws of the Commonwealth of the
Bahamas, which is a wholly owned subsidiary of Gesfid, S.A., a fiduciary
corporation established under the laws of Switzerland, which has a
principal place of business at Via Adamini, 10a, Lugano, Switzerland.
Gesfid, S.A. is indirectly controlled by Mr. Antonio Saladino, a citizen of
Switzerland, who has a principal place of business at Via Adamini, 10a,
Lugano, Switzerland. Mr. Saladino may be deemed to be the beneficial owner
of the shares of the Company held by Privest I N.V. and Privest II N.V. to
the extent that Premier is delegated the authority to vote or direct the
vote or to dispose of such shares.
(5) Includes 366,666 shares issuable upon conversion of Class A Preferred Stock
held of record by BancBoston Ventures, Inc. and 7,776 shares issuable to
BancBoston Ventures, Inc. upon the exercise of warrants. BancBoston
Ventures, Inc. is a wholly owned subsidiary of The First National Bank of
Boston, which is a national banking association. The First National Bank of
Boston disclaims beneficial ownership of any shares of the Company held by
BancBoston Ventures, Inc.
(6) Includes 160,666 shares issuable upon conversion of Class A Preferred Stock
and 2,176 shares and 1,111 shares issuable upon the exercise of warrants
and options, respectively.
(7) Includes 89,773 shares and 110,000 shares issuable to Mr. Boelig upon the
exercise of warrants and options, respectively.
(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.
(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.
(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.
(11) Includes 100,996 shares issuable to Mr. Hart upon the exercise of warrants.
(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.
(13) Includes 73,616 shares issuable to Mr. Greve upon the exercise of options.
(14) Includes 66,666 shares issuable to Mr. Seguin upon the exercise of options.
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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, the Company will have
outstanding 5,171,221 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 issuance, none of which will be
outstanding. The Company intends to file an amendment to the Company's
41
<PAGE> 43
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 to the interested stockholder. Subject to
certain exceptions, an "interested stockholder" is a person who,
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<PAGE> 44
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
The Class A Common Stock has been approved for quotation 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 5,593,247 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).
Of these shares, the 2,100,000 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 3,493,247 shares of
Class A Common Stock outstanding or issuable on the conversion of outstanding
Class B Common Stock, 86,465 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). 355,045 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
$7.00 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 3,406,783 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 5,593,247
shares immediately after this Offering) or (ii) the average weekly trading
volume of the Class A Common Stock on the Nasdaq National Market during the four
calendar weeks immediately preceding the date on which notice of such sale is
filed with the Securities and Exchange Commission. Sales pursuant to Rule 144
are also subject to certain requirements relating to the manner of sale, notice
and the availability of current public information about the Company. A person
(or persons whose shares are aggregated) who is not an Affiliate (as such term
is defined under the Securities Act) and has not been an Affiliate of the
Company at any time during the three months immediately preceding the sale and
who has beneficially owned Restricted Shares for at least three years is
entitled to sell such shares pursuant to Rule 144(k) without regard to the Rule
144 limitations described above.
Rule 701 under the Securities Act provides that the shares of Class A
Common Stock acquired upon the exercise of currently outstanding options and
warrants may be resold by persons, other than Affiliates, beginning 90 days
after the date of this Prospectus, subject only to the manner of sale of
provisions of Rule 144, and by Affiliates under Rule 144 without compliance with
its two-year minimum holding period requirement. The Securities and Exchange
Commission has proposed an amendment to Rule 144 which would reduce the holding
period for shares subject to Rule 144 to become eligible for sale in the public
market. This proposal, if adopted, would increase the number of shares of Common
Stock eligible for immediate sale following the expiration of any applicable
lock-up period.
As of June 30, 1996, options and warrants to purchase a total of 1,922,436
shares of Common Stock were outstanding, of which options and warrants to
purchase 1,674,805 shares were currently exercisable at prices ranging from
$0.90 to the assumed offering price of $7.00 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 $7.00 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."
The Company intends to file a registration statement under the Securities
Act covering the shares issuable on the exercise of options or warrants granted
under its stock plans within 180 days after the date of
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<PAGE> 46
this Prospectus. The Company expects that this registration will automatically
become effective upon filing. Accordingly, shares registered under such
registration statement will immediately thereafter be available for sale in the
public market, subject to Rule 144 volume limitations applicable to Affiliates,
and subject to any applicable vesting restrictions.
LOCK-UP AGREEMENTS
Each of the Company's directors and officers, and certain other employees
and security holders of the Company, have agreed not to offer, sell, contract to
sell, make any short sale, pledge, or otherwise dispose of, directly or
indirectly, any of the shares of Class A Common Stock or other securities
convertible into or exchangeable for, or any rights to purchase or acquire,
Class A Common Stock (each, a "Transfer") beneficially owned by them (the
"Lock-Up Securities"), or enter into any swap or other agreement with respect to
Lock-Up Securities that transfers, in whole or part any of the economic
consequences of ownership (each, a "Swap") for a period of 180 days following
the Effective Date, without the prior written consent of Volpe, Welty & Company,
except for the sale of shares of Class A Common Stock 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
<TABLE>
Subject to the terms and conditions of the Underwriting Agreement, the
Company has 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 the respective number of shares of
Class A Common Stock set forth opposite its name below.
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Volpe, Welty & Company....................................................
Advest, Inc. .............................................................
---------
Total........................................................... 2,100,000
=========
</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 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 as set forth on the cover page of this Prospectus.
The Company has 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 315,000 additional shares of Class A Common Stock at the same
price per share as the Company receives for the 2,100,000 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
2,100,000 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 2,100,000 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 purchased in the open
market after the Effective Date and except for shares issued 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 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.
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<PAGE> 48
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 has 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 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 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> 49
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> 50
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> 51
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> 52
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
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> 59
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> 60
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> 61
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> 62
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> 63
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(6) DEBT
(a) Line of Credit
On March 18, 1996, the Company amended its July 14, 1995 working capital
line-of-credit agreement with a bank to provide for borrowings up to $1,000,000
based on a percentage of qualified accounts receivable, as defined. This line
bears interest at various per annum rates between the prime rate (8.25% as of
June 30, 1996) plus 1% to 2%, depending on the occurrence of certain events, as
defined. As a component of this agreement, the Company can obtain up to $250,000
in letters of credit. Substantially all of the Company's assets are
collateralized under this agreement. The balance outstanding under this line was
$300,000 and $150,000, respectively as of December 31, 1995 and June 30, 1996.
The Company also amended and increased its $400,000 equipment term loan
agreement to $500,000 on March 18, 1996. This term loan bears interest at the
prime rate (8.25% as of June 30, 1996) plus 1.5% per annum or, if the Company so
chooses prior to September 1996, at a fixed rate based on the lender's current
market rate. The assets purchased with the use of these funds are collateralized
under this agreement. As of June 30, 1996, the Company has approximately
$274,000 outstanding under this term loan agreement, with 30 equal monthly
payments of principal and interest scheduled to be made beginning in October
1996.
(b) Capital Leases
<TABLE>
The Company leases certain equipment under capital leases expiring through
fiscal 1998. These capital lease payments are due in equal monthly installments
and bear interest at rates ranging from 8% to 10.75%. Future minimum lease
payments under the capital lease obligations as of December 31, 1995 are as
follows:
<CAPTION>
FISCAL YEAR AMOUNT
----------- --------
<S> <C>
1996............................................................ $153,000
1997............................................................ 86,000
1998............................................................ 58,000
1999............................................................ 31,000
2000............................................................ 39,000
--------
Total minimum lease payments............................ 367,000
Less -- Amount representing interest......................... 49,000
--------
Capital lease obligations............................ 318,000
Less -- Current portion...................................... 134,000
--------
$184,000
========
</TABLE>
(c) Subordinated Notes Payable to Stockholders
On February 22, 1996, the Company entered into agreements with certain
parties including certain directors and principal stockholders, pursuant to
which the Company borrowed an aggregate amount of $600,000. In connection with
these note payable agreements, the Company agreed to pay the principal amount
borrowed plus simple interest at 12% per annum on August 22, 1996. On August 22,
1996, the Company entered into an amendment to the notes pursuant to which the
maturity date was extended to October 22, 1996. On October 9, 1996, the Company
entered into a further amendment to the notes pursuant to which the maturity
date was extended to December 22, 1996. These notes are subordinate to all other
debt facilities.
F-15
<PAGE> 64
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(7) OPERATING LEASES
<TABLE>
The Company conducts its operations in leased facilities and is obligated
to pay monthly rent plus real estate taxes and certain operating expenses
through October 1998. Rent expense charged to operations for the years ended
September 30, 1993, 1994 and 1995 and the three months ended December 31, 1995
and the six months ended June 30, 1996 was approximately $704,000, $229,000,
$244,000, $54,000 and $134,000, respectively. Future minimum annual rent
commitments as of December 31, 1995 under the Company's leased facilities are as
follows:
<CAPTION>
YEAR AMOUNT
---- --------
<S> <C>
1996.............................................................. $189,000
1997.............................................................. 189,000
1998.............................................................. 142,000
--------
$520,000
========
</TABLE>
(8) CONTINGENT LIABILITIES
On May 26, 1995, The Friends of the Museum of Printing, Inc. (the
plaintiff) filed a lawsuit in the Middlesex County Superior Court of
Massachusetts against the Company in connection with a letter agreement dated
July 23, 1992 from the Company to the Museum concerning storage of certain font
materials for the Museum. The letter provided that the Company would store and
maintain the font materials for a period of two years from the date of the
letter and that the Company would have no liability to the Museum, over and
above the proceeds of insurance, for damage or loss of any of the font
materials, and that neither the Company nor the Museum would incur any liability
to the other for any loss or damage arising out of their respective rights and
obligations set forth in the letter. The Museum alleges that after the two-year
storage period had expired, the Company disposed of the font materials.
Although the Company cannot determine an estimate of the possible loss
associated with this matter, it believes that its available insurance will cover
any liability incurred in connection with the lawsuit, except for certain
potential liabilities, up to a maximum of $1.01 million, subject to a $10,000
deductible. The Company further believes that in the event that the claim
exceeds $1.01 million its available insurance will cover one-half of any
liability incurred by the Company in excess of $1.01 million up to a maximum of
$1.8 million. The Company's insurer is currently paying all of the costs
incurred by the Company in defending this lawsuit.
The Company has reserved the $10,000 deductible in the accompanying
consolidated financial statements as of June 30, 1996.
Pursuant to a letter dated May 6, 1996, a former director and officer of
the Company asserted that the Company has breached certain obligations he
alleges are due to him under a severance agreement dated May 22, 1991 (the
"Severance Agreement") between him and the Company. The former director and
officer claims that a provision in the Severance Agreement entitles him to
additional shares of Class A Common Stock and a reduction in the exercise price
of options to purchase Class A Common Stock held by him. The Company believes
that these claims are without merit and intends vigorously to contest their
validity. As of June 30, 1996, this former director and officer has not
commenced an action in any court in respect of the claims he has asserted
against the Company under the Severance Agreement.
The Company is self-insured for health costs to its employees up to an
annual aggregate amount of approximately $270,000, after which the Company's
insurance carrier pays for all additional claims.
F-16
<PAGE> 65
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> 66
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> 67
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> 68
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> 69
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> 70
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(14) GEOGRAPHICAL INFORMATION
<TABLE>
The Company's export sales from the United States to customers in foreign
countries are as follows:
<CAPTION>
THREE SIX MONTHS
MONTHS ENDED
YEARS ENDED SEPTEMBER 30, ENDED JUNE 30,
---------------------------------------- DECEMBER 31, -------------------------
1993 1994 1995 1995 1995 1996
---------- ---------- ---------- ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Europe......... $2,325,000 $2,344,000 $2,407,000 $ 775,000 $1,266,000 $1,606,000
Japan.......... 1,951,000 1,485,000 1,177,000 548,000 779,000 344,000
Canada......... -- 149,000 894,000 28,000 597,000 794,000
Other.......... -- 94,000 73,000 7,000 24,000 82,000
---------- ---------- ---------- ---------- ---------- ----------
$4,276,000 $4,072,000 $4,551,000 $1,358,000 $2,666,000 $2,826,000
========== ========== ========== ========== ========== ==========
</TABLE>
F-22
<PAGE> 71
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> 72
===============================================================================
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 OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES, OR AN OFFER TO, OR A SOLICITATION OF,
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 5
The Company............................... 10
Use of Proceeds........................... 10
Dividend Policy........................... 10
Capitalization............................ 11
Dilution.................................. 12
Selected Consolidated Financial Data...... 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 14
Business.................................. 21
Management................................ 31
Certain Transactions...................... 37
Principal Stockholders.................... 39
Description of Capital Stock.............. 41
Shares Eligible for Future Sale........... 44
Underwriting.............................. 46
Legal Matters............................. 47
Experts................................... 47
Additional Information.................... 47
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.
