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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______ to______
COMMISSION FILE NUMBER 0-21541
BITSTREAM INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2744890
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(State or other jurisdiction of Employer Identification No.)
incorporation or organ(I.R.S.)
215 FIRST STREET, CAMBRIDGE, MASSACHUSETTS 02142
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(Address of principal executive offices, including Zip code)
(617) 497-6222
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 14, 1997 was approximately $26.3 million.
As of March 14, 1997, there were 5,506,771 shares of Class A Common Stock,
par value $0.01 per share, and 422,026 shares of Class B Common Stock, par value
$0.01 per share, outstanding.
Documents Incorporated by Reference
Portions of the Registrant's definitive proxy statement for the 1997 Annual
Meeting of Stockholders, to be filed with the Securities and Exchange
Commission, are incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
RECENT DEVELOPMENTS
MAINSTREAM ACQUISITION
On January 9, 1997, Bitstream Inc. (the "Company" or "Bitstream") purchased
substantially all of the assets of Mainstream Software Solutions, a corporation
organized under the laws of England primarily engaged in the business of
marketing, selling, distributing and supporting Bitstream type products in the
United Kingdom, for approximately $505,000. As a result, Bitstream will now
directly distribute its own products in the United Kingdom. The acquisition will
be accounted for as a purchase and will result in approximately $500,000 of
goodwill.
1997 STOCK PLAN
On March 10, 1997, the Board of Directors approved the 1997 Stock Plan
under which the Company is authorized to grant incentive stock options and
nonqualified stock options (including warrants) to purchase up to 1,000,000
shares of Class A Common Stock (however, in the event the Merger (described
below) is not consummated by September 30, 1997, such number of shares of Class
A Common Stock will be reduced to 500,000). Options granted under this plan
shall expire no later than 10 years from the date of the grant and vest over
periods of up to three years. The 1997 Stock Plan will be submitted for approval
of Bitstream's stockholders at the 1997 Annual Stockholders' Meeting.
ARCHETYPE ACQUISITION
On March 27, 1997, the Company entered into a Plan and Agreement of Merger
(the "Merger Agreement") with Archetype, Inc. ("Archetype"), a Delaware
corporation primarily engaged in the business of developing and marketing
server-based information management software for the graphic arts industry. The
Merger Agreement provides for the merger (the "Merger") of Archetype into
Archetype Acquisition Corporation, a newly organized wholly-owned subsidiary of
Bitstream. The Merger is intended to qualify as a tax free reorganization under
the Internal Revenue Code.
The Merger Agreement provides that, upon consummation of the Merger, each
Archetype stockholder will receive, in exchange for their shares of Archetype
capital stock, a certain amount of cash and Class A Common Stock (the "Merger
Consideration") depending on the class of Archetype capital stock exchanged
therefor. It is expected that the Merger Consideration will consist of
approximately $1.64 million in cash, in aggregate, and approximately 531,427
shares of Class A Common Stock, in aggregate, subject to certain adjustments. On
the closing of the Merger, it is expected that Bitstream will repay up to
$800,000, in aggregate, of indebtedness owed by Archetype to certain of its
stockholders. Additionally, following the Merger, the Company expects to issue
options or warrants (the "Options") to purchase up to approximately 650,000
shares of Class A Common Stock, in order to induce the former Archetype
employees and other persons receiving such Options to become employees of, or
perform certain services for, the Company and/or to replace certain outstanding
options and warrants issued by Archetype. Of these Options, 450,000 will be
issued at an exercise price of $.90 per share and the remaining 200,000 will be
issued at an exercise price per share equal to the fair market value of the
Class A Common Stock on the date of the consummation of the Merger. The
acquisition will be accounted for as a purchase with a significant portion of
the purchase price being allocated to, and expensed, as in process research and
development.
Through the acquisition of Archetype, by the third quarter of 1997,
Bitstream expects to begin to market Archetype's products to original equipment
manufacturers ("OEMs") and independent software vendors ("ISVs"), and to the
graphic arts/publishing market through the network of value added resellers
("VARs") that Archetype has established. Archetype's products include: (i)
MediaBank, a digital asset management product that allows for the cataloging,
archiving, and management of electronic images, text and documents; (ii)
InterSep OPI and InterSep Output Manager, advanced open prepress interface and
print management products for raster image processors and servers; and
(iii) NuDoc, an advanced document composition technology.
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Upon the consummation of the Merger, Bitstream expects to hire
substantially all of the employees of Archetype, thereby increasing the number
of Bitstream employees to approximately 90 people in the second quarter of 1997.
Consummation of the Merger is subject to various conditions and there can
be no assurance that the Merger will be consummated on the terms referenced
above if at all.
The foregoing statements are summaries of certain terms of the Merger and
the Merger Agreement and do not purport to be complete. The summaries are
subject to, and qualified in their entirety by reference to, the provisions of
the Merger Agreement, a copy of which is attached hereto as Exhibit 10.10.
GENERAL
Bitstream develops and markets software products and technologies to
enhance the creation, transport, viewing and printing of electronic text based
information. 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 compact format. The Company's enabling technologies and TrueDoc allow
textbased digital information to maintain its intended appearance in any
computing environment. The Company primarily licenses its products and
technologies to OEM's and ISV's 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 creation and
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 Computer, Inc. ("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 complicated when users try to incorporate non-Latin
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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. 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.
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 compaction
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. During 1996, the Company
concentrated its efforts 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. If the
Merger is consummated, Bitstream will seek to expand the sale of Archetype's
products through its established VAR channel. See "Recent
Developments--Archetype Acquisition."
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.
SUPPORT INDUSTRY STANDARDS. Bitstream's products and technologies have been
designed to support existing technological and typographic standards, such as
Hypertext Markup Language ("HTML"), Standard Generalized Markup Language
("SGML"), UNICODE, 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 environments,
including Windows, UNIX and Macintosh, OS/9 and Java. The Company plans to
continue to promote the use of its products in multivendor configurations and is
a member of the World Wide Web Consortium and the Unicode Consortium.
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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 compact format.
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 is a single typeface 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
Imaging System."
TRUEDOC
TrueDoc is a portable type compaction technology designed for the
distribution of electronic text based information. 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.
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TrueDoc is composed of two main software components. The TrueDoc Character
Shape Recorder, approximately 75 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 65 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.
In February 1997, the Company entered into a licensing agreement with
Netscape Communications Corporation ("Netscape"), pursuant to which Netscape
licensed TrueDoc's Character Shape Player (viewing component) and TrueDoc's
Character Shape Recorder (recording component) from the Company. The Company
anticipates that Netscape will integrate such TrueDoc technology into Netscape's
Communicator software, an integrated suite of applications that combine
electronic mail, browsing, Internet document composition and collaboration. The
Company is also pursuing, and has concluded, similar arrangements with other
Internet technology developers. In June 1996, Bitstream entered into separate
licensing agreements with Spyglass, Inc. ("Spyglass") and Oracle Corporation
("Oracle"), to include TrueDoc technology into their respective Internet
browsing technologies: the Spyglass Web Technology Kit and the Oracle
PowerBrowser. Spyglass' Web Technology Kit is an Internet enabling technology
for hardware manufacturers and continues to be marketed by Spyglass. Oracle's
PowerBrowser is not currently being marketed by Oracle.
Although the Company expects that it will receive no or only nominal
royalty payments under these agreements, the inclusion of TrueDoc viewing
technology into Netscape's and Spyglass' client products or World Wide Web
navigation tools will create an installed TrueDoc user base of these companies'
customers. The Company believes that this will stimulate demand by OEM's and
ISV's to license the recording component of TrueDoc, the Character Shape
Recorder, for use in their Internet and corporate intranet products or
applications on a royalty basis. There can, however, be no assurance that either
Netscape or Spyglass will include (or continue to include) TrueDoc in its
products or that the Company will achieve any commercial benefit from the
inclusion of TrueDoc in such products.