===============================================================================
===============================================================================
2,100,000 SHARES
[BITSTREAM LOGO]
CLASS A COMMON STOCK
--------------------
PROSPECTUS
, 1996
--------------------
VOLPE, WELTY & COMPANY
ADVEST, INC.
================================================================================
<PAGE> 73
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate (except for the Securities and Exchange
Commission Registration Fee, the NASD Filing Fee, and the Nasdaq Filing Fee) of
the fees and expanses all of which are payable by the Registrant, other than
underwriting discounts and commissions, in connection with the registration and
sale of the Class A Common Stock being registered:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee....................... $ 11,897
NASD Filing Fee........................................................... 3,950
Nasdaq Filing Fee......................................................... 31,710
Fees of Registrar and Transfer Agent...................................... 5,000
Printing and Engraving.................................................... 125,000
Blue Sky Fees and Expenses................................................ 20,000
Legal Fees................................................................ 425,000
Accounting Fees and expenses.............................................. 175,000
Directors' and Officers' Insurance........................................ 75,000
Miscellaneous............................................................. 77,443
--------
Total........................................................... $950,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the DGCL provides that a corporation may indemnify its
directors and officers, with respect to suits or proceedings arising out of
their capacity or status as directors and officers, if such person shall have
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, in any criminal
proceeding, if such person had no reasonable cause to believe his conduct was
unlawful; provided that, in the case of actions brought by or in the right of
the corporation, no indemnification shall be made with respect to any matter as
to which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the adjudicating court determines that such
indemnification is proper under the circumstances.
The Company's Certificate of Incorporation provides that to the extent not
prohibited by law, and to the fullest extent authorized by the DGCL, the Company
shall indemnify any person who is or was made, or threatened to be made, a party
to any threatened, pending or completed action, suit or proceeding (a
"Proceeding"), whether civil, criminal, administrative or investigative,
including, without limitation, an action by or in the right of the Company to
procure a judgment in its favor, by reason of the fact that such person, or a
person of whom such person is the legal representative, is or was a director or
officer of the Company, or is or was serving in any capacity at the request of
the Company for any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise against judgments, fines, penalties,
excise taxes, amounts paid in settlement and costs, charges and expenses
(including attorneys' fees and disbursements. Rights to indemnification and
reimbursement or advancement of expenses shall continue as to a person who has
ceased to be a director or officer (or other person indemnified) and shall inure
to the benefit of the executors, administrators, legatees and distributees of
such person. The Certificate of Incorporation further provides that the right to
indemnification is a contract right and includes the right to be reimbursed or
advanced the funds necessary for payment of expenses, including attorneys' fees
and disbursements, incurred in connection with any Proceeding, in advance of the
final disposition of such Proceeding; provided, however, that, if required by
the DGCL, such expenses incurred by or on behalf of any director or officer or
other person may be paid in advance of the final disposition of a Proceeding
only upon receipt by the Company of an undertaking, by or on behalf of such
director or officer (or other person indemnified hereunder), to repay any such
amount so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right of appeal that such director,
officer or other person is not entitled to be indemnified for such expenses.
II-1
<PAGE> 74
The Company has entered into a separate indemnification agreement with each
of its directors which provides for mandatory indemnification arrangements
broader than that specifically provided by current Delaware law, including the
advancement of expenses incurred to defend actions brought against him or her in
his or her capacity as a director or agent of the Company.
Under the form of Underwriting Agreement filed as Exhibit 1.1 hereto, the
Underwriter is obligated, under certain circumstances, to indemnify directors
and officers of the Company against or otherwise certain liabilities, including
liabilities under the Securities Act.
The Company intends to purchase a general liability insurance policy which
covers certain liabilities of directors and officers of the Company arising out
of claims based on acts or omissions in their capacity as directors or officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
From June 1993 to June 30, 1996, the Company granted options and warrants
to purchase an aggregate of 1,833,271 shares of the Company's Class A Common
Stock to employees and directors with exercise prices ranging from $0.90 to
$3.00. During the fiscal quarter ended June 30, 1996, the Company issued an
aggregate of 6,833 shares of Class A Common Stock in connection with the
exercise of 6,833 vested options and warrants issued under the 1994 Stock Plan.
Of such options and warrants granted which remain outstanding, options and
warrants to purchase 1,674,805 shares are fully exercisable as of June 30, 1996,
and the remaining options and warrants to purchase 151,633 shares are subject to
further vesting. Additionally, on November 30, 1994, the Company issued 40,000
shares of Class A Common Stock to each of the three members of the Board in
discharge of $60,000 of unpaid directors fees due to each director for fiscal
years 1992 through 1994. (All numbers of Common Stock and prices per share
listed above have been adjusted for the 2-for-3 conversion effected in
connection with the Delaware Reincorporation.)
Except for the shares issued to the members of the Board, the sales and
issuances of securities in the transactions described above are deemed to be
exempt from registration under the Securities Act by virtue of Rule 701
promulgated thereunder, in that they were issued either pursuant to written
compensatory benefits plans or pursuant to a written contract relating to
compensation, as provided by Rule 701. The issuance of shares to the members of
the Board described above are deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) thereof as transactions by an issuer
not involving any public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
(a) Exhibits. The following is a list of exhibits filed as part of the
Registration Statement.
<S> <C>
1 Underwriting Agreement
++1.1 Underwriting Agreement
3 Certificate of Incorporation and Bylaws
*3.1 Certificate of Incorporation of the Company
*3.2 Bylaws of the Company.
4 Instruments Defining the Rights of Security Holders
*4.1 Specimen Common Stock Certificate.
5 Opinion Regarding Legality
++5.1 Opinion of Rubin Baum Levin Constant & Friedman
10 Material Contracts
*10.1 1996 Stock Plan
*10.2 1994 Stock Plan
*10.3 Agreement and Plan of Recapitalization dated October 28, 1994
*10.4 Lease between Athenaeum Group and the Registrant dated March 17, 1992
*10.4.1 First Lease Amendment between Athenaeum Group and the Registrant
dated September 7, 1993
*10.4.2 Second Lease Amendment between Athenaeum Group and the Registrant dated July 13, 1994
*10.4.3 Third Lease Amendment between Athenaeum Group and the Registrant
dated July 15, 1996
</TABLE>
II-2
<PAGE> 75
<TABLE>
<C> <S>
*10.5 Bridge Loan Agreement, dated February 22, 1996 among the Registrant
and certain bridge lenders named therein
*10.5.1 Amendment to Loan Agreement and to Waiver and Subordination
Agreements dated August 22, 1996 among the Registrant and certain bridge
lenders named therein
*10.5.2 Amendment No. 2 to Loan Agreement and to Waiver and Subordination
Agreements dated October 9, 1996 among the Registrant and certain
bridge lenders named therein
#10.6 Software License Agreement between Novell, Inc. and the Registrant,
dated as of September 6, 1996
#10.7 Agreement between Tumbleweed Software Corporation and the Registrant
dated as of June 10, 1996
*10.8 Agreement dated as of May 1, 1996 among the Registrant and James D.
Hart
*10.9 Form of Indemnification Agreement between the Registrant, its
directors and certain of its officers
21 Subsidiaries of Registrant
*21.1 Subsidiaries of the Registrant
23 Consents of Experts and Counsel
++23.1 Consent of Arthur Andersen LLP
23.2 Consent of Rubin Baum Levin Constant & Friedman (included in Item 5)
24 Power of Attorney
*24.1 Power of Attorney (included on signature page)
27 Financial Data Schedule
*27.1 Financial Data Schedule
<FN>
- ---------------
++ Filed herewith.
* Previously filed.
# Previously filed in redacted form subject to a request for confidential
treatment pursuant to Rule 406 under the Securities Act. The confidential
information that has been omitted has been filed separately with the Securities
and Exchange Commission with the request for confidential treatment.
</TABLE>
(b) Financial statement schedule.
Schedule I. Valuation and Qualifying Accounts.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities rising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the Certificate of Incorporation, Bylaws, and indemnity
agreements, or otherwise, the Company has been advised that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the Company in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h)
II-3
<PAGE> 76
under the Act shall be deemed to be part of this Registration Statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 77
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Pre-Effective Amendment No. 2 to Registration
Statement No. 333-11519 on Form S-1, to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts on this 29th day of October, 1996.
BITSTREAM INC.
By: /S/ C. RAYMOND BOELIG
------------------------------------
C. Raymond Boelig
President and Chief Executive
Officer
<TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Pre-Effective Amendment No. 2 to Registration Statement No. 333-11519 on
Form S-1 has been signed by the following persons in the capacities indicated
below on the dates indicated.
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman of the Board and October 29, 1996
- ------------------------------------------ Director
Amos Kaminski
/S/ C. RAYMOND BOELIG President, Chief Executive October 29, 1996
- ------------------------------------------ Officer and Director
C. Raymond Boelig (Principal Executive
Officer)
/S/ JAMES D. HART Vice President, Finance and October 29, 1996
- ------------------------------------------ Administration, Treasurer
James D. Hart and Chief Financial
Officer (Principal
Financial and Accounting
Officer)
* Director October 29, 1996
- ------------------------------------------
David G. Lubrano
* Director October 29, 1996
- ------------------------------------------
George B. Beitzel
*By: /S/ C. RAYMOND BOELIG
- ------------------------------------------
C. Raymond Boelig, Attorney-in-Fact
</TABLE>
II-5
<PAGE> 78
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Bitstream Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Bitstream Inc. and subsidiaries
included in this registration statement and have issued our report thereon dated
April 30, 1996 (except with respect to the matters discussed in Note 1(k) and
Note 10(d), as to which the date is May 21, 1996). Our audit was made for the
purpose of forming an opinion on the basic consolidated financial statements
taken as a whole. The schedule for the Valuation and Qualifying Accounts
included herein is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic consolidated financial statements and, in our opinion,
fairly states, in all material respects, the financial data required to be set
forth therein, in relation to the basic consolidated financial statements taken
as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 30, 1996 (except with respect
to the matters discussed in Note 1(k)
and Note 10(d), as to which the
date is May 21, 1996)
S-1
<PAGE> 79
SCHEDULE I
BITSTREAM INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995
AND THE THREE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
NET
BALANCE, PROVISIONS DEDUCTIONS
BEGINNING OF CHARGED TO FROM BALANCE, END
DESCRIPTION PERIOD OPERATIONS ALLOWANCES OF PERIOD
- ------------------------------------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Year Ended September 30, 1993 --
Bad debt reserve........................ $ 779,000 $ 80,000 $ (676,000) $ 91,000
Sales returns and allowances reserve.... 4,500,000 -- (3,613,000) 887,000
Self-insurance reserve.................. 117,000 588,000 (571,000) 134,000
Year Ended September 30, 1994 --
Bad debt reserve........................ 183,000 302,000 (252,000) 233,000
Sales returns and allowances reserve.... 887,000 -- (636,000) 251,000
Self-insurance reserve.................. 134,000 188,000 (261,000) 61,000
Year Ended September 30, 1995 --
Bad debt reserve........................ 233,000 (25,000) (27,000) 181,000
Sales returns and allowances reserve.... 251,000 -- (154,000) 97,000
Self-insurance reserve.................. 61,000 168,000 (176,000) 53,000
Three Months Ended December 31, 1995 --
Bad debt reserve........................ 181,000 12,000 (60,000) 133,000
Sales returns and allowances reserve.... 97,000 136,000 (198,000) 35,000
Self-insurance reserve.................. 53,000 58,000 (45,000) 66,000
</TABLE>
S-2
<PAGE> 80
<TABLE>
EXHIBIT INDEX
<CAPTION>
EXHIBIT
NO. PAGE
----- -----
<C> <S>
1 Underwriting Agreement
++1.1 Underwriting Agreement
3 Certificate of Incorporation and Bylaws
*3.1 Certificate of Incorporation of the Company
*3.2 Bylaws of the Company
4 Instruments Defining the Rights of Security Holders
*4.1 Specimen Common Stock Certificate.
5 Opinion Regarding Legality
++5.1 Opinion of Rubin Baum Levin Constant & Friedman
10 Material Contracts
*10.1 1996 Stock Plan
*10.2 1994 Stock Plan
*10.3 Agreement and Plan of Recapitalization dated October 28, 1994
*10.4 Lease between Athenaeum Group and the Registrant dated March 17, 1992
*10.4.1 First Lease Amendment between Athenaeum Group and the Registrant dated
September 7, 1993
*10.4.2 Second Lease Amendment between Athenaeum Group and the Registrant dated
July 13, 1994
*10.4.3 Third Lease Amendment between Athenaeum Group and the Registrant dated
July 15, 1996
*10.5 Bridge Loan Agreement, dated February 22, 1996 among the Registrant and
certain bridge lenders named therein
*10.5.1 Amendment to Loan Agreement and to Waiver and Subordination Agreements
dated August 22, 1996 among the Registrant and certain bridge lenders
named therein
*10.5.2 Amendment No. 2 to Loan Agreement and to Waiver and Subordination
Agreements dated October 9, 1996 among the Registrant and certain bridge
lenders named therein
#10.6 Software License Agreement between Novell, Inc. and the Registrant, dated
as of September 6, 1996
#10.7 Agreement between Tumbleweed Software Corporation and the Registrant dated
as of June 10, 1996
*10.8 Agreement dated as of May 1, 1996 among the Registrant and James D. Hart
*10.9 Form of Indemnification Agreement between the Registrant, its directors
and certain of its officers
21 Subsidiaries of Registrant
*21.1 Subsidiaries of the Registrant
23 Consents of Experts and Counsel
++23.1 Consent of Arthur Andersen LLP
23.2 Consent of Rubin Baum Levin Constant & Friedman (included in Item 5)
24 Power of Attorney
*24.1 Power of Attorney (included on signature page)
27 Financial Data Schedule
*27.1 Financial Data Schedule
<FN>
- ---------------
++ Filed herewith.
* Previously filed.
# Previously filed in redacted form subject to a request for confidential
treatment pursuant to Rule 406 under the Securities Act. The confidential
information that has been omitted has been filed separately with the Securities
and Exchange Commission with the request for confidential treatment.
</TABLE>
<PAGE> 1
EXHIBIT 1.1
Draft Dated 10/29/96
2,100,000 Shares(1)
BITSTREAM INC.
Common Stock
UNDERWRITING AGREEMENT
October , 1996
Volpe, Welty & Company
Advest, Inc.
As Representatives of the Several Underwriters
c/o Volpe, Welty & Company
One Maritime Plaza, 11th Floor
San Francisco, California 94111
Dear Sirs and Madams:
Bitstream Inc., a Delaware corporation (the "Company"), proposes to issue
and sell 2,100,000 shares (the "Firm Shares") of its authorized but unissued
Class A Common Stock, $.01 par value (the "Common Stock"). The Company proposes
to grant to the Underwriters (as defined below) an option to purchase up to
315,000 additional shares of Common Stock (the "Optional Shares" and, with the
Firm Shares, collectively, the "Shares"). The Common Stock is more fully
described in the Registration Statement and the Prospectus hereinafter
mentioned.
The Company hereby confirms the agreements made with respect to the
purchase of the shares by the several underwriters, for whom you are acting,
named in Schedule I hereto (collectively, the "Underwriters," which term shall
also include any underwriter purchasing Common Stock pursuant to Section 2(b)
hereof). You represent and warrant that you have been authorized by each of
the other Underwriters to enter into this Agreement on its behalf and to act
for it in the manner herein provided.
Amos Kaminski, C. Raymond Boelig, James D. Hart, David G. Lubrano and
George B. Beitzel are hereinafter collectively referred to as the "Principal
Securityholders."
- --------
1 Plus an option to purchase from the Company up to 315,000 additional shares
to cover over-allotments.
<PAGE> 2
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPAL
SECURITYHOLDERS. The Company and each of the Principal Securityholders hereby
represent and warrant to the several Underwriters as of the date hereof and as
of each Closing Date (as defined below) that:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (No.
333-11519), including the related preliminary prospectus, for the registration
under the Securities Act of 1933, as amended (the "Securities Act") of the
Shares. Copies of such registration statement and of each amendment thereto, if
any, including the related preliminary prospectus (meeting the requirements of
Rule 430A of the rules and regulations of the Commission) heretofore filed by
the Company with the Commission have been delivered to you and are identical to
the electronically transmitted copies thereof filed with the Commission pursuant
to the Commission's Electronic Data Gathering, Analysis and Retrieval ("EDGAR"),
except to the extent permitted by Regulation S-T.
The term Registration Statement as used in this agreement shall mean such
registration statement, including all exhibits and financial statements, all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, in the form in which it became effective, and any
registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Shares (a "Rule 462(b)
registration statement"), and, in the event of any amendment thereto after the
effective date of such registration statement (the "Effective Date"), shall also
mean (from and after the effectiveness of such amendment) such registration
statement as so amended (including any Rule 462(b) registration statement). The
term Prospectus as used in this Agreement shall mean the prospectus relating to
the Shares first filed with the Commission pursuant to Rule 424(b) and Rule 430A
of the rules and regulations of the Commission (or if no such filing is
required, as included in the Registration Statement) and, in the event of any
supplement or amendment to such prospectus after the Effective Date, shall also
mean (from and after the filing with the Commission of such supplement or the
effectiveness of such amendment) such prospectus as so supplemented or amended.
The term Preliminary Prospectus as used in this Agreement shall mean each
preliminary prospectus included in such registration statement prior to the time
it becomes effective. For purposes of this Agreement, all references to the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement to any of the foregoing shall be deemed to include the
applicable copy filed with the Commission pursuant to EDGAR.
The Registration Statement has been declared effective under the
Securities Act, and no post-effective amendment to the Registration Statement
has been filed as of the date of this Agreement. The Company has caused to be
delivered to you copies of each Preliminary Prospectus and has consented to the
use of such copies for the purposes permitted by the Securities Act.
(b) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, has full corporate power and
authority to own or lease its properties and conduct its business as described
in the Registration Statement and the Prospectus and as being conducted, and
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<PAGE> 3
is duly qualified as a foreign corporation and in good standing in all
jurisdictions in which the character of the property owned or leased or the
nature of the business transacted by it makes qualification necessary (except
where the failure to be so qualified would not have a material adverse effect on
the business, business prospects, properties, condition (financial or otherwise)
or results of operations of the Company and its subsidiaries, taken as a whole
(a "Material Adverse Effect")).
(c) The Company does not own or control, directly or
indirectly, any corporation, association or other entity other than the
subsidiaries listed in Exhibit 21 to the Registration Statement. Except as
described in the Prospectus, the Company owns all of the outstanding capital
stock of its subsidiaries free and clear of all claims, liens, charges and
encumbrances. The Company and each of its subsidiaries are in possession of and
operating in compliance with all material authorizations, licenses, permits,
consents, certificates and orders ("Permits") material to the conduct of their
respective businesses as described in the Prospectus, all of which are valid and
in full force and effect, except for any such Permits the absence of which or
the noncompliance with which or the failure to be valid and in full force and
effect could not reasonably be expected to result in a Material Adverse Effect.
(d) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, there has not been any
materially adverse change in the business, business prospects, properties,
condition (financial or otherwise) or results of operations of the Company and
its subsidiaries, taken as a whole, whether or not arising from transactions in
the ordinary course of business, other than as set forth in the Registration
Statement and the Prospectus, and since such dates, except in the ordinary
course of business, neither the Company nor any of its subsidiaries has entered
into any material transaction not referred to in the Registration Statement and
the Prospectus.
(e) The Registration Statement and the Prospectus comply, and
on the Closing Date (as hereinafter defined) and any later date on which
Optional Shares are to be purchased, the Prospectus will comply, in all material
respects, with the provisions of the Securities Act and the rules and
regulations of the Commission thereunder; on the Effective Date, the
Registration Statement did not contain any untrue statement of a material fact
and did not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and, on the
Effective Date the Prospectus did not and, on the Closing Date and any later
date on which Optional Shares are to be purchased, will not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that none of the
representations and warranties in this subparagraph (e) shall apply to
statements in, or omissions from, the Registration Statement or the Prospectus
made in reliance upon and in conformity with information herein or otherwise
furnished in writing to the Company by or on behalf of the Underwriters for use
in the Registration Statement or the Prospectus.
(f) The Company has authorized and outstanding capital stock as
set forth under the heading "Capitalization" in the Prospectus. The issued and
outstanding shares of Common Stock have been duly authorized and validly issued,
are fully paid and nonassessable, have been
-3-
<PAGE> 4
issued in compliance with all federal and state securities laws, and were not
issued in violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities which rights were not waived in writing at
the time of issuance. All issued and outstanding shares of capital stock of each
subsidiary of the Company have been duly authorized and validly issued and are
fully paid and nonassessable. Except as disclosed in or contemplated by the
Prospectus and the financial statements of the Company and the related notes
thereto included in the Prospectus, neither the Company nor any subsidiary has
any outstanding options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. The description
of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised thereunder,
set forth in the Prospectus accurately and fairly presents the information
required by the Securities Act and the rules and regulations of the Commission
thereunder to be shown with respect to such plans, arrangements, options and
rights.
(g) The Shares are duly authorized, are (or, in the case of
Shares to be sold by the Company, will be, when issued and sold to the
Underwriters against payment therefor, as provided herein) validly issued, fully
paid and nonassessable and conform to the description thereof in the Prospectus.
No further approval or authority of the stockholders or the Board of Directors
of the Company will be required for the issuance and sale of the Shares to be
sold by the Company as contemplated herein.
(h) The Shares to be issued and sold by the Company will be
authorized for listing on the Nasdaq National Market upon official notice of
issuance.
(i) The Shares to be sold by the Company will be sold free and
clear of any pledge, lien, security interest, encumbrance, claim or equitable
interest, and will conform to the description thereof contained in the
Prospectus. No preemptive right, co-sale right, right of first refusal or other
similar right to subscribe for or purchase securities of the Company which has
not been waived in writing exists with respect to the issuance and sale of the
Shares by the Company pursuant to this Agreement. No stockholder of the Company
has any right which has not been waived, or complied with, to require the
Company to register the sale of any shares owned by such stockholder under the
Securities Act in the public offering contemplated by this Agreement.
(j) The Company has full corporate power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and
constitutes a valid and binding obligation of the Company enforceable in
accordance with its terms, except as enforceability may be limited by general
equitable principles, bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium laws affecting creditors' rights generally and except as
to those provisions relating to indemnity or contribution for liabilities
arising under federal and state securities laws. The making
-4-
<PAGE> 5
and performance of this Agreement by the Company and the consummation of the
transactions contemplated hereby (i) will not violate any provisions of the
Certificate of Incorporation, Bylaws or other organizational documents of the
Company or any of its subsidiaries, and (ii) will not conflict with, result in a
material breach or material violation of, or constitute, either by itself or
upon notice or the passage of time or both, a material default under (A) any
agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit
or other instrument to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries or any of their respective
properties may be bound or affected, or (B) any statute or any authorization,
judgment, decree, order, rule or regulation of any court or any regulatory body,
administrative agency or other governmental body applicable to the Company or
any of its subsidiaries or any of their respective properties. No consent,
approval, authorization or other order of any court, regulatory body,
administrative agency or other governmental body that has not already been
obtained is required for the execution and delivery of this Agreement by the
Company or the consummation by the Company of the transactions contemplated by
this Agreement, except for compliance with the Securities Act, state Blue Sky
laws applicable to the public offering of the Shares by the several Underwriters
and the clearance of such offering with the NASD.
(k) The consolidated financial statements and schedules of the
Company and the related notes thereto included in the Registration Statement and
the Prospectus present fairly on a consolidated basis the financial position of
the Company and its subsidiaries as of the respective dates of such financial
statements and schedules, and the results of operations and cash flows of the
Company and its subsidiaries for the respective periods covered thereby. Such
statements, schedules and related notes have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods specified, as certified by the independent accountants
named in subsection 1(ac). No other financial statements or schedules are
required to be included in the Registration Statement. The selected financial
data set forth in the Prospectus under the captions "Capitalization" and
"Selected Consolidated Financial Information" fairly present the information set
forth therein on the basis stated in the Registration Statement.
(l) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance in all material respects with management's general or
specific authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance in all material respects with
management's general or specific authorization, and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences. The
representations and warranties given by the Company and its officers to its
independent public accountants for the purpose of supporting the letters
referred to in Section 9(f) are true and correct in all material respects.
(m) Neither the Company nor any of its subsidiaries is (i) in
violation or default of any provision of its Certificate of Incorporation,
Bylaws or other organizational documents, or (ii) in a breach of or default with
respect to any provision of any agreement, judgment, decree, order, mortgage,
deed of trust, lease, franchise, license, indenture, permit or other instrument
to which it is a party or by which it or any of its properties are bound; and
there does not exist any
-5-
<PAGE> 6
state of facts which, with notice or lapse of time or both would constitute such
a breach or default on the part of the Company and its subsidiaries, taken as a
whole, except in the case of clause (ii) for such breaches or defaults which
individually or in the aggregate would not have a Material Adverse Effect.