In September 1996, the relationship that developed between Oracle and
Bitstream led to a separate licensing agreement between Bitstream with Network
Computer, Inc., a subsidiary of Oracle, to provide full multilingual font
technology support for its Network Computer architecture. The Company is also
pursuing separate licensing arrangements with HTML authoring tool developers and
Internet compatible hardware manufacturers.
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 a license (the "Envoy License") the Company obtained from
Novell, Inc. ("Novell"), Novell granted the Company the exclusive right to
distribute Novell's proprietary portable document technology, Envoy, 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) and a non-exclusive rights to distribute Envoy to end users.
During the first quarter of 1997, the Company held discussions with Novell
as to various matters relating to Envoy and certain provisions of the Envoy
License. Such discussions resulted in the termination of the Envoy License
without any further obligation or liability of either party to the other. The
Company believes that such termination will not have an adverse effect on the
Company and is consistent with furthering the Company's presence in Internet
tools, Network Computers and set top boxes, where the emphasis appears to be on
developing technologies which are more open to industry standards, such as HTML,
SGML and Java.
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:
o 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
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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 product. This product is expected to
work with Novell's Netware Distributed Print Services ("NDPS"). NDPS is
expected to ship in mid 1997.
o TrueDoc-based utilities for the graphic arts market that address font
portability issues in the electronic delivery of desktop publishing
documents.
o 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.
o If the Merger is consummated, products from Archetype, such as MediaBank,
InterSep OPI and InterSep Output Manager and NuDoc.
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, or that
the Merger with Archetype will be consummated. See "Recent
Developments--Archetype Acquisition."
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 VAR channel serving the networking market
or increased direct corporate and international marketing. See "Recent
Developments--Archetype Acquisition."
The Company's sales organization, as of March 17, 1997, consisted of 9
people focused on OEM and ISV sales and 6 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, Reading, England and Cheltenham, 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.
CUSTOMERS
The Company licenses type products, enabling technologies and TrueDoc to a
wide variety of OEM and ISV customers. In addition, the Company sells custom and
other type products directly to corporate customers. No single Bitstream
customer accounted for 10% or more of the Company's revenues for any of the
fiscal years ended September 30, 1994 through December 30, 1996. 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 13 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 within the OEM/ISV, corporate and VAR
channels. Customers which are representative of the various industry groups
served by the Company include those listed below.
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<TABLE>
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ISVS
Application Developers Graphic Arts Operating Systems
<S> <C> <C>
Accent Software International Ltd. Barco Graphics N.V. Apple Computer, Inc.
Corel Systems Corporation DaiNippon Screen Manufacturing Co., Ltd. QNX Software Systems Ltd.
Hummingbird Communications Inc. Intergraph Corporation Silicon Graphics, Inc.
Macromedia, Inc. Interleaf, Inc. Sun Microsystems, Inc.
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OEMs
Printer Companies Broadcast Television
Hewlett-Packard Company Seiko Epson Corporation Victor Company of Japan (JVC)
Kyocera Corp. Sharp Electronics Corporation The Walt Disney Company
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Corporate End Users
CNA Insurance Company Kemper Financial Services TV Guide
Deluxe Corporation Price Waterhouse L.L.P.
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</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 and, if the Merger is
consummated, will include advancing products and technologies developed by
Archetype for sale through the VAR channel. The Company maintains specific
expertise in the areas of font formats, multi-lingual fonts, font portability,
font compression and font processing technology and, if the Merger is
consummated, this expertise will be expanded to include composition, media and
server technology. See "Recent Developments - Archetype Acquisition."
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. Java versions of True Doc in platform specific
format are currently available for Windows and UNIX. The Company expects to have
a Java version of TrueDoc that will work on all computing platforms available
in the last quarter of 1997. There can, however, be no assurance that such a
version of TrueDoc will be completed in the last quarter of 1997, if at all.
As of March 17, 1997, the Company employed 18 individuals who engage in
research and development activities. Of these, eight focus on type product
development, four on developing enabling technology, and three on TrueDoc. The
remainder focus on quality assurance and administration.
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.
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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 consists primarily of software from Agfa,
which includes a font compression technology known as MicroType Express. Until
recently, the Company also faced competition with respect to TrueDoc from the
former Ares Software Corporation, which was acquired by Adobe.
The Company also faces competition in its efforts to have TrueDoc accepted
and supported by Internet companies. In March 1996, Adobe and Netscape announced
their intention to integrate Adobe technology into Netscape products. The
Company's licensing agreement with Netscape does not preclude Netscape from
integrating Adobe technology into Netscape products. In addition, Microsoft
Corporation ("Microsoft") has announced an initiative to provide font
portability and compression in future versions of its Internet applications. The
Company believes that Microsoft has licensed Agfa's MicroType Express to provide
font compression for this initiative.
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.
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 been
granted two patents and a third is 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 March 17, 1997, the Company employed 66 persons, including 29 in
sales and marketing, 18 in research and development and 19 in general
administrative functions. Of the Company's 66 employees, 64 are full time and 2
are 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
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<PAGE> 10
work stoppages. The Company considers its employee relations to be good. See
"Recent Developments--Archetype Acquisition."
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."
Bitstream(R) and TrueDoc(R) are federally registered trademarks of the
Company; the Company claims trademark rights in Cyberbit(TM). All other
trademarks, service marks or tradenames referred to in this Report are the
property of their respective owners.
ITEM 2. PROPERTY
The Company's corporate headquarters is located in Cambridge, Massachusetts
where it currently leases approximately 25,000 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 suitable additional space, should it be needed, will be available
to accommodate expansion of the Company's operations on commercially reasonable
terms.
ITEM 3. 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 agreement (the "Letter") 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 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, which
provides, among other things, that persons found to have engaged in an unfair or
deceptive act in the conduct of a trade or business may be liable for double or
treble damages and attorney fees. The Museum further demanded an accounting of
royalties the Museum claims are due from the Company for use 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 cannot ensure that current reserves and insurance coverage will
be sufficient to cover any liability incurred by the Company in this lawsuit.
The Company has reserved the $10,000 deductible in the accompanying
consolidated financial statements as of December 31, 1996.
On November 22, 1996, Mr. Robert S. Friedman, a former director and officer
of the Company, and Mr. Gordon Greer, and Ms. Faith G. Friedman, as trustees of
the Robert S. Friedman Family Trust, filed a lawsuit in the Middlesex County
Superior Court of Massachusetts against the Company, asserting that the Company
has breached certain obligations the plaintiffs allege are due to them under a
separation agreement dated May 22, 1991 (the "Separation Agreement") between Mr.
Friedman and the Company. The plaintiffs are seeking monetary damages from the
Company based on their claim that, in connection with the 1994 recapitalization
of the Company, the Company allegedly made adjustments to the stock and options
of the officers of the Company and that a provision in the Separation Agreement
entitled the plaintiffs to equivalent
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<PAGE> 11
adjustments with respect to the stock and options of the Company held by them.
The plaintiffs further allege that the breach by the Company resulted in a loss
to them of stock and options valued at $2.2 million. The Company believes that
these claims are without merit and intends to vigorously contest their validity.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 22, 1996, prior to the effective date of the Company's initial
public offering of its Class A Common Stock (the "IPO"), a majority of the
stockholders of each class of Bitstream's common stock and preferred stock voted
by written consent to amend the certificate of incorporation of the Company to
eliminate the shares of the Company's authorized Class A Preferred Stock and
Class B Preferred Stock remaining outstanding after all shares of such Class A
Preferred Stock and Class B Preferred Stock were automatically converted to
Class A Common Stock and Class B Common Stock, respectively, on the effective
date of the IPO.