(n) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and Regulations of
the Commission thereunder which have not been described or filed as required.
The contracts so described in the Prospectus are in full force and effect on the
date hereof.
(o) Except as disclosed in the Prospectus, there are no legal
or governmental actions, suits or proceedings pending or, to the knowledge of
the Company, threatened to which the Company or any of its subsidiaries is or,
to the knowledge of the Company, is threatened to be made a party or of which
property owned or leased by the Company or any of its subsidiaries is or, to the
knowledge of the Company, is threatened to be made the subject, which actions,
suits or proceedings could, if determined adversely to the Company or any of its
subsidiaries, individually or in the aggregate, prevent or adversely affect the
transactions contemplated by this Agreement or result in a material adverse
change in the business, business prospects, properties, condition (financial or
otherwise), or results of operations of the Company and its subsidiaries taken
as a whole; and no labor disturbance by the employees of the Company or any of
its subsidiaries exists or, to the knowledge of the Company, is imminent which
could materially adversely affect the business, business prospects, properties,
condition (financial or otherwise), or results of operations of the Company and
its subsidiaries taken as a whole. Neither the Company nor any of its
subsidiaries is a party or subject to the provisions of any material injunction,
judgment, decree or order of any court, regulatory body, administrative agency
or other governmental body. Except as disclosed in the Prospectus, there are no
material legal or governmental actions, suits or proceedings pending or, to the
Company's and the Principal Securityholders' knowledge, threatened against any
executive officers or directors of the Company.
(p) The Company or the applicable subsidiary has good and
marketable title to all the properties and assets reflected as owned in the
financial statements hereinabove described (or elsewhere in the Prospectus),
subject to no lien, mortgage, pledge, charge or encumbrance of any kind except
(i) those, if any, reflected in such financial statements (or elsewhere in the
Prospectus), (ii) liens to be satisfied or discharged upon repayment of
indebtedness with the proceeds of the Offering as disclosed in the Prospectus
under the caption "Use of Proceeds," or (iii) those which could not reasonably
be expected to have a Material Adverse Effect, and do not materially adversely
affect the use made and proposed to be made of such property by the Company or
its subsidiaries. The Company or the applicable subsidiary holds its leased
properties under valid and binding leases except where the failure of a lease to
be valid and binding could not, singly or in the aggregate, reasonably be
expected to have a Material Adverse Effect. Except as disclosed in the
Prospectus, the Company owns or leases all such properties as are materially
necessary to its operations as now conducted or as proposed to be conducted.
-6-
<PAGE> 7
(q) Since the respective dates as of which information is given
in the Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus: (i) the Company and its
subsidiaries have not (A) incurred any material liabilities or obligations,
indirect, direct or contingent, or (B) entered into any oral or written
agreement or other transaction, which in the case of (A) or (B) is not in the
ordinary course of business; (ii) the Company and its subsidiaries have not
sustained any material loss or interference with their respective businesses or
properties from fire, flood, windstorm, accident or other calamity, whether or
not covered by insurance; (iii) the Company and its subsidiaries have not paid
or declared any dividends or other distributions with respect to their
respective capital stock and the Company and its subsidiaries are not in default
in the payment of principal or interest on any outstanding debt obligations
which default could have a Material Adverse Effect; (iv) there has not been any
change in the capital stock of the Company or its subsidiaries (other than upon
the sale of the Shares hereunder or upon the exercise of any options or warrants
or conversion of any convertible securities disclosed in the Prospectus); (v)
there has not been any material increase in the short- or long-term debt of the
Company and its subsidiaries; and (vi) there has not been any material adverse
change or any development involving or which may reasonably be expected to
involve a prospective material adverse change, in the business, business
prospects, condition (financial or otherwise), properties, or results of
operations of the Company and its subsidiaries taken as a whole.
(r) The Company is and its subsidiaries are conducting business
in compliance with all applicable laws, rules and regulations of the
jurisdictions in which they are conducting business, except where the failure to
be so in compliance would not have a material adverse effect on the business,
business prospects, properties, condition (financial or otherwise) or results of
operations of the Company and its subsidiaries taken as a whole.
(s) The Company and its subsidiaries have filed all necessary
federal, state and foreign income and franchise tax returns required to have
been filed as of the date hereof, and all such tax returns are complete and
correct in all material respects, and the Company and its subsidiaries have not
failed to pay any taxes which were payable pursuant to said returns or any
assessments with respect thereto other than those being contested in good faith
and for which adequate reserves have been provided or those currently payable
without penalty or interest. The Company has no knowledge of any material tax
deficiency which has been or is likely to be threatened or asserted against the
Company or its subsidiaries.
(t) The Company has not distributed, and will not distribute
prior to the later to occur of (i) completion of the distribution of the Shares,
or (ii) the expiration of any time period within which a dealer is required
under the Securities Act to deliver a prospectus relating to the Shares, any
offering material in connection with the offering and sale of the Shares other
than the Prospectus, the Registration Statement and any other materials
permitted by the Securities Act and consented to by the Underwriters.
(u) Each of the Company and its subsidiaries maintains
insurance of the types and in the amounts generally deemed adequate for its
business, including, but not limited to, directors' and officers' insurance,
insurance covering real and personal property owned or leased by the
-7-
<PAGE> 8
Company and its subsidiaries against theft, damage, destruction, acts of
vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect. The Company has not been refused any
insurance coverage sought or applied for, and the Company has no reason to
believe that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would not materially
adversely affect the business, business prospects, properties, condition
(financial or otherwise) or results of operations of the Company and its
subsidiaries taken as a whole.
(v) Neither the Company nor any of its subsidiaries nor, to the
best of the Company's or the Principal Securityholders' knowledge, any of their
employees or agents has at any time during the last five years (i) made any
unlawful contribution to any candidate for foreign office, or failed to disclose
fully any contribution in violation of law, or (ii) made any payment to any
foreign, federal or state governmental officer or official or other person
charged with similar public or quasi-public duties, other than payments required
or permitted by the laws of the United States or any jurisdiction thereof.
(w) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might be reasonably expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(x) The Company has caused (i) each of its executive officers
and directors as set forth in the Prospectus and (ii) the holders of Common
Stock (including shares issuable upon the exercise or conversion of any option,
warrant or other security) listed on Schedule II hereto, to furnish to Volpe,
Welty & Company as a representative of the Underwriters an agreement in form and
substance satisfactory to Volpe, Welty & Company pursuant to which each such
party has agreed that without the prior written approval of Volpe, Welty &
Company, such party will not during the period of one hundred eighty (180) days
after the date the Registration Statement becomes effective (A) offer, sell,
contract to sell, make any short sale (including without limitation a short
against the box), pledge or otherwise dispose of, directly or indirectly, any
shares of the Company's Common Stock, or Class B Common Stock, $.01 par value
per share ("Class B Common Stock"), options to acquire Common Stock or Class B
Common Stock or securities convertible into or exchangeable for, or any other
rights to purchase or acquire, the Company's Common Stock or Class B Common
Stock beneficially owned by such persons (as determined in accordance with the
rules and regulations of the Commission) (collectively "Restricted Securities")
or (B) enter into any swap or other agreement that transfers, in whole or in
part, any of the economic consequences of ownership of Common Stock or Class B
Common Stock, whether any such transaction described in (A) or (B) is to be
settled by delivery of Common Stock or Class B Common Stock or such other
securities, in cash or otherwise. The lock-up restriction of the foregoing
sentence shall not apply to (i) the sale of shares purchased in the open market
after the date the Registration Statement becomes effective or (ii) the
exercise or conversion of outstanding options, warrants or convertible
securities during any such period (but such lock-up restrictions do apply to any
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<PAGE> 9
subsequent sale of shares received upon such exercise or conversion). The
foregoing lock-up restriction is expressly agreed to preclude the holder of
Restricted Securities from engaging in any hedging or other transaction that is
designed to or could reasonably be expected to lead to, or result in, a
disposition of Restricted Securities during the applicable lock-up period even
if such Restricted Securities would be disposed of by the holder subsequent to
the applicable lock-up period or by someone other than the original holder.
Notwithstanding the foregoing, any transfer of Restricted Securities which
either (i) constitutes a pro rata distribution of a partnership or a corporation
to its partners or its stockholders, respectively, or (ii) constitutes a bona
fide gift of such shares, will not require the consent of Volpe, Welty &
Company; provided, that the transferee enters into a lock-up agreement in
substantially this form covering the remainder of such lock-up period.
(y) Neither the Company nor any of its affiliates does business with
the government of Cuba or with any person or affiliate located in Cuba.
(z) The Company owns or has the right to utilize, pursuant to a
license, a sublicense, an agreement, written permission or otherwise, all
Intellectual Property (as defined below) used in or necessary to conduct its
business as presently conducted and as presently proposed to be conducted in all
material respects; moreover, each item of Intellectual Property owned or used by
the Company in its business as presently conducted or presently proposed to be
conducted, will be owned or available to the Company on identical terms and
conditions immediately subsequent to the closing of the sale of the Shares. The
Company has taken all commercially reasonable action to maintain and protect
each material item of Intellectual Property that the Company owns or uses. As
far as the Company can reasonably foresee, the expiration of any Intellectual
Property or governmental authorizations would not have a Material Adverse
Effect, except that early termination or revocation of, or failure to renew, the
license rights granted from Novell, Inc. could have a Material Adverse Effect on
the Company. Neither the Company nor any Principal Securityholder has any
knowledge of an infringement or misappropriation by the Company or its
subsidiaries of any Intellectual Property rights of third parties. Neither the
Company nor any Principal Securityholder have any knowledge that the continued
operation of the business of the Company as presently conducted or presently
proposed to be conducted, would interfere with, infringe upon or misappropriate
any Intellectual Property rights of third parties; and no claims, charges,
complaints, or notices have been received by the Company or, to the knowledge of
the Company, are threatened against the Company or its subsidiaries regarding
any Intellectual Property rights of any third party. All copyright registrations
material to the Company in conducting its present business and presently
proposed business are valid, in full force and effect except for such instances
as would not have a Material Adverse Effect; all trademark applications and
registrations material to the Company in conducting its present business and
presently proposed business are valid, in full force and effect and the
description of the goods and services specified in such applications and
registrations reflect in all material respects the goods and services provided
by and/or sold by the Company in connection with its use of the applicable
Intellectual Property; all issued patents material to the Company in conducting
its present business and presently proposed business are valid and enforceable;
and all patent, trademark and copyright related
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<PAGE> 10
ownership documents which purport to have been duly recorded have been duly
recorded at and by the appropriate patent, trademark and copyright offices; no
pending patent or trademark application in respect of any patent or trademark
material to the Company is subject to any governmental proceeding regarding
ownership rights, all applicable taxes, annuities and maintenance fees relevant
to the Company's material Intellectual Property have been or can be timely paid.
As used in this Agreement, the term "Intellectual Property"
means (a) all inventions (whether patentable or unpatentable and whether or not
reduced to practice), all improvements thereto, and all patents, patent
applications and patent disclosures, together with all reissuances,
continuations, continuations-in-part, divisions, reissues, revisions, extensions
and reexaminations thereof in any jurisdiction, (b) all trademarks, service
marks, trade dress, logos, trade names, corporate names, together with all
translations, adaptations, derivations and combinations thereof and all
applications, registrations and renewals in connection therewith, (c) all
copyrightable works, all copyrights and all registration applications,
registrations and renewals in connection therewith, (d) all mask works and all
applications, registrations and renewals in connection therewith, (e) all trade
secrets and confidential business information (including ideas, research and
development, discoveries, know-how, formulas, source code, data structures, font
designs, compositions, manufacturing and production processes and techniques,
technical data, designs, drawings, specifications, customer and supplier lists,
pricing and cost information and business and marketing plans and proposals),
(f) all proprietary computer software (including data and related documentation)
except over the counter software, (g) all other proprietary rights, (h) all
copies and tangible embodiments thereof (in whatever form or medium) and all
licenses or agreements in connection with the foregoing.
(aa) Except as disclosed in the Prospectus and except as could not,
singly or in the aggregate, reasonably be expected to have a Material Adverse
Effect, (i) the Company and its subsidiaries are in compliance in all material
respects with all rules, laws and regulations relating to the use, treatment,
storage and disposal of toxic substances and protection of health or the
environment ("Environmental Laws") which are applicable to their business, (ii)
neither the Company nor any of its subsidiaries has received any written notice
from any governmental authority or third party of an asserted claim under
Environmental Laws, (iii) no facts currently exist that will require the Company
or any of its subsidiaries to make future material capital expenditures to
comply with Environmental Laws, and (iv) to the knowledge of the Company and the
Principal Securityholders, no property which is or has been owned, leased or
occupied by the Company or any of its subsidiaries has been designated as a
Superfund site pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended (42 U.S.C. Section 9601, et
seq.), or otherwise designated as a contaminated site under applicable state or
local law.