On October 22, 1996, 2,782,575 shares, 391,162 shares, 288,646 shares and
30,884 shares of Bitstream's Class A Preferred Stock, Class B Preferred Stock,
Class A Common Stock and Class B Common Stock, respectively, were outstanding
and a total of 2,475,074 shares, 391,162 shares, 206,340 shares and 30,884
shares of Class A Preferred Stock, Class B Preferred Stock, Class A Common Stock
and Class B Common Stock, respectively, voted for the amendment to the Company's
Certificate of Incorporation.
EXECUTIVE OFFICERS OF THE COMPANY
The Company's executive officers and their ages as of March 15, 1997 are as
follows:
<TABLE>
<CAPTION>
Name Age Position
- --------------------- ------ --------------------------------------------
<S> <C> <C>
C. Raymond Boelig 43 President and Chief Executive Officer
James D. Hart 39 Vice President, Finance and Administration,
Treasurer and Chief Financial Officer
John S. Collins 57 Vice President, Engineering and Development
Geoffrey W. Greve 39 Vice President, Type Operations
John S. Seguin 42 Vice President, Sales and Marketing
</TABLE>
C. Raymond Boelig has been Chairman of the Board of Directors of the
Company since December 6, 1996, 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 Ltd. ("Interfid"), a private
investment advisory firm, 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.
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.
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<PAGE> 12
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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Class A Common Stock of the Company began trading publicly on the
Nasdaq National Market tier of The Nasdaq Stock Market on October 30, 1996 under
the symbol "BITS." Prior to October 30, 1996, there was no public market for the
Class A Common Stock. The following table sets forth the high and low closing
sale prices of the Company's Class A Common Stock as reported on the Nasdaq
National Market for the period commencing October 30, 1996 through December 31,
1996. Such information reflects interdealer prices, without retail markup,
markdown, or commission, and may not represent actual transactions.
- --------------------------------- ---------------------------------------
HIGH LOW
----------------- ----------------
October 30 through December 31 6 1/2 4 5/8
As of March 14, 1997, the Company's Class A Common Stock was held by
approximately 34 holders of record and the Company believes that the Company's
Class A Common Stock was beneficially held by more than 400 holders. The
Company's Class B Common Stock was held by 1 holder beneficially and of record.
DIVIDENDS
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.
SALE OF UNREGISTERED SECURITIES
During the fiscal year ended December 31, 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 Company's 1994
Stock Plan.
The sales and issuances of securities in the transactions described above
are deemed to be exempt from registration under the Securities Act of 1933, as
amended, 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.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of September
30, 1994 and 1995 and December 31, 1995 and 1996 and for each of the two years
in the period ended September 30, 1995, the three months ended December 31,
1995, and the year in the period ended December 31, 1996 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
12
<PAGE> 13
accountants, whose report thereon is included elsewhere in this Report. The
selected consolidated financial data presented below as of September 30, 1992
and 1993 and for each of the two years in the period ended September 30, 1993
have been derived from, and are qualified by reference to, the Company's audited
financial statements, which are not included in this Report. 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 Report. 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. 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 Report, and other financial data appearing elsewhere
herein.
<TABLE>
<CAPTION>
Three Months Ended Year Ended
Year Ended September 30, December 31, December 31,
--------------------------------------------- --------------------------------
1992 1993 1994 1995 1994(1) 1995(1) 1996(1)
------- ------ ------ ------ --------- --------- --------
(In thousands, except per share data) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Revenues...................................... $20,548 $17,430 $ 9,832 $8,970 $2,276 $2,355 $10,551
Cost of revenues.............................. 5,433 6,276 2,299 1,579 273 411 1,858
------- ------- ------- ------- ------ ------ -------
Gross profit................................ 15,115 11,154 7,533 7,391 2,003 1,944 8,693
------- ------- ------- ------- ------ ------ -------
Operating expenses:
Marketing and selling....................... 10,531 9,080 3,334 3,264 740 978 4,386
Research and development.................... 5,686 3,536 1,534 1,071 255 331 1,512
General and administrative.................. 2,237 3,006 1,281 1,261 266 385 1,533
Restructuring charge........................ -- -- 365 -- -- -- --
------- ------- ------- ------- ------ ------ -------
Total operating expenses.................. 18,454 15,622 6,514 5,596 1,261 1,694 7,431
------- ------- ------- ------- ------ ------ -------
Operating income (loss)....................... (3,339) (4,468) 1,019 1,795 742 250 1,262
------- ------- ------- ------- ------ ------ -------
Other income (expense), net................... (107) (18) (40) 11 (2) 17 (97)
------- ------- ------- ------- ------ ------ -------
Provisions for (benefit from) income taxes.... 178 319 133 118 17 (471) (94)
------- ------- ------- ------- ------ ------ -------
Net income (loss)............................. $(3,624) $(4,805) $ 846 $1,688 $ 723 $738 $1,337
======== ======== ======= ======= ====== ====== =======
Pro forma net income per common and common
equivalent share (2)........................ $ .38 $ .17 $ .27
======= ====== =======
Pro forma weighted average common and common
equivalent shares outstanding(2)......... 4,984 4,705 5,041
===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
As of September 30, As of December 31,
---------------------------------------------- -------------------------
1992 1993 1994 1995 1995(1) 1996(1)
---- ---- ---- ---- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Cash and cash equivalents................. $ 347 $ 1,068 $ 654 $ 523 $ 390 $11,718
Working capital (deficit)................. (976) (2,266) (920) 881 1,254 14,220
Total assets.............................. 7,895 5,029 2,640 3,194 4,328 17,477
Long-term obligations..................... 566 17 125 124 210 .99
Mandatorily redeemable convertible preferred -- 1,204 2,311 -- -- --
Stock Stockholders' equity (deficit)...... 153 (2,803) (3,041) 1,066 1,806 15,359
- ------------------
</TABLE>
(1) Effective December 31, 1995, the Company changed its fiscal year end from a
fiscal year end of September 30 to a calendar year end. The fiscal year
ended December 31, 1996 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
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
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<PAGE> 14
inclusion in their output devices, embedded systems, applications, Internet
authoring tools, World Wide Web browsers and other products.
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, and any royalty fees paid
to third parties for rights to license typefaces.
Operating expenses consist primarily of sales and marketing expenses
(principally sales compensation and commissions), research and development
expense and general and administrative expenses.
Except for the historical information contained herein, this Annual Report
on Form 10-K may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Investors are cautioned that
forward-looking statements are inherently uncertain. Actual performance and
results of operations may differ materially from those projected or suggested in
the forward-looking statements due to certain risks and uncertainties,
including, without limitation, market acceptance of the Company's products,
including its TrueDoc enabling technology, competition, the timely introduction
of new products, and when and on what terms the Merger might be consummated, if
at all. Additional information concerning certain risks and uncertainties that
would cause actual results to differ materially from those projected or
suggested in the forward-looking statements is contained in the Company's
filings with the Securities and Exchange Commission, including those risks and
uncertainties discussed in the Company's final Prospectus, dated October 30,
1996, included as part of the Company's Registration Statement on Form S-1
(333-11519), in the section entitled "Risk Factors." The forward-looking
statements contained herein represent the Company's judgment as of the date of
this report, and the Company cautions readers not to place undue reliance on
such statements.