(ab) The Company is not an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
(ac) Arthur Andersen LLP, which has certified the consolidated
financial statements of the Company filed with the Commission as part of the
Registration Statement, are independent public accountants with respect to the
Company within the meaning of the Securities Act and the applicable published
rules and regulations thereunder.
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<PAGE> 12
SECTION 2. PURCHASE OF THE SHARES BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue and sell
2,100,000 of the Firm Shares to the several Underwriters, and each of the
Underwriters agrees to purchase from the Company the respective aggregate number
of Firm Shares set forth opposite its name in Schedule I. The price at which
such Firm Shares shall be sold by the Company and purchased by the several
Underwriters shall be $___ per share. The obligation of each Underwriter to the
Company shall be to purchase from the Company that number of Firm Shares which
represents the same proportion of the total number of Firm Shares to be sold by
the Company pursuant to this Agreement as the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I hereto represents of the
total number of shares of the Firm Shares to be purchased by all Underwriters
pursuant to this Agreement, as adjusted by you in such manner as you deem
advisable to avoid fractional shares. In making this Agreement, each Underwriter
is contracting severally and not jointly; except as provided in paragraphs (b)
and (c) of this Section 2, the agreement of each Underwriter is to purchase only
the respective number of shares of the Firm Shares specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of Shares agreed to be purchased by such Underwriter or
Underwriters, the Company shall immediately give notice thereof to you, and the
non-defaulting Underwriters shall have the right within 24 hours after the
receipt by you of such notice to purchase, or procure one or more other
Underwriters to purchase, in such proportions as may be agreed upon between you
and such purchasing Underwriter or Underwriters and upon the terms herein set
forth, all or any part of Shares which such defaulting Underwriter or
Underwriters agreed to purchase. If the non-defaulting Underwriters fail so to
make such arrangements with respect to all such shares and portion, the number
of Shares which each non-defaulting Underwriter is otherwise obligated to
purchase under this Agreement shall be automatically increased on a pro rata
basis to absorb the remaining shares and portion which the defaulting
Underwriter or Underwriters agreed to purchase; provided, however, that the
non-defaulting Underwriters shall not be obligated to purchase the portion which
the defaulting Underwriter or Underwriters agreed to purchase if the aggregate
number of such Shares exceeds 10% of the total number of Shares which all
Underwriters agreed to purchase hereunder. If the total number of Shares which
the defaulting Underwriter or Underwriters agreed to purchase shall not be
purchased or absorbed in accordance with the two preceding sentences, the
Company shall have the right, within 24 hours next succeeding the 24-hour period
above referred to, to make arrangements with other underwriters or purchasers
satisfactory to you for purchase of such Shares and portion on the terms herein
set forth. In any
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<PAGE> 13
such case, either you or the Company shall have the right to postpone the
Closing Date determined as provided in Section 4 hereof for not more than seven
business days after the date originally fixed as the Closing Date pursuant to
Section 5 in order that any necessary changes in the Registration Statement, the
Prospectus or any other documents or arrangements may be made. If neither the
non-defaulting Underwriters nor the Company shall make arrangements within the
24-hour periods stated above for the purchase of all of the Shares which the
defaulting Underwriter or Underwriters agreed to purchase hereunder, this
Agreement shall be terminated without further act or deed and without any
liability on the part of the Company to any non-defaulting Underwriter and
without any liability on the part of any non-defaulting Underwriter to the
Company. Nothing in this paragraph (b), and no action taken hereunder, shall
relieve any defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company grants an option to the several Underwriters to purchase, severally and
not jointly, up to 315,000 Optional Shares from the Company at the same price
per share as the Underwriters shall pay for the Firm Shares. Said option may be
exercised only to cover over-allotments in the sale of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time on or before
the thirtieth day after the date of this Agreement upon written or telegraphic
notice by you to the Company setting forth the aggregate number of Optional
Shares as to which the several Underwriters are exercising the option. Delivery
of certificates for the Optional Shares, and payment therefor, shall be made as
provided in Section 4 hereof. The number of Optional Shares to be purchased by
each Underwriter shall be the same percentage of the total number of Optional
Shares to be purchased by the several Underwriters as such Underwriter is
purchasing of the Firm Shares, as adjusted by you in such manner as you deem
advisable to avoid fractional shares.
SECTION 3. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters of
the Shares to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) The information (insofar as such information relates to the
Underwriters) set forth in the last paragraph on the front cover page and under
"Underwriting" in the Registration Statement, any Preliminary Prospectus and the
Prospectus relating to the Shares constitutes the only information furnished by
the Underwriters to the Company for inclusion in the Registration Statement, any
Preliminary Prospectus, and the Prospectus, and you on behalf of the respective
Underwriters represent and warrant to the Company that the statements made
therein are correct.
SECTION 4. DELIVERY OF AND PAYMENT FOR THE SHARES.
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<PAGE> 14
(a) Delivery of certificates for the Firm Shares and the Optional
Shares (if the option granted by Section 2(c) hereof shall have been exercised
not later than 7:00 A.M., San Francisco time, on the date two business days
preceding the Closing Date), and payment therefor, shall be made at the offices
of Testa, Hurwitz & Thibeault, LLP, High Street Tower, 125 High Street, Boston,
Massachusetts 02110, at 10:00 a.m., Boston, Massachusetts time, on the [fourth]
business day after the date of this Agreement, or at such time on such other
day, not later than seven full business days after such [fourth] business day,
as shall be agreed upon in writing by the Company, the Selling Securityholders
and you. The date and hour of such delivery and payment (which may be postponed
as provided in Section 2(b) hereof) are herein called the "Closing Date".
(b) If the option granted by Section 2(c) hereof shall be exercised
after 7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Optional Shares, and
payment therefor, shall be made at the office of Testa, Hurwitz & Thibeault,
LLP, High Street Tower, 125 High Street, Boston, Massachusetts 02110, at 10:00
a.m., Boston, Massachusetts time, on the third business day after the exercise
of such option.
(c) Payment for the shares purchased from the Company shall be made to
the Company or its order by (i) one or more certified or official bank check or
checks in next day funds (and the Company agrees not to deposit any such check
in the bank on which drawn until the day following the date of its delivery to
the Company or (ii) federal funds wire transfer. Such payment shall be made upon
delivery of certificates for the shares to you for the respective accounts of
the several Underwriters (including without limitation by "full-fast" electronic
transfer by Depository Trust Company) against receipt therefor signed by you.
Certificates for the shares to be delivered to you shall be registered in such
name or names and shall be in such denominations as you may request at least one
business day before the Closing Date, in the case of Firm Shares, and at least
one business day prior to the purchase thereof, in the case of the Optional
Shares. Such certificates will be made available to the Underwriters for
inspection, checking and packaging at the offices of the agent of Volpe, Welty &
Company's clearing agent, Bear Stearns Securities Corp., on the business day
prior to the Closing Date or, in the case of the Optional Shares, by 3:00 p.m.,
New York time, on the business day preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check shall not have been
received by you on the Closing Date or any later date on which Optional Shares
are purchased for the account of such Underwriter. Any such payment by you shall
not relieve such Underwriter from any of its obligations hereunder.
SECTION 5. COVENANTS OF THE COMPANY. The Company covenants and agrees as
follows:
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<PAGE> 15
(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A and
(ii) not file any amendment to the Registration Statement or supplement to the
Prospectus of which you shall not previously have been advised and furnished
with a copy or to which you shall have reasonably objected in writing or which
is not in compliance with the Securities Act or the rules and regulations of the
Commission.
(b) The Company will promptly notify each Underwriter in the event of
(i) the request by the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, (iii) the institution or notice of intended institution
of any action or proceeding for that purpose, (iv) the receipt by the Company of
any notification with respect to the suspension of the qualification of the
Shares for sale in any jurisdiction, or (v) the receipt by it of notice of the
initiation or threatening of any proceeding for such purpose. The Company will
make every reasonable effort to prevent the issuance of such a stop order and,
if such an order shall at any time be issued, to obtain the withdrawal thereof
at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to you
a signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together with,
in each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus as
you may reasonably request, and (iii) thereafter from time to time during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement to the Prospectus
and of any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act. The
copies of the Registration Statement, any Preliminary Prospectus and the
Prospectus and any amendments or supplements to any of the foregoing furnished
or to be furnished to the Underwriters were or will be, as the case may be,
identical to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent otherwise permitted by
Regulation S-T.
(d) If at any time during the period in which a prospectus is required
by law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing by
you, shall occur as a result of which it is necessary, in the opinion of counsel
for the Company or of counsel for the Underwriters, to supplement or amend the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser of the shares,
the Company will forthwith prepare and file with the Commission a supplement to
the Prospectus or an amended prospectus so that the
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<PAGE> 16
Prospectus as so supplemented or amended will not contain any untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances existing at the time
such Prospectus is delivered to such purchaser, not misleading. If, after the
initial public offering of the shares by the Underwriters and during such
period, the Underwriters shall propose to vary the terms of offering thereof by
reason of changes in general market conditions or otherwise, you will advise the
Company in writing of the proposed variation, and, if in the opinion either of
counsel for the Company or of counsel for the Underwriters such proposed
variation requires that the Prospectus be supplemented or amended, the Company
will forthwith prepare and file with the Commission a supplement to the
Prospectus or an amended prospectus setting forth such variation. The Company
authorizes the Underwriters and all dealers to whom any of the shares may be
sold by the several Underwriters to use the Prospectus, as from time to time
amended or supplemented, in connection with the sale of the shares in accordance
with the applicable provisions of the Securities Act and the applicable rules
and regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the shares for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified or where it would become
subject to taxation as a foreign corporation solely by virtue of such filing.
The Company will, from time to time, prepare and file such statements, reports,
and other documents as are or may be required to continue such qualifications in
effect for so long a period as you may reasonably request for distribution of
the shares.
(g) During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to stockholders of
the Company and of all information, documents and reports filed with the
Commission (including the Report on Form SR required by Rule 463 of the
Commission under the Securities Act). If applicable, any such document furnished
to you will be identical to the electronically transmitted copy thereof filed
with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(h) Not later than the 45th day following the end of the fiscal
quarter first occurring after the first anniversary of the Effective Date, the
Company will make generally available to its security holders an earnings
statement in accordance with Section 11(a) of the Securities Act and Rule 158
thereunder.
(i) The Company agrees to pay, or cause to be paid, all costs and
expenses
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<PAGE> 17
incident to the performance of their obligations under this Agreement, including
all costs and expenses incident to (i) the preparation, printing and filing with
the Commission and the National Association of Securities Dealers, Inc. ("NASD")
of the Registration Statement, any Preliminary Prospectus and the Prospectus,
(ii) the furnishing to the Underwriters and the persons designated by them of
copies of any Preliminary Prospectus and of the several documents required by
paragraph (c) of this Section 6 to be so furnished, (iii) the printing of this
Agreement and related documents delivered to the Underwriters, (iv) the
preparation, printing and filing of all supplements and amendments to the
Prospectus referred to in paragraph (d) of this Section 5, (v) the furnishing to
you and the Underwriters of the reports and information referred to in paragraph
(g) of this Section 5 and (vi) the printing and issuance of stock certificates,
including the transfer agent's fees.
(j) The Company agrees to reimburse you, for the account of the
several Underwriters, for blue sky fees and related disbursements (including
reasonable counsel fees and disbursements and cost of printing memoranda for the
Underwriters) paid by or for the account of the Underwriters or their counsel in
qualifying the shares under state securities or blue sky laws and in the review
of the offering by the NASD.