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 Ended Year Ended
Year Ended September 30, December 31, December 31,
------------------------- ----------------------- -----------
1994 1995 1994 1995 1996
-------- ------- ------- -------- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues ........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues ................................... 23.4 17.6 12.0 17.5 17.6
----- ----- ----- ----- -----
Gross profit ...................................... 76.6 82.4 88.0 82.5 82.4
----- ----- ----- ----- -----
Operating expenses
Marketing and selling ............................. 33.9 36.4 32.5 41.5 41.6
Research and development .......................... 15.6 11.9 11.2 14.1 14.3
General and administrative ........................ 13.0 14.0 11.7 16.4 14.5
Restructuring charge .............................. 3.7 -- -- -- --
----- ----- ----- ----- -----
Total operating expenses ...................... 66.2 62.3 55.4 72.0 70.4
----- ----- ----- ----- -----
Operating income (loss) ........................... 10.4 20.1 32.6 10.5 12.0
----- ----- ----- ----- -----
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
Three Months Ended Year Ended
Year Ended September 30, December 31, December 31,
------------------------- ------------------------ ----------------
1994 1995 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Other income (expense), net................... (0.4) -- (0.1) 0.8 (0.2)
----- ------ ----- ----- -----
Provision for (benefit from) income taxes..... 1.4 1.3 0.8 (20.0) (0.9)
----- ------- ----- ----- -----
Net income (loss)............................. 8.6% 18.8% 31.7% 31.3% 12.7%
===== ======= ====== ===== ======
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED SEPTEMBER 30, 1995
Revenues. Revenues for the fiscal year ended December 31, 1996 increased by
approximately $1.6 million, or 17.6%, to approximately $10.6 million, compared
to approximately $9.0 million for the fiscal year ended September 30, 1995.
Revenues from product sales to OEM and ISV customers for the fiscal year ended
December 31, 1996 increased by approximately $2.4 million, or 38%, to
approximately $8.7 million, from approximately $6.3 million for the fiscal year
ended September 30, 1995, 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 additional OEM and ISV customers of the Company's TrueDoc
technology. Revenues from product sales to end users and distributors for the
fiscal year ended December 31, 1996 declined by $700,000, or 27%, to $1.9
million, from $2.6 million for the fiscal year ended September 30, 1995, 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 December 31, 1996
increased by approximately $1.3 million, or 17.6%, to approximately $8.7
million, compared to approximately $7.4 million for the fiscal year ended
September 30, 1995. The increase in gross profit was due primarily to the
increase in revenues. Gross profit as a percentage of revenues remained
approximately the same for both fiscal years.
Marketing and Selling. Marketing and selling expenses for the fiscal year
ended December 31, 1996 increased by approximately $1.1 million, or 33.3%, to
approximately $4.4 million, compared to approximately $3.3 million for the
fiscal year ended September 30, 1995, 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 fiscal
year ended December 31, 1996 increased $441,000, or 41.2%, to approximately $1.5
million, compared to approximately $1.1 million for the fiscal year ended
September 30, 1995. This increase reflects the costs associated with the
addition of engineering 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
fiscal year ended December 31, 1996 increased by $272,000, or 22%, to $1.5
million, compared to $1.3 million for the fiscal year ended September 30, 1995.
General and administrative expenses principally consist of payroll costs to
executives, office, MIS and accounting personnel, as well as outside
professional fees. The Company expects to increase general and administrative
expenses in absolute dollars in the future to support the Company's growth and
infrastructure.
The Company recorded a tax benefit for the year ended December 31, 1996 of
$94,000. This benefit consisted of a reduction of the valuation allowance for
deferred tax assets of $268,000, partially offset by a current tax provision of
$174,000. The reduction to the valuation allowance is primarily based upon
estimated future utilization of net operating loss carryforwards and federal tax
credits. For the fiscal year ended September 30, 1995, the Company recorded a
tax provision of $118,000, reflecting an effective tax rate of 6.5%.
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.
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<PAGE> 16
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 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
16
<PAGE> 17
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily through the public and
private sale of equity securities, cash flow from operations, and certain bank
and stockholder indebtedness.
In November 1996, the Company completed an initial public offering ("IPO")
of 2,415,000 shares of its Class A Common Stock at $6.00 per share. Net proceeds
from the IPO were approximately $12.2 million, of which approximately $1.5
million was used to repay outstanding indebtedness.
The Company's operating activities provided cash of $339,000 and $248,000
for the fiscal years ended September 30, 1994 and 1995, respectively, used cash
of $304,000 for the three months ended December 31, 1995, and provided cash of
$487,000 for the fiscal year ended December 31, 1996. The Company's investing
activities used cash of $65,000 and $137,000 for the fiscal years ended
September 30, 1994 and 1995, respectively, used cash of $115,000 for the three
months ended December 31, 1995, and used cash of $866,000 for the fiscal year
ended December 31, 1996. Investing activities consisted principally of the
purchase of property and equipment to support the growing employee base and
corporate infrastructure.
The Company's financing activities used cash of $688,000 and $242,000 for
the fiscal years ended September 30, 1994 and 1995, respectively, to fund a net
reduction of outstanding indebtedness. For the year ended December 31, 1996,
cash flow from financing activities was approximately $11.7 million, including
approximately $12.2 million from the net proceeds of the IPO. As of December 31,
1996, the Company had cash and cash equivalents of approximately $11.7 million,
an increase of approximately $11.3 million from $390,000 at December 31, 1995.
Working capital was approximately $14.2 million at December 31, 1996, as
compared to approximately $1.3 million at December 31, 1995.
The Company believes that the cash generated from the proceeds of the IPO,
cash from operations and current cash balances will be sufficient to meet the
Company's operating and capital requirements for at least the next 12 months.
There can be no assurance, however, that the Company will not require additional
financing in the future. If the Company were required to obtain additional
financing in the future, there can be no assurance that sources of capital will
be available on terms favorable to the Company, if at all.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The index to Financial Statements appears on page F-1, the Independent
Auditors' Report appears on page F-2, and the Financial Statements and Notes to
Financial Statements appear on pages F-3 to F-12.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
<PAGE> 18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item is incorporated by reference herein
to the definitive Proxy Statement to be filed by the Company pursuant to
Regulation 14A within 120 days after the close of the 1996 fiscal year. Certain
information with regard to the executive officers of the Company is contained in
Item 4 hereof and is incorporated by reference in this Part III.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is incorporated herein by reference
to the definitive Proxy Statement to be filed by the Company pursuant to
Regulation 14A within 120 days after the close of the 1996 fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is incorporated herein by reference
to the definitive Proxy Statement to be filed by the Company pursuant to
Regulation 14A within 120 days after the close of the 1996 fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is incorporated herein by reference
to the definitive Proxy Statement to be filed by the Company pursuant to
Regulation 14A within 120 days after the close of the 1996 fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS.
An index to Financial Statements appears on page F-1.
2. SCHEDULES.
None.
3. EXHIBITS.
3 Certificate of Incorporation and Bylaws
*3.1.1 Certificate of Incorporation of the Company
++3.1.2 Certificate of Amendment to 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.