(k) The Company hereby agrees that, without the prior written approval
of Volpe, Welty & Company, the Company will not during the period of one hundred
eighty (180) days after the date the Registration Statement becomes effective
(A) offer, sell, contract to sell, make any short sale (including without
limitation a short against the box), pledge or otherwise dispose of, directly or
indirectly, any shares of the Company's Common Stock, Class B Common Stock,
options to acquire Common Stock or Class B Common Stock or securities
convertible into or exchangeable for, or any other rights to purchase or
acquire, the Company's Common Stock or Class B Common Stock or (B) enter into
any swap or other agreement that transfers, in whole or in part, any of the
economic consequences of ownership of Common Stock or Class B Common Stock,
whether any such transaction described in (A) or (B) is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise. The
lock-up restriction of the foregoing sentence shall not apply to (i) the shares
to be sold to the Underwriters pursuant to this Agreement (including without
limitation, the Optional Shares), (ii) the sale of shares purchased in the open
market after the date the Registration Statement becomes effective, (iii) the
issuance
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of options or warrants issued under currently existing plans or (iv) the
issuance of shares upon the exercise or conversion of outstanding options,
warrants or convertible securities during any such period. The foregoing lock-up
restriction is expressly agreed to preclude the Company from engaging in any
hedging or other transaction that is designed to or could reasonably be expected
to lead to, or result in, a disposition of Restricted Securities during the
applicable lock-up period even if such Restricted Securities would be disposed
of by the Company subsequent to the applicable lock-up period or by someone
other than the Company.
(l) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the shares has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding to
or commenting on such rumor, publication or event.
(m) The Company is familiar with the Investment Company Act of 1940,
as amended, and has in the past conducted its affairs, and will in the future
conduct its affairs, in such a manner to ensure that the Company was not and
will not be an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as amended,
and the rules and regulations thereunder.
(n) The Company agrees to maintain directors' and officers' insurance
in amounts customary for the size and nature of the Company's business for a
period of two years from the date of this Agreement.
SECTION 6. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person (including each partner or officer thereof) who controls any
Underwriter within the meaning of Section 15 of the Securities Act from and
against any and all losses, claims, damages or liabilities, joint or several, to
which such indemnified parties or any of them may become subject under the
Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange
Act") or the common law or otherwise (including in settlement of any litigation,
if such settlement is effected with the prior written consent of the Company),
and the Company agrees to reimburse each such Underwriter and controlling person
for any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration
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Statement (including the Prospectus as part thereof and any Rule 462(b)
registration statement) or any post-effective amendment thereto (including any
Rule 462(b) registration statement), or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, (ii) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus or
the Prospectus (as amended or as supplemented if the Company shall have filed
with the Commission any amendment thereof or supplement thereto) or the omission
or alleged omission to state therein a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, or (iii) any act or failure to act or any alleged act or
failure to act by any Underwriter in connection with, or relating in any manner
to, the Shares or the offering contemplated hereby, and which is included as
part of or referred to in any loss, claim, damage or liability arising out of or
based upon matters covered by clause (i) or (ii) above; provided, however, that
(1) the indemnity agreement of the Company contained in this paragraph (a) shall
not apply to any such losses, claims, damages, liabilities or expenses if such
statement or omission was made in reliance upon and in conformity with
information furnished as herein stated or otherwise furnished in writing to the
Company by or on behalf of any Underwriter for use in any Preliminary Prospectus
or the Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto, and (2) the indemnity agreement contained in this paragraph
(a) with respect to any Preliminary Prospectus shall not inure to the benefit of
any Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the shares which is the subject thereof (or to
the benefit of any person controlling such Underwriter) if at or prior to the
written confirmation of the sale of such shares a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (c) of Section 5 hereof. The indemnity agreement of
the Company contained in this paragraph (a) and the representations and
warranties of the Company contained in Section 1 hereof shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of any indemnified party and shall survive the delivery of and payment
for the shares.
(b) Each Underwriter severally and not jointly agrees to indemnify and
hold harmless the Company, each of its officers who signs the Registration
Statement on his own behalf or pursuant to a power of attorney, each of its
directors, each other Underwriter, and each person (including each partner or
officer thereof) who controls the Company, any such other Underwriter within the
meaning of Section 15 of the Securities Act, from and against any and all
losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Securities Act,
the Exchange Act, or the common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the prior written consent of
each Underwriter) and to reimburse each of them for any legal or other expenses
(including, except as otherwise hereinafter provided, reasonable fees and
disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against,
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the respective indemnified parties, in each case arising out of or based upon
(i) any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement (including the Prospectus as part
thereof and any Rule 462(b) registration statement) or any post-effective
amendment thereto (including any Rule 462(b) registration statement) or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading or
(ii) any untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any amendment
thereof or supplement thereto) or the omission or alleged omission to state
therein a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading, if
such statement or omission was made in reliance upon and in conformity with
information furnished as herein stated or otherwise furnished in writing to the
Company by or on behalf of such indemnifying Underwriter for use in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any such
amendment thereof or supplement thereto. The indemnity agreement of each
Underwriter contained in this paragraph (b) shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the Shares.
(c) Each party indemnified under the provision of paragraphs (a) and
(b) of this Section 6 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (the "Notice") of such service
or notification to the party or parties from whom indemnification may be sought
hereunder. No indemnification provided for in such paragraphs shall be available
to any party who shall fail so to give the Notice if the party to whom such
Notice was not given was unaware of the action, suit, investigation, inquiry or
proceeding to which the Notice would have related and was prejudiced by the
failure to give the Notice, but the omission so to notify such indemnifying
party or parties of any such service or notification shall not relieve such
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of such
indemnity agreement. Any indemnifying party shall be entitled at its own expense
to participate in the defense of any action, suit or proceeding against, or
investigation or inquiry of, an indemnified party. Any indemnifying party shall
be entitled, if it so elects within a reasonable time after receipt of the
Notice by giving written notice (the "Notice of Defense") to the indemnified
party, to assume (alone or in conjunction with any other indemnifying party or
parties) the entire defense of such action, suit, investigation, inquiry or
proceeding, in which event such defense shall be conducted, at the expense of
the indemnifying party or parties, by counsel chosen by such indemnifying party
or parties and reasonably satisfactory to the indemnified party or parties;
provided, however, that (i) if the indemnified party or parties reasonably
determine that there may be a conflict between the positions of the indemnifying
party or parties and of the indemnified party or parties in conducting the
defense of such action, suit, investigation, inquiry or proceeding or that there
may be legal defenses available to such indemnified party or parties different
from or in addition to those available to the indemnifying party or parties,
then counsel for the indemnified party or parties shall be entitled to conduct
the defense to the extent reasonably determined by such counsel to be necessary
to protect
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<PAGE> 21
the interests of the indemnified party or parties and (ii) in any event, the
indemnified party or parties shall be entitled to have counsel chosen by such
indemnified party or parties participate in, but not conduct, the defense. If,
within a reasonable time after receipt of the Notice, an indemnifying party
gives a Notice of Defense and the counsel chosen by the indemnifying party or
parties is reasonably satisfactory to the indemnified party or parties, the
indemnifying party or parties will not be liable under paragraphs (a) through
(c) of this Section 6 for any legal or other expenses subsequently incurred by
the indemnified party or parties in connection with the defense of the action,
suit, investigation, inquiry or proceeding, except that (A) the indemnifying
party or parties shall bear the reasonable legal and other expenses incurred in
connection with the conduct of the defense as referred to in clause (i) of the
proviso to the preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel) and (B) the indemnifying party or parties shall bear such
other expenses as it or they have authorized to be incurred by the indemnified
party or parties. If, within a reasonable time after receipt of the Notice, no
Notice of Defense has been given, the indemnifying party or parties shall be
responsible for any reasonable legal or other expenses incurred by the
indemnified party or parties in connection with the defense of the action, suit,
investigation, inquiry or proceeding.
(d) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 6, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 6 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party in
connection with the statements or omissions that resulted in such losses,
claims, damages, expenses or liabilities, or actions in respect thereof, as well
as any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and the Underwriters on the other shall be deemed
to be in the same respective proportions as the total net proceeds from the
offering of the Shares received by the Company and the total underwriting
discount received by the Underwriters, as set forth in the table on the cover
page of the Prospectus, bear to the aggregate public offering price of the
Shares. Relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by each indemnifying party and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this paragraph
(d). The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the first
sentence of this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigation,
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<PAGE> 22
preparing to defend or defending against any action or claim which is the
subject of this paragraph (d). Notwithstanding the provisions of this paragraph
(d), no Underwriter shall be required to contribute any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this paragraph (d) to contribute are several in proportion to
their respective underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section 6).
(e) The Company will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Underwriter or any
person who controls such Underwriter within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act is a party to such claim,
action, suit or proceeding) unless such settlement, compromise or consent
includes an unconditional release of such Underwriter and each such controlling
person from all liability arising out of such claim, action, suit or proceeding.
(f) Notwithstanding anything to the contrary contained in this
Agreement, the Principal Securityholders shall not be liable for any breach of
the representations and warranties contained in Section 1 hereof.
SECTION 7. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to their other
obligations under Section 6 of this Agreement, the Company hereby agrees to
reimburse on a monthly basis the Underwriters for all reasonable legal and other
expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 6 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 7 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be
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<PAGE> 23
improper, the persons receiving such payments shall promptly refund them and
(ii) such persons shall provide to the Company, upon request, reasonable
assurances of their ability to effect any refund, when and if due.
SECTION 8. TERMINATION. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company pursuant to
the provisions of Section 9 and in accordance with Section 12, or if after the
date of this Agreement trading in the Common Stock shall have been suspended, or
if there shall have occurred (i) the engagement in hostilities or an escalation
of major hostilities by the United States or the declaration of war or a
national emergency by the United States on or after the date hereof, (ii) any
outbreak of hostilities or other national or international calamity or crisis or
change in economic or political conditions if the effect of such outbreak,
calamity, crisis or change in economic or political conditions in the financial
markets of the United States or the Company's industry sector would, in the
Underwriters' reasonable judgment, make the offering or delivery of the Shares
impracticable, (iii) suspension of trading in securities generally or a material
adverse decline in value of securities generally on the New York Stock Exchange,
the American Stock Exchange, or The Nasdaq Stock Market, or limitations on
prices (other than limitations on hours or numbers of days of trading) for
securities on either such exchange or system, (iv) the enactment, publication,
decree or other promulgation of any federal or state statute, regulation, rule
or order of, or commencement of any proceeding or investigation by, any court,
legislative body, agency or other governmental authority which in the
Underwriters' reasonable opinion materially and adversely affects or will
materially or adversely affect the business or operations of the Company, (v)
declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in the
Underwriters' reasonable opinion has a material adverse effect on the securities
markets in the United States. If this Agreement shall be terminated pursuant to
this Section 8, there shall be no liability of the Company to the Underwriters
and no liability of the Underwriters to the Company; provided, however, that in
the event of any such termination the Company agrees to indemnify and hold
harmless the Underwriters from all costs or expenses incident to the performance
of the obligations of the Company under this Agreement, including all costs and
expenses referred to in paragraphs (i) and (j) of Section 5 hereof.
SECTION 9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the shares shall be subject to the
performance by the Company of its respective obligations to be performed
hereunder at or prior to the Closing Date or any later date on which Optional
Shares are to be purchased, as the case may be, and to the following further
conditions:
(a) The Registration Statement shall have become effective; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the shares hereunder
and the validity and form of the certificates representing the shares, all
corporate proceedings and other legal
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<PAGE> 24
matters incident to the foregoing, and the form of the Registration Statement
and of the Prospectus (except as to the financial statements contained therein),
shall have been approved at or prior to the Closing Date by Testa, Hurwitz &
Thibeault, LLP, counsel for the Underwriters.
(c) You shall have received from Rubin Baum Levin Constant & Friedman,
counsel for the Company, and from Porter & Associates, patent counsel for the
Company, opinions, addressed to the Underwriters and dated the Closing Date,
covering the matters set forth in Annex A and Annex B hereto, respectively, and
if Optional Shares are purchased at any date after the Closing Date, additional
opinions from each such counsel, addressed to the Underwriters and dated such
later date, confirming that the statements expressed as of the Closing Date in
such opinions remain valid as of such later date.
(d) You shall be satisfied in your reasonable judgment that (i) as of
the Effective Date, the statements made in the Registration Statement and the
Prospectus were true and correct, and neither the Registration Statement nor the
Prospectus omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, respectively, not misleading;
(ii) since the Effective Date, no event has occurred which should have been set
forth in a supplement or amendment to the Prospectus which has not been set
forth in such a supplement or amendment; (iii) since the respective dates as of
which information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole, whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of business,
neither the Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein; (iv) the
Commission has not issued any order preventing or suspending the use of the
Prospectus or any Preliminary Prospectus filed as a part of the Registration
Statement or any amendment thereto; no stop order suspending the effectiveness
of the Registration Statement has been issued; and to the best knowledge of the
respective signers, no proceedings for that purpose have been instituted or are
pending or contemplated under the Securities Act; (v) neither the Company nor
any of its subsidiaries has any material contingent obligations which are not
disclosed in the Registration Statement and the Prospectus; (vi) there are not
any pending or known threatened legal proceedings to which the Company or any of
its subsidiaries is a party or of which property of the Company or any of its
subsidiaries is the subject which are material and which are not disclosed in
the Registration Statement and the Prospectus; (vii) there are not any
franchises, contracts, leases or other documents which are required to be filed
as exhibits to the Registration Statement which have not been filed as required;
and (viii) the representations and warranties of the Company herein are true and
correct in all material respects as of the Closing Date or any later date on
which Optional Shares are to be purchased, as the case may be.