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 Company dated
March 17, 1992
*10.4.1 First Lease Amendment between Athenaeum Group and the
Company dated September 7, 1993
*10.4.2 Second Lease Amendment between Athenaeum Group and the
Company dated July 13, 1994
*10.4.3 Third Lease Amendment between Athenaeum Group and the
Company dated July 15, 1996
++10.4.4 Fourth Lease Amendment between Athenaeum Property LLC
and the Company dated March 3, 1997
18
<PAGE> 19
*10.5 Bridge Loan Agreement, dated February 22, 1996 among
the Company 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 Company 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 Company and certain bridge lenders named therein
#10.6 Software License Agreement between Novell, Inc. and
the Company, dated as of September 6, 1996
#10.7 Agreement between Tumbleweed Software Corporation
and the Company dated as of June 10, 1996
*10.8 Agreement dated as of May 1, 1996 among the
Company and James D. Hart
*10.9 Form of Indemnification Agreement between the
Company, its directors and certain of its officers
++10.10 Agreement and Plan of Merger dated as of March 27, 1997
among the Company, Archetype Acquisition Corporation
and Archetype, Inc.
++10.11 1997 Stock Plan
21 Subsidiaries of Registrant
++21.1 Subsidiaries of the Company
27 Financial Data Schedule
++27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the year
ended December 31, 1996.
- ----------
++ 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.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Boston,
Commonwealth of Massachusetts on this 31 day of March, 1997.
BITSTREAM INC.
By: /s/ C. Raymond Boelig
---------------------
C. Raymond Boelig
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities indicated
below on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ C. Raymond Boelig Chairman of the Board, Director, President March 31, 1997
- ----------------------------------------- and Chief Executive Officer (Principal
C. Raymond Boelig Executive Officer)
/s/ James D. Hart Vice President, Finance and March 31, 1997
- ----------------------------------------- Administration, Treasurer and Chief
James D. Hart Financial Officer (Principal Financial and
Accounting Officer)
/s/ Amos Kaminski Director March 31, 1997
- -----------------------------------------
Amos Kaminski
/s/ David G. Lubrano Director March 31, 1997
- -----------------------------------------
David G. Lubrano
/s/ George B. Beitzel Director March 31, 1997
- -----------------------------------------
George B. Beitzel
</TABLE>
20
<PAGE> 21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Bitstream Inc.:
We have audited the accompanying consolidated balance sheets of Bitstream
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1995 and 1996,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the two years in the period ended September
30, 1995, the three-month period ended December 31, 1995 and for the year ended
December 31, 1996. 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 December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the two years in the period ended
September 30, 1995, the three-month period ended December 31, 1995, and for the
year ended December 31, 1996, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Boston, Massachusetts
February 11, 1997
F-2
<PAGE> 22
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................. $ 390,000 $ 11,718,000
Accounts receivable, net of allowance for doubtful accounts ............... 1,846,000 1,552,000
Current portion of long-term accounts receivable and extended plan accounts
receivable, net of allowance for doubtful accounts ...................... 536,000 1,667,000
Deferred income taxes ..................................................... 600,000 868,000
Other current assets ...................................................... 194,000 434,000
------------ ------------
Total current assets .............................................. 3,566,000 16,239,000
------------ ------------
Property and equipment, net ................................................. 530,000 924,000
------------ ------------
Other assets
Long-term accounts receivable, net of current portion ..................... 228,000 123,000
Other assets .............................................................. 4,000 191,000
------------ ------------
232,000 314,000
------------ ------------
Total assets ...................................................... $ 4,328,000 $ 17,477,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ............................................................. $ 300,000 $ --
Current maturities of capital lease obligations ........................... 134,000 36,000
Accounts payable .......................................................... 466,000 513,000
Accrued expenses .......................................................... 1,412,000 1,470,000
------------ ------------
Total current liabilities ......................................... 2,312,000 2,019,000
------------ ------------
Capital lease obligations, less current maturities .......................... 184,000 79,000
------------ ------------
Other long-term liabilities ................................................. 26,000 20,000
------------ ------------
Commitments and contingent liabilities (Notes 7 and 8)
Stockholders' equity
Convertible preferred stock ............................................... 32,000 --
Common stock .............................................................. 3,000 59,000
Additional paid-in capital ................................................ 14,449,000 26,637,000
Accumulated deficit ....................................................... (12,630,000) (11,293,000)
Cumulative translation adjustment ......................................... (48,000) (44,000)
------------ ------------
Total stockholders' equity ........................................ 1,806,000 15,359,000
------------ ------------
Total liabilities and stockholders' equity ........................ $ 4,328,000 $ 17,477,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 23
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months
Years Ended September 30, Ended Year Ended
----------------------------- December 31, December 31,
1994 1995 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues ........................................................ $ 9,832,000 $ 8,970,000 $ 2,355,000 $ 10,551,000
Cost of revenues ................................................ 2,299,000 1,579,000 411,000 1,858,000
------------ ------------ ------------ ------------
Gross profit .................................................. 7,533,000 7,391,000 1,944,000 8,693,000
------------ ------------ ------------ ------------
Operating expenses:
Marketing and selling ......................................... 3,334,000 3,264,000 978,000 4,386,000
Research and development ...................................... 1,534,000 1,071,000 331,000 1,512,000
General and administrative .................................... 1,281,000 1,261,000 385,000 1,533,000
Restructuring charge .......................................... 365,000 -- -- --
------------ ------------ ------------ ------------
Total operating expenses .................................... 6,514,000 5,596,000 1,694,000 7,431,000
------------ ------------ ------------ ------------
Operating income ............................................ 1,019,000 1,795,000 250,000 1,262,000
------------ ------------ ------------ ------------
Other income (expense) , net .................................... (40,000) 11,000 17,000 (19,000)
------------ ------------ ------------ ------------
Income before provision for (benefit from) income taxes ..... 979,000 1,806,000 267,000 1,243,000
Provision for (benefit from) income taxes ....................... 133,000 118,000 (471,000) (94,000)
------------ ------------ ------------ ------------
Net income .................................................... $ 846,000 $ 1,688,000 $ 738,000 $ 1,337,000
============ ============ ============ ============
Pro forma net income per common and common
equivalent share ................................................ $ .38 $ .17 $ .27
============ ============ ============
Pro forma weighted average common and common equivalent
shares outstanding
4,983,678 4,704,805 5,041,054
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 24
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
CONVERTIBLE PREFERRED
<TABLE>
<CAPTION>
STOCK COMMON STOCK
-------------------- ---------------------- ADDITIONAL
NUMBER $.01 NUMBER $.01 PAID-IN
OF SHARES PAR VALUE OF SHARES PAR VALUE CAPITAL
---------- -------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE,
SEPTEMBER 30, 1993 ..... 3,052,647 $ 31,000 1,759,163 $ 18,000 $ 13,391,000
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 ...... -- -- -- -- --
Reduction of notes
receivable .......... -- -- -- -- --
Cancellation of notes
receivable and Series
H convertible
preferred stock...... -- -- -- -- (7,000)
Cumulative translation
adjustment .......... -- -- -- -- --
Net income ............ -- -- -- -- --
---------- -------- ---------- -------- ------------
BALANCE,
SEPTEMBER 30, 1994 .... 3,052,647 31,000 1,759,230 18,000 12,277,000
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
Net income ............. -- -- -- -- --
---------- -------- ---------- -------- ------------
BALANCE,
SEPTEMBER 30, 1995 .... 3,173,737 32,000 312,677 3,000 14,449,000
Cumulative translation
adjustment .......... -- -- -- -- --
Net income ............. -- -- -- -- --
---------- -------- ---------- -------- ------------
BALANCE,
DECEMBER 31, 1995 ..... 3,173,737 32,000 312,677 3,000 14,449,000
Exercise of stock
options and
warrants ............ -- -- 6,833 -- 5,000
Cumulative translation
adjustment .......... -- -- -- -- --
Conversion of
convertible
preferred stock into
common stock ........ (3,173,737) (32,000) 3,173,737 32,000 --
Sale of 2,415,000
shares of common stock
in initial public
offering, net of
issuance costs
of $1,369,000........ -- -- 2,415,000 24,000 12,183,000
Net income ............ -- -- -- -- --
---------- -------- ---------- -------- ------------
BALANCE,
DECEMBER 31, 1996 ...... -- $ -- 5,908,247 $ 59,000 $ 26,637,000
========== ======== ========== ======== ============
<CAPTION>
TOTAL
CUMULATIVE STOCKHOLDERS'
ACCUMULATED TRANSLATION TREASURY NOTES EQUITY
DEFICIT ADJUSTMENT STOCK RECEIVABLE (DEFICIT)
------------ -------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1993 ..... $(15,902,000) $(32,000) $ (17,000) $(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) 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) -- -- (18,000)
Net income ............ 846,000 -- -- -- 846,000
------------ -------- --------- --------- ------------
BALANCE,
SEPTEMBER 30, 1994 .... (15,056,000) (50,000) (247,000) (14,000) (3,041,000)
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 ......... -- -- 247,000 14,000 2,552,000
Net income ............. 1,688,000 -- -- -- 1,688,000
------------ -------- --------- --------- ------------
BALANCE,
SEPTEMBER 30, 1995 .... (13,368,000) (50,000) -- -- 1,066,000
Cumulative translation
adjustment .......... -- 2,000 -- -- 2,000
Net income ............ 738,000 -- -- -- 738,000
------------ -------- --------- --------- ------------
BALANCE,
DECEMBER 31, 1995 ..... (12,630,000) (48,000) -- -- 1,806,000
Exercise of stock
options and
warrants ............ -- -- -- -- 5,000
Cumulative translation
adjustment .......... -- 4,000 -- -- 4,000
Conversion of
convertible
preferred stock into
common stock -- -- -- -- --
Sale of 2,415,000
shares of common stock
in initial public
offering, net of
issuance costs of
$1,269,000 -- -- -- -- 12,207,000
Net income ........... $ 1,337,000 -- -- -- 1,337,000
------------ -------- --------- --------- ------------
BALANCE,
DECEMBER 31, 1996 ...... $(11,293,000) $(44,000) $ -- $ -- $ 15,359,000
============ ======== ========= ========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 25
BITSTREAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
YEARS ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income.................................................. $ 846,000 $ 1,688,000 $ 738,000 $ 1,337,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities --
Depreciation and amortization............................. 476,000 214,000 36,000 292,000
Deferred income tax benefit............................... -- -- (600,000) (268,000)
Net loss (gain) on disposal of property and equipment, net.... 51,000 (14,000) (22,000) (7,000)
Issuance of common stock for services rendered............ -- 108,000 -- --
Changes in assets and liabilities --
Accounts receivable..................................... 1,272,000 (754,000) (613,000) 294,000
Long-term and extended plan accounts receivable......... (277,000) 96,000 205,000 (1,026,000)
Other current assets.................................... 554,000 24,000 (34,000) (240,000)
Accounts payable........................................ (2,553,000) (453,000) (333,000) 47,000
Accrued expenses........................................ (30,000) (661,000) 319,000 58,000
------------- ------------ ----------- ------------
Net cash provided by (used in) operating activities..... 339,000 248,000 (304,000) 487,000
------------- ------------ ----------- ------------
Cash Flows from Investing Activities:
Purchase of property and equipment.......................... (68,000) (197,000) (140,000) (679,000)
Proceeds from sale of property and equipment................ -- 60,000 24,000 --
Decrease in other assets.................................... 3,000 -- 1,000 (187,000)
------------- ------------ ----------- -------------
Net cash used in investing activities................. (65,000) (137,000) (115,000) (866,000)
------------- ------------ ----------- ------------
Cash Flows from Financing Activities:
Proceeds from long-term debt and capital lease obligations -- -- 300,000 324,000
Proceeds from line of credit................................ -- -- -- 100,000
Payments on line of credit.................................. (194,000) -- -- (400,000)
Proceeds from debt to stockholders.......................... -- -- -- 600,000
Payments on debt to stockholders............................ -- -- -- (600,000)
Payments on long-term debt and capital lease obligations.... (496,000) (244,000) (26,000) (527,000)
Change in other long-term liabilities....................... (3,000) 2,000 12,000 (2,000)
Receipts of payments on notes receivable.................... 5,000 -- -- --
Proceeds from sale of common stock.......................... -- -- -- 12,207,000
Proceeds from the exercise of stock options and warrants... -- -- -- 5,000
------------- ------------ ----------- ------------
Net cash provided by (used in) financing activities... (688,000) (242,000) 286,000 11,707,000
------------- ------------ ----------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents......... (414,000) (131,000) (133,000) 11,328,000
Cash and Cash Equivalents, beginning of period................ 1,068,000 654,000 523,000 390,000
------------- ------------ ----------- ------------
Cash and Cash Equivalents, end of period...................... $ 654,000 $ 523,000 $ 390,000 $11,718,000
============= ============ =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest...................................... $ 72,000 $ 16,000 $ 6,000 $ 29,000
============= ============ =========== ============
Cash paid for income taxes.................................. $ -- $ 5,000 $ 93,000 $ 41,000
============= ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 26
BITSTREAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Bitstream Inc. and subsidiaries (the "Company") develop and market software
products and technologies to enhance the creation, transport, viewing and
printing of electronic documents.
The Company 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 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 as 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 9(a)).
The Company is subject to risks common to technology-based companies,
including dependence on key personnel, 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); and Bitstream B.V.
France (a French corporation). All material intercompany transactions and
balances have been eliminated in consolidation. Actual results may differ from
these estimates.
(b) 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 OEMs and 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 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.
F-7
<PAGE> 27
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
post delivery obligations and if collection is probable. Revenue from
maintenance contracts is recognized pro rata over the term of the contract.
Cost of revenues consists of costs to distribute the product, including the
cost of the media on which it is delivered and internal production costs
incurred in the fulfillment of custom orders. Additional costs include fees paid
to third parties for the development of unique typeface designs and costs
associated with fulfilling maintenance contracts.
(c) 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.
(d) Cash and Cash Equivalents
As of December 31, 1996, cash and cash equivalents consisted of
approximately $2.0 million of bank deposits, $1.8 million of money market
instruments and $7.9 million of United States government treasury bills. 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.
(e) 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>
DECEMBER 31,
---------------------------------
1995 1996
------------ ------------
<S> <C> <C>
Equipment and computer software..................................... $ 2,047,000 $ 2,283,000
Equipment and computer software under capital lease................. 292,000 433,000
Furniture and fixtures.............................................. 239,000 235,000
Leasehold improvements.............................................. 200,000 505,000
------------ ------------
2,778,000 3,456,000
Less-- Accumulated depreciation and amortization ................... 2,248,000 2,532,000
------------ ------------
$ 530,000 $ 924,000
============ ============
</TABLE>
F-8
<PAGE> 28
Depreciation is provided on a straight-line basis over the estimated useful
lives of the related assets principally as follows:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED 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>
(f) 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>
DECEMBER 31,
--------------------------------
1995 1996
----------- -----------
<S> <C> <C>
Accounts receivable...................................... $ 137,000 $ 217,000
Current portion of long-term accounts receivable
and extended plan accounts receivable .................. 31,000 60,000
----------- -----------
$ 168,000 $ 277,000
=========== ===========
</TABLE>
(g) Foreign Currency Translation
The financial statements of the Company's foreign operations are translated
in accordance with SFAS No. 52, Foreign Currency Translation.
(h) 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.
(i) 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.
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 year ended December 31,
1996, no single customer accounted for 10% or greater of the Company's revenues.