(e) You shall have received on the Closing Date and on any later date
on which Optional Shares are purchased a certificate, dated the Closing Date or
such later date, as the case may be, and signed by the President and the Chief
Financial Officer of the Company, stating that
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<PAGE> 25
the respective signers of said certificate have carefully examined the
Registration Statement in the form in which it originally became effective and
the Prospectus contained therein and any supplements or amendments thereto, and
that the statements included in clauses (i) through (viii) of paragraph (d) of
this Section 9 are true and correct.
(f) You shall have received from Arthur Andersen LLP, a letter or
letters, addressed to the Underwriters and dated the Closing Date, covering the
matters set forth in Annex C hereto, and any later date on which Optional Shares
are purchased, confirming that they are independent public accountants with
respect to the Company within the meaning of the Securities Act and the
applicable published rules and regulations thereunder and based upon the
procedures described in their letter delivered to you concurrently with the
execution of this Agreement (the "Original Letter"), but carried out to a date
not more than three business days prior to the Closing Date or such later date
on which Optional Shares are purchased (i) confirming, to the extent true, that
the statements and conclusions set forth in the Original Letter are accurate as
of the Closing Date or such later date, as the case may be, and (ii) setting
forth any revisions and additions to the statements and conclusions set forth in
the Original Letter which are necessary to reflect any changes in the facts
described in the Original Letter since the date of the Original Letter or to
reflect the availability of more recent financial statements, data or
information. The letters shall not disclose any change, or any development
involving a prospective change, in or affecting the business or properties of
the Company or any of its subsidiaries which, in your sole judgment, makes it
impractical or inadvisable to proceed with the public offering of the shares or
the purchase of the Optional Shares as contemplated by the Prospectus.
(g) You shall have received from Arthur Andersen LLP a letter stating
that their review of the Company's system of internal accounting controls, to
the extent they deemed necessary in establishing the scope of their examination
of the Company's financial statements as at December 31, 1995, did not disclose
any weakness in internal controls that they considered to be material
weaknesses.
(h) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several jurisdictions,
or other evidence satisfactory to you, of the qualification referred to in
paragraph (f) of Section 5 hereof.
(i) Prior to the Closing Date, the shares to be issued and sold by the
Company shall have been duly authorized for listing by the Nasdaq National
Market upon official notice of issuance.
(j) On or prior to the Closing Date, you shall have received from all
parties listed on Schedule II attached hereto the agreement referred to in
Section 1(x).
All the agreements, opinions, certificates and letters mentioned above
or elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Testa, Hurwitz & Thibeault, LLP, counsel for the
Underwriters, shall be satisfied that they comply in form and scope.
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<PAGE> 26
In case any of the conditions specified in this Section 9 shall not
be fulfilled, this Agreement may be terminated by you by giving written notice
to the Company. Any such termination shall be without liability of the Company
to the Underwriters and without liability of the Underwriters to the Company
provided, however, that in the event of such termination, the Company agrees
(i) to indemnify and hold harmless the Underwriters from all reasonable costs
or expenses incident to the performance of the obligations of the Company
under this Agreement, including all reasonable costs and expenses referred to
in paragraphs (i) and (j) of Section 5 hereof, and (ii) unless this Agreement
is terminated by reason of a default of any of the Underwriters, to reimburse
the Underwriters severally upon demand for all reasonable out-of-pocket
expenses (including reasonable fees and disbursements of counsel) that shall
have been incurred by them in connection with the transactions contemplated
hereby.
SECTION 10. CONDITIONS OF THE OBLIGATION OF THE COMPANY. The obligation
of the Company to deliver the Shares shall be subject to the conditions that
(a) the Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall
not be fulfilled, this Agreement may be terminated by the Company by giving
written notice to you. Any such termination shall be without liability of the
Company to the Underwriters and without liability of the Underwriters to the
Company; provided, however, that in the event of any such termination the
Company agrees to indemnify and hold harmless the Underwriters from all
reasonable costs or expenses incident to the performance of the obligations of
the Company under this Agreement, including all reasonable costs and expenses
referred to in paragraphs (i) and (j) of Section 5 hereof.
SECTION 11. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall
inure to the benefit of the Company, and the several Underwriters and, with
respect to the provisions of Section 6 hereof, the several parties (in addition
to the Company, and the several Underwriters) indemnified under the provisions
of said Section 6, and their respective personal representatives, successors
and assigns. Nothing in this Agreement is intended or shall be construed to
give to any other person, firm or corporation any legal or equitable remedy or
claim under or in respect of this Agreement or any provision herein contained.
The term "successors and assigns" as herein used shall not include any
purchaser, as such purchaser, of any of the shares from any of the several
Underwriters.
SECTION 12. NOTICES. Except as otherwise provided herein, all
communications hereunder shall be in writing or by telegraph and, if to the
Underwriters, shall be mailed, telegraphed or delivered to Volpe, Welty &
Company, One Maritime Plaza, 11th Floor, San Francisco, California 94111,
Attention: Gil Mogavero; and if to the Company, shall be mailed,
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<PAGE> 27
telegraphed or delivered to it at its office, Bitstream Inc., 215 First Street,
Cambridge, Massachusetts 02142, Attention: C. Raymond Boelig, President and
Chief Executive Officer. All notices given by telegraph shall be promptly
confirmed by letter.
SECTION 13. MISCELLANEOUS. The reimbursement, indemnification and
contribution agreements contained in this Agreement and the representations,
warranties and covenants in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any investigation made
by or on behalf of any Underwriter or controlling person thereof, or by or on
behalf of the Company or its directors or officers, and (c) delivery and
payment for the shares under this Agreement; provided, however, that if this
Agreement is terminated prior to the Closing Date, the provisions of the lock-
up agreements referred to in Section l(x) hereof and the provisions of
paragraphs (k) and (l) of Section 5 hereof shall be of no further force or
effect.
SECTION 14. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability
of any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section , paragraph or provision hereof.
If any Section , paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
SECTION 15. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the laws pertaining to
conflicts of laws) of the State of California.
SECTION 16. GENERAL. This Agreement constitutes the entire agreement of
the parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof. This Agreement may be executed in several
counterparts, each one of which shall be an original, and all of which shall
constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company.
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<PAGE> 28
<PAGE> 29
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof, whereupon it
will become a binding agreement among the Company and the several Underwriters,
including you, all in accordance with its terms.
Very truly yours,
BITSTREAM INC.
By:_____________________________________
Name:
Title:
PRINCIPAL SECURITYHOLDERS
By:_____________________________________
C. Raymond Boelig
The foregoing Underwriting
Agreement is hereby confirmed By:____________________________________
San Francisco, California as of George B. Beitzel
the date first above written.
VOLPE, WELTY & COMPANY By:____________________________________
ADVEST, INC. James D. Hart
Acting for ourselves and as
Representatives of the several By:____________________________________
Underwriters named in the Amos Kaminski
attached Schedule I
BY: VOLPE, WELTY & COMPANY By:____________________________________
David G. Lubrano
By:_________________________________
Name:
Title:
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<PAGE> 30
SCHEDULE I
UNDERWRITERS
NUMBER OF
SHARES
TO BE
UNDERWRITERS PURCHASED
- ----------------------------------------------------------------------
Volpe, Welty & Company .............................
Advest, Inc. .......................................
Total ..................................... 2,100,000
=========
I-1
<PAGE> 31
SCHEDULE II
SIGNATORIES OF 180-DAY LOCK-UP LETTER
Robert Abrue
BancBoston Ventures
BVB Grantor Retained Income Trust
George B. Beitzel
Ray Boelig
John Collins
John & Nicola Collins
Lawernce Coppinger
Neal Dini
Robert Eggers
Mark Goldwater
Morton E. Goulder
Geoff Greve
James D. Hart
Donna Held
Interfid Ltd.
J.P. Morgan Capital Corp.
JHI Development Capital
Amos Kaminski
Anthony King
Steve Lewis
David G. Lubrano
Jim Lyles
David Maupin
Privest I, N.V.
Privest II, N.V.
Michael Regan
Glenn Rippel
John Seguin
James W. Sole
William F. Swiggart
Karen Tackett
Yoine Van Ooyen
James Welch
Stefan Wennick
Sue Zafarana
II-1
<PAGE> 32
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF
RUBIN BAUM LEVIN CONSTANT & FRIEDMAN
COUNSEL FOR THE COMPANY
AND THE SELLING SECURITYHOLDERS
(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, is duly qualified as a foreign
corporation and in good standing in each state of the United States of America
in which the nature of its business or its ownership or leasing of property
requires such qualification (except where the failure to be so qualified would
not have a material adverse effect on the business, properties, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole (a "Material Adverse Effect")), and has full corporate power and
authority to own or lease its properties and conduct its business as described
in the Registration Statement; all of the issued and outstanding capital stock
of each of the subsidiaries of the Company (other than subsidiaries incorporated
under the laws of a foreign country) has been duly authorized and validly issued
and is fully paid and nonassessable, and, to the best of such counsel's
knowledge, is owned by the Company free and clear of all liens, encumbrances and
security interests, and to the best of such counsel's knowledge, no options,
warrants or other rights to purchase, agreements or other obligations to issue
or other rights to convert any obligations into shares of capital stock or
ownership interests in such subsidiaries are outstanding;
(ii) the authorized capital stock of the Company consists of
[_____________ shares of _____________ Stock, $_____ par value, of which there
are outstanding _____________ shares; all of such outstanding shares of capital
stock (including the Firm Shares and the Optional Shares issued, if any) have
been duly authorized and validly issued and are fully paid and nonassessable;
any Optional Shares purchased after the Closing Date have been duly authorized
and, when issued and delivered to, and paid for by, the Underwriters as provided
in the Underwriting Agreement, will be validly issued and fully paid and
nonassessable; and no preemptive rights of, or rights of refusal in favor of,
stockholders exist with respect to the Shares, or the issue and sale thereof,
pursuant to the Certificate of Incorporation or Bylaws of the Company or any
other instrument known to such counsel and, to the knowledge of such counsel,
there are no contractual preemptive rights that have not been waived, rights of
first refusal or rights of co-sale which exist with respect to the issue and
sale of the Shares by the Company;
(iii) the Registration Statement has become effective under the
Securities Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or suspending or
preventing the use of the Prospectus is in effect and no proceedings for that
purpose have been instituted or are pending or contemplated by the Commission;
A-1
<PAGE> 33
(iv) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial data contained therein,
as to which such counsel need express no opinion) comply or complied as to form
in all material respects with the requirements of the Securities Act, and with
the rules and regulations of the Commission thereunder (in passing upon the
compliance as to the form of the Registration Statement and the Prospectus only
and without in anyway limiting the opinion of such counsel under paragraph (v)
below, such counsel may assume that all of the statements set forth in the
Registration Statement and the Prospectus are complete, true and correct in all
respects);
(v) such counsel have no reason to believe that the Registration
Statement (except as to the financial statements and schedules and other
financial data contained therein, as to which such counsel need not express any
opinion or belief) at the Effective Date contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, or that the
Prospectus (except as to the financial statements and schedules and other
financial data contained therein, as to which such counsel need not express any
opinion or belief) as of its date or at the Closing Date (or any later date on
which Optional Shares are purchased), contained or contains any untrue statement
of a material fact or omitted or omits to state a material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading;
(vi) the information required to be set forth in the Registration
Statement in answer to Items 9, 10 (insofar as it relates to such counsel) and
11(c) of Form S-1 is to the best of such counsel's knowledge accurately and
adequately set forth therein in all material respects or no response is required
with respect to such Items and the description of the Company's stock option
plans and the options granted and which may be granted thereunder and the
options granted otherwise than under such plans set forth in the Prospectus
accurately and fairly presents in all material respects the information required
to be shown with respect to said plans and options to the extent required by the
Securities Act and the rules and regulations of the Commission thereunder;
(vii) to the best of such counsel's knowledge there are no franchises,
contracts, leases, documents or legal proceedings, pending or threatened, which
in the opinion of such counsel are of a character required to be described in
the Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement, which are not described or referred to therein or filed
as required;
(viii) the Underwriting Agreement has been duly authorized, executed
and delivered by the Company;
A-2
<PAGE> 34
(ix) the Company has full corporate power and authority to enter into
the Underwriting Agreement and to sell and deliver the Shares to be sold by it
to the several Underwriters; the Underwriting Agreement is a valid and binding
agreement of the Company enforceable in accordance with its terms (such counsel
being entitled to assume the due execution and delivery of the Underwriting
Agreement by the Underwriters), except as enforceability may be limited by
general equitable principles, bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other laws affecting creditor's rights generally and
except as to those provisions relating to indemnity or contribution for
liabilities arising under federal and state securities laws (as to which no
opinion need be expressed);
(x) the issue and sale by the Company of the Shares sold by the
Company as contemplated by the Underwriting Agreement will not conflict with, or
result in a breach of, or constitute a default under the Certificate of
Incorporation or Bylaws of the Company or any of its subsidiaries or any
agreement or instrument known to such counsel to which the Company or any of its
subsidiaries is a party or by which any of its properties may be bound or any
applicable law or regulation, or so far as is known to such counsel, any order,
writ, injunction or decree, of any jurisdiction, court or governmental
instrumentality applicable to the Company;
(xi) all holders of securities of the Company representing more than
1% of the outstanding shares of Common Stock having rights to the registration
of shares of Common Stock, or other securities, because of the filing of the
Registration Statement by the Company of which such counsel is aware have waived
such rights or such rights have expired by reason of lapse of time following
notification of the Company's intent to file the Registration Statement;
A-3
<PAGE> 35
(xii) good and marketable title to the Shares under the Underwriting
Agreement, free and clear of all liens, encumbrances, equities, security
interests and claims, has been transferred to the Underwriters who have
severally purchased such Shares under the Underwriting Agreement, assuming for
the purpose of this opinion that the Underwriters purchased the same in good
faith without notice of any adverse claims;
(xiii) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the Company
of the transactions contemplated in the Underwriting Agreement, except such as
have been obtained under the Securities Act and such as may be required under
state or foreign securities or blue sky laws in connection with the purchase and
distribution of the Shares by the Underwriters and the clearance of the offering
with the NASD; and
(xiv) the Shares issued and sold by the Company will be duly
authorized for listing by the Nasdaq National Market upon official notice of
issuance.