(j) Delaware Reincorporation, Amendment to Certificate of Incorporation
On May 21, 1996, the Company 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. On November 4, 1996, the
Company filed an amendment to its certificate of incorporation changing its
authorized capital to be as follows: 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
6,000,000 shares of preferred stock, $0.01 par value. All share and per share
information has been restated to reflect these transactions.
F-9
<PAGE> 29
(k) 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 9(a), the plan of
reorganization was completed by September 30, 1994.
(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
-------------------------------
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 year ended
December 31, 1996 have been determined in accordance with the modified treasury
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, if appropriate, 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
YEAR ENDED ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1995 1995 1996
---------- ---------- ----------
<S> <C> <C>
Preferred stock, convertible ................................................. 3,155,496 3,173,737 --
Common stock, Class A ........................................................ 471,052 281,813 3,457,464
Common stock, Class B convertible ............................................ 26,213 30,864 422,026
Common stock, Class C convertible ............................................ 33,398 -- --
Mandatorily redeemable convertible preferred stock ........................... 79,129 -- --
---------- ---------- ----------
Weighted average common shares outstanding during the period ................. 3,765,288 3,486,414 3,879,490
Dilutive effect of common stock options and warrants ......................... 1,218,390 1,218,391 1,161,564
---------- ---------- ----------
Pro forma weighted average common and common equivalent shares
outstanding ............................................................... 4,983,678 4,704,805 5,041,054
========== ========== ==========
Net income, adjusted for assumed interest expense
savings and incremental interest income ................................... $1,918,000 $ 796,000 $1,337,000
========== ========== ==========
Pro forma net income per common and common
equivalent share .......................................................... $ 0.38 $ 0.17 $ 0.27
========== ========== ==========
</TABLE>
F-10
<PAGE> 30
(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
YEARS ENDED SEPTEMBER 30, ENDED YEAR ENDED
-------------------------- DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Computed expected federal tax provision ........................ $ 333,000 $ 614,000 $ 91,000 $ 422,000
State income taxes, net of federal benefit ..................... 96,000 112,000 29,000 75,000
State and foreign net operating loss carryforwards ............. (97,000) (102,000) (13,000) (23,000)
Foreign losses not benefited ................................... 209,000 19,000 71,000 4,000
Foreign withholding taxes ...................................... 134,000 108,000 92,000 109,000
Domestic net operating loss carryforwards ...................... (542,000) (633,000) (423,000) (131,000)
Change in valuation allowance .................................. -- -- (600,000) (268,000)
--------- --------- --------- ---------
$ 133,000 $ 118,000 $(471,000) $ (94,000)
========= ========= ========= =========
</TABLE>
The following is a summary of the provision for (benefit from) income taxes.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
YEARS ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Federal --
Current .......... $ -- $ 8,000 $ 31,000 $ 40,000
Deferred ......... -- -- (510,000) (228,000)
--------- --------- --------- ---------
-- 8,000 (479,000) (188,000)
--------- --------- --------- ---------
State --
Current .......... (1,000) 2,000 6,000 25,000
Deferred ......... -- -- (90,000) (40,000)
--------- --------- --------- ---------
(1,000) 2,000 (84,000) (15,000)
--------- --------- --------- ---------
Foreign --
Current .......... 134,000 108,000 92,000 109,000
Deferred ......... -- -- -- --
--------- --------- --------- ---------
134,000 108,000 92,000 109,000
--------- --------- --------- ---------
$ 133,000 $ 118,000 $(471,000) $ (94,000)
========= ========= ========= =========
</TABLE>
The significant items comprising the deferred tax asset are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
Assets --
Net operating loss carryforwards ................. $ 3,873,000 $ 3,374,000
Tax credit carryforwards ......................... 2,131,000 2,244,000
Other temporary differences ...................... 404,000 471,000
----------- -----------
Gross deferred tax asset ................. 6,408,000 6,089,000
Valuation allowance .............................. (5,808,000) (5,221,000)
----------- -----------
Net deferred tax asset ................... $ 600,000 $ 868,000
=========== ===========
</TABLE>
F-11
<PAGE> 31
At December 31, 1996, the Company has available federal and state net
operating loss carryforwards for income tax purposes and federal and state 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 --
2007 113,000 --
2008 311,000 7,359,000
2009 135,000 1,075,000
2010 107,000 --
2011 84,000 --
2012 109,000 --
---------- ----------
$2,240,000 $8,434,000
========== ==========
</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 with the 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>
DECEMBER 31,
-----------------------
1995 1996
---------- ----------
<S> <C> <C>
Accrued royalties ............ $ 592,000 $ 499,000
Payroll and other compensation 357,000 162,000
Commissions .................. 91,000 98,000
Other ........................ 372,000 711,000
---------- ----------
$1,412,000 $1,470,000
========== ==========
</TABLE>
F-12
<PAGE> 32
(6) DEBT
(a) Line of Credit
On March 18, 1996, the Company amended its July 14, 1995 working capital
line-of-credit agreement maturing on June 15, 1997 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 December 31, 1996) plus 1% to 2%, 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 as of December 31, 1995. No balance was outstanding as of December 31,
1996.
The Company also amended and increased its $400,000 equipment term loan
agreement to $500,000 on March 18, 1996. This term loan bore interest at the
prime rate (8.25% as of December 31, 1996) plus 1.5% per annum or at a fixed
rate based on the lender's current market rate. Amounts outstanding under the
term loan were repaid with the proceeds from the Company's initial public
offering of common stock.
(b) Capital Leases
The Company leases certain equipment under capital leases expiring through
fiscal 2001. 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, 1996 are as
follows:
<TABLE>
YEAR AMOUNT
-------------------------------------- --------
<S> <C> <C>
1997 ................................. $ 40,000
1998 ................................. 32,000
1999 ................................. 32,000
2000 ................................. 31,000
--------
Total minimum lease payments ...... 135,000
Less -- Amount representing interest 20,000
--------
Capital lease obligations ......... 115,000
Less -- Current portion ............ 36,000
--------
$ 79,000
========
</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 were subordinate to all
other debt facilities. On November 4, 1996, the Company repaid all amounts due
under these notes and the notes were canceled.
(7) OPERATING LEASES
The Company conducts its operations in leased facilities and is obligated to pay
monthly rent plus real estate taxes and certain operating expenses through
October 1998. Rent expense charged to operations for the years ended September
30, 1994 and 1995 and the three months ended December 31, 1995 and the year
ended December 31, 1996 was approximately $229,000, $244,000, $54,000, and
$270,000. Future minimum annual rent commitments as of December 31, 1996 under
the Company's leased facilities are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---------- -----------
<S> <C> <C>
1997 $ 217,000
1998 163,000
-----------
$ 380,000
===========
</TABLE>
F-13
<PAGE> 33
(8) CONTINGENT LIABILITIES
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 agreement (the "Letter") 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 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, which
provides, among other things, that persons found to have engaged in an unfair or
deceptive act in the conduct of a trade or business may be liable for double or
treble damages and attorney fees. The Museum further demanded an accounting of
royalties the Museum claims are due from the Company for use 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 December 31, 1996.
On November 22, 1996, Mr. Robert S. Friedman, a former director and officer
of the Company, and Mr. Gordon Greer, and Ms. Faith G. Friedman, as trustees of
the Robert S. Friedman Family Trust, filed a lawsuit in the Middlesex County
Superior Court of Massachusetts against the Company, asserting that the Company
has breached certain obligations the plaintiffs allege are due to them under a
separation agreement dated May 22, 1991 (the "Separation Agreement") between Mr.