------------------------------------
Counsel rendering the foregoing opinion may rely as to factual matters
on certificates of officers of the Company and of government officials and the
representations and warranties of the Company contained in the Underwriting
Agreement provided, that such counsel shall state that they believe that both
they and the Underwriters are justified in relying upon such certificates,
representations and warranties.
In giving such opinion with respect to the matters covered by clause
(v) such counsel may state that their opinion is based upon their participation
in the preparation of the Registration Statement and Prospectus and any
amendments or supplements thereto and review and discussion of the contents
thereof, but are without independent check or verification except as specified.
Counsel rendering the foregoing opinion may rely on an opinion or opinions of
other counsel retained by them, or the Company provided that (1) each such
counsel is acceptable to the Representatives, (2) such reliance and reliance
by the Representatives is expressly authorized by each opinion so relied upon,
and (3) each such opinion is in form and scope satisfactory to counsel for the
Underwriters. Copies of any opinions so relied upon shall be delivered to the
Representatives and to counsel for the Underwriters and the foregoing opinion
shall also state that counsel knows of no reason the Underwriters are not
entitled to rely upon the opinions of such counsel.
A-4
<PAGE> 36
ANNEX B
MATTERS TO BE COVERED IN THE OPINION OF ___________
PATENT COUNSEL FOR THE COMPANY
Such counsel are familiar with the TrueDoc technology used by the Company
in its business and have read the Registration Statement and the Prospectus,
including particularly the portions of the Registration Statement and the
Prospectus referring to patents, copyrights, trade secrets, trademarks, service
marks and other proprietary information or materials and:
(i) such counsel have no reason to believe that the Registration Statement
or the Prospectus (A) contains any untrue statement of a material fact with
respect to any intellectual property including patents, copyrights, trade
secrets, trademarks, service marks or other proprietary information or materials
owned, licensed or used by the Company, or the manner of its use thereof, or any
allegation on the part of any person that the Company is infringing or has
misappropriated any patent rights, copyrights, trade secrets, trademarks,
service marks or other rights in proprietary information or materials or (B)
omits to state any material fact relating to patents, copyrights, trade secrets,
trademarks, service marks or other proprietary information or materials owned,
licensed or used by the Company, or the manner of its use thereof, that is
required to be stated in the Registration Statement or the Prospectus or is
necessary to make the statements therein not misleading;
OR
[(i) The statements in the Registration Statement and the Prospectus under
the caption[s] ["Intellectual Property and Proprietary Rights" and "Intellectual
Property,"] to the best of such counsel's knowledge and belief, are accurate and
complete statements or summaries of the matters therein set forth and nothing
has come to such counsel's attention that causes such counsel to believe that
the above-described portions of the Registration Statement and the Prospectus
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading;]
(ii) to the best of such counsel's knowledge and except for patent
applications in examination before the United States, or a foreign, Patent
Office and as set forth in the Prospectus under the caption "_______________,"
there are no legal or governmental proceedings pending relating to the patent
rights, copyrights, trade secrets, trademarks, service marks or other
proprietary information or materials of the Company, and to the best of such
counsel's knowledge no such proceedings are threatened or contemplated by
governmental authorities or others;
(iii) such counsel do not know of any contracts or other documents,
relating to the Company's patents, copyrights, trade secrets, trademarks,
service marks or other proprietary
B-1
<PAGE> 37
information or materials of a character required to be filed as an exhibit to
the Registration Statement or required to be described in the Registration
Statement or the Prospectus that are not filed or described as required;
(iv) to the best of such counsel's knowledge, the Company is not
infringing or otherwise violating any patents, copyrights, trade secrets,
trademarks, service marks or other proprietary information or materials, of
others, and, except as set forth in the Prospectus, to the best of such
counsel's knowledge there are no infringements by others of any of the Company's
patents, copyrights, trade secrets, trademarks, service marks or other
proprietary information or materials of the Company except for a possible
infringement of TrueDoc by Ares Software Corp.; and
(v) to the best of such counsel's knowledge, the Company owns or possesses
sufficient licenses or other rights to use all patents, copyrights, trade
secrets, trademarks, service marks or other proprietary information or materials
necessary to conduct the business now being or proposed to be conducted by the
Company as described in the Prospectus.
B-2
<PAGE> 38
ANNEX C
Pursuant to Section 9(f) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect
to the Company and its Subsidiaries within the meaning of the Act and the
applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules examined by them and
included in the Prospectus or the Registration Statement comply as to form
in all material respects with the applicable accounting requirements of
the Act and the related published rules and regulations thereunder and
they have performed procedures specified in accordance with standards
specified by the American Institute of Certified Public Accountants
Statement No. 71 of the unaudited consolidated interim financial
statements, selected financial data and/or condensed financial statements
derived from audited financial statements of the Company for the periods
specified in such letter, as indicated in their reports thereon, copies of
which have been furnished to the representatives of the Underwriters (the
"Representatives");
(iii) The unaudited selected financial information with respect to
the consolidated results of operations and financial position of the
Company for the five most recent fiscal years included in the Prospectus
agrees with the corresponding amounts (after restatements where
applicable) in the audited consolidated financial statements for such five
fiscal years;
(iv) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available interim
financial statements of the Company and its subsidiaries, inspection of
the minute books of the Company and its subsidiaries since the date of the
latest audited financial statements included in the Prospectus, inquiries
of officials of the Company and its subsidiaries responsible for financial
and accounting matters and such other inquiries and procedures as may be
specified in such letter, nothing came to their attention that caused them
to believed that:
(A) the unaudited consolidated statements of income,
consolidated balance sheets and consolidated statements of cash
flows included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the
Act and the related published rules and regulations thereunder, or
are not in conformity with generally accepted accounting principles
applied on a basis substantially consistent with the basis for the
audited consolidated statements of income, consolidated balance
sheets and consolidated statements of cash flows included in the
Prospectus;
C-1
<PAGE> 39
(B) any other unaudited income statement data and balance
sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited consolidated financial
statements from which such data and items were derived, and any such
unaudited data and items were not determined on a basis
substantially consistent with the basis for the corresponding
amounts in the audited consolidated financial statements included in
the Prospectus;
(C) the unaudited financial statements which were not included
in the Prospectus but from which were derived any unaudited
condensed financial statements referred to in Clause (A) and any
unaudited income statement data and balance sheet items included in
the Prospectus and referred to in Clause (B) were not determined on
a basis substantially consistent with the basis for the audited
consolidated financial statements included in the Prospectus;
(D) any unaudited pro forma consolidated condensed financial
statements included in the Prospectus do not comply as to form in
all material respects with the applicable accounting requirements of
the Act and the published rules and regulations thereunder or the
pro forma adjustments have not been properly applied to the
historical amounts in the compilation of those statements;
(E) as of a specified date not more than three days prior to
the date of such letter, there have been any changes in the
consolidated capital stock (other than issuances of capital stock
upon exercise of options and upon conversions of convertible
securities, in each case which were outstanding on the date of the
latest financial statements included in the Prospectus) or any
increase in the consolidated long-term debt of the Company and its
subsidiaries, or any decreases in consolidated net current assets or
net assets or other items specified by the Representatives, or any
increases in any items specified by the Representatives, in each
case as compared with amounts shown in the latest balance sheet
included in the Prospectus, except in each case for changes,
increases or decreases which the Prospectus discloses have occurred
or may occur or which are described in such letter; and
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date referred
to in Clause (E) there were any decreases in consolidated net
revenues or operating profit or the total or per share amounts of
consolidated net income or other items specified by the
Representatives, or any increases in any items specified by the
Representatives, in each case as compared with the comparable period
of the preceding year and with any other period of corresponding
length specified by the Representatives, except in each case for
decreases or increases which the Prospectus discloses have occurred
or may occur or which are described in such letter; and
C-2
<PAGE> 40
(v) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of
minute books, inquiries and other procedures referred to in paragraphs
(iii) and (iv) above, they have carried out certain specified procedures,
not constituting an examination in accordance with generally accepted
auditing standards, with respect to certain amounts, percentages and
financial information specified by the Representatives, which are derived
from the general accounting records of the Company and its subsidiaries,
which appear in the Prospectus, or in Part II of, or in exhibits and
schedules to, the Registration Statement specified by the Representatives,
and have compared certain of such amounts, percentages and financial
information with the accounting records of the Company and its
subsidiaries and have found them to be in agreement.
C-3
<PAGE> 1
[RUBIN BAUM LEVIN CONSTANT & FRIEDMAN LETTERHEAD]
October 11, 1996
Bitstream Inc.
215 First Street
Cambridge, Massachusetts 02142
Ladies and Gentlemen:
We refer to the Registration Statement on Form S-1, File No. 333-11519
(the "Registration Statement"), filed by Bitstream Inc. (the "Company") with
the Securities and Exchange Commission for the purpose of registering under the
Securities Act of 1933, as amended, 2,415,000 shares of the Company's Class A
Common Stock, par value $0.01 per share (the "Class A Common Stock"), for sale
by the Company in an underwritten public offering, which includes amounts to be
sold to cover over-allotments. Except as otherwise defined herein, all
capitalized terms used herein shall have the meaning assigned thereto in the
Registration Statement.
As counsel to the Company, we have examined such corporate records,
documents, agreements and such matters of law as we have considered necessary
or appropriate for the purpose of this opinion. Upon the basis of such
examination, we advise you that in our opinion, the Class A Common Stock to be
sold by the Company to the Underwriters, if and when paid for and issued in
accordance with the terms of the underwriting agreement between the Company and
the Underwriters in the form of Exhibit 1.1 to the Registration Statement,
will be validly issued, fully paid and nonassessable.
We are members of the New York Bar, and the opinions expressed herein are
limited to questions arising under the laws of the State of New York and the
Federal law of the United States, and we disclaim any opinion whatsoever with
respect to matters governed by the laws of any other jurisdiction.
<PAGE> 2
RUBIN BAUM, LEVIN CONSTANT & FRIEDMAN
Bitstream Inc.
October 11,1996
Page 2
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the references to this firm under the caption "Legal Matters"
in the Prospectus which is a part of the Registration Statement.
Very truly yours,
/s/ Rubin Baum Levin Constant & Friedman
RUBIN BAUM LEVIN CONSTANT & FRIEDMAN
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
To Bitstream Inc.:
As independent public accountants, we hereby consent to the use of our
reports dated April 30, 1996 (except with respect to the matters discussed in
Note 1(k) and Note 10(d), as to which the date is May 21, 1996) (and to all
references to our Firm) included in or made a part of this registration
statement.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
October 29, 1996