Friedman and the Company. The plaintiffs are seeking monetary damages from the
Company based on their claim that, in connection with the 1994 recapitalization
of the Company, the Company allegedly made adjustments to the stock and options
of the officers of the Company and that a provision in the Separation Agreement
entitled the plaintiffs to equivalent adjustments with respect to the stock and
options of the Company held by them. The plaintiffs further allege that the
breach by the Company resulted in a loss to them of stock and options valued at
$2.2 million. The Company believes that these claims are without merit and
intends to vigorously contest their validity.
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.
(9) 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
F-14
<PAGE> 34
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.
On October 30, 1996, upon the effective date of an underwritten public offering
of common stock all shares of Class A and B Preferred Stock were automatically
converted into an equal number of shares of Class A Common Stock and Class B
Common Stock, respectively. The number of common shares issued upon conversion
was as follows:
<TABLE>
<CAPTION>
OUTSTANDING AS 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
All of the outstanding shares of Class A Preferred Stock and Class B
Preferred Stock were converted into the same number of shares of Class A Common
Stock and Class B Common Stock, respectively, on October 30, 1996, the effective
date of the IPO (see Note 9(d)).
Convertible preferred stock consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------ --------------------
1994 1995 1995 1996
------- ------- ------- ------
<S> <C> <C> <C> <C>
Convertible preferred stock, Class A, $.01 par value -- Authorized --
2,792,580 shares at September 30, 1994 and 1995, and December 31, 1995
and no shares at December 31, 1996
Issued and outstanding -- 636,787 shares in 1994 and 2,782,575
shares in 1995 and no shares in 1996 ................................... $ 6,000 $28,000 $28,000 $ --
Convertible preferred stock, Class B, $.01 par value
--Authorized -- no shares at September 30, 1994, 391,162 shares at
September 30, 1995 and December 31, 1995 and no shares at December 31,
1996 Issued and outstanding -- no shares in 1994, 391,162 shares in
1995 and no shares in 1996 ............................................. -- 4,000 4,000 --
Convertible preferred stock, Class C, $.01 par value--
Authorized -- no shares at December 31, 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 December 31, 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 December 31, 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 December 31, 1996 Issued and outstanding --
1,221,200 shares in 1994 and no
shares in 1995 and 1996 ................................................ 12,000 -- -- --
Convertible preferred stock, Class G, $.01 par value--
Authorized -- no shares at December 31, 1996 Issued and outstanding --
391,163 shares in 1994 and no
shares in 1995 and 1996 ................................................ 4,000 -- -- --
------- ------- ------- ---
$31,000 $32,000 $32,000 $ --
======= ======= ======= ====
</TABLE>
F-15
<PAGE> 35
(c) Common Stock
Class A Common stockholders have full voting rights. 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, to the extent such stockholder 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 stockholder or
its affiliates.
<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 and December 31, 1995 ................. 281,813 3,000 30,864 -- -- --
Initial public offering ............................... 2,415,000 24,000 -- -- -- --
Conversion of convertible preferred stock ............. 2,782,575 28,000 391,162 4,000 -- --
Exercise of stock options & warrants .................. 6,833 -- -- -- -- --
---------- -------- ------- ------ -------- -------
December 31, 1996 ........................................ 5,486,221 $ 55,000 422,026 $4,000 -- $ --
========== ======== ======= ====== ======== =======
</TABLE>
(d) Initial Public Offering
In November 1996, the Company completed an initial public offering ("IPO")
of 2,415,000 shares of its Class A Common Stock at $6.00 per share. Net proceeds
from the IPO were approximately $12.2 million, of which approximately $1.5
million was used to repay outstanding indebtedness.
(e) Stock Option Plans
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 are exercisable at such price as shall be determined by
the Board of Directors at the time of grant which, in the case of incentive
stock options, 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. As of December 31, 1996, no
options had 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.
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 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.
F-16
<PAGE> 36
As of December 31, 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 December 7, 1992, the Company adopted the 1993 Nonqualified Stock Option
Plan (the 1993 Plan). Options outstanding under the 1993 Plan as of December 31,
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.
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.................................... 522,033 .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......................................................... (5,341) 1.50 - 84.38
Granted.......................................................... 21,266 3.00
------------ ----------------
Outstanding, December 31, 1996..................................... 1,473,819 $ .90 - $84.38
============ ================
Exercisable, December 31, 1996..................................... 1,417,503 $ .90 - $84.38
============ ================
Weighted average exercise price of all options..................... $1.81
Weighted average exercise price of options exercisable............. $1.80
</TABLE>
(f) Warrants
All unexercised 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. 5,500 shares were exercised during the
fiscal year ended December 31, 1996. 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 December 31, 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 433,571 387,903 $ .90-111.15
Class B Common Stock 13,038 13,038 $ 22.50
</TABLE>
F-17
<PAGE> 37
(g) Stock-Based Compensation -- Pro Forma Disclosure
The Company accounts for its stock-based compensation plans under APB Opinion
No. 25, Accounting for Stock Issued to Employees. In October 1995, The Financial
Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based
Compensation, which is effective for fiscal years beginning after December 15,
1995. SFAS No. 123 establishes a fair-value based method of accounting for
stock-based compensation plans. The Company has adopted the disclosure-only
alternative for grants to employees, which requires disclosure of the pro forma
effects on earnings and earnings per share as if SFAS No. 123 had been adopted,
as well as certain other information.
The Company has computed the pro forma disclosures required under SFAS No. 123
for all 1995 and 1996 stock options granted to employees as of December 31, 1996
using the Black Scholes option pricing model prescribed by SFAS No. 123.
Assumptions used and the weighted average information are as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1995 1995 1996
------------------ ------------------ ------------------
<S> <C> <C> <C>
Risk-free interest rates..................................... 6.71%-7.91% 5.70%-6.18% 5.72%-5.82%
Expected dividend yield...................................... -- -- --
Expected lives............................................... 5-10 years 3-10 years 10 years
Expected volatility.......................................... 61% 61% 61%
</TABLE>
The total value of the options granted to employees during the year ended
September 30, 1995, three months ended December 31, 1995 and year ended December
31, 1996 was computed as $1,284,082, $58,691, and $48,270, respectively. Of
these amounts $1,132,539, $68,068 and $84,188 would be charged to operations for
the year ended September 30, 1995, three months ended December 31, 1995 and year
ended December 31, 1996, respectively. The remaining amount of $106,248 would be
amortized over the remaining vesting periods.
The effect of applying SFAS No 123 would be as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1995 DECEMBER 31, 1995 DECEMBER 31, 1996
------------------ ----------------- -----------------
<S> <C> <C> <C>
Pro Forma Net Income........................ $ 555,328 $670,060 $1,251,160
Pro Forma Net Income per Share.............. $0.16 $0.16 $0.25
</TABLE>
(10) 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 $16,000, $26,000, $6,000, and $32,000
during the years ended September 30, 1994 and 1995, the three-month period ended
December 31, 1995 and the year ended December 31, 1996, respectively.
(11) RELATED PARTY TRANSACTIONS
An employee of a company which is an affiliate of a member 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.
F-18
<PAGE> 38
(12) OTHER INCOME (EXPENSE), NET
Other income (expense), net, consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED YEAR ENDED
----------------------- DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Interest income ........... $ 10,000 $ 11,000 $ 2,000 $ 97,000
Interest expense .......... (72,000) (16,000) (7,000) (113,000)
Other ..................... 22,000 16,000 22,000 (3,000)
-------- -------- -------- ---------
$(40,000) $ 11,000 $ 17,000 $ (19,000)
======== ======== ======== =========
</TABLE>
(13) GEOGRAPHICAL INFORMATION
The Company's export sales from the United States to customers in foreign
countries are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED YEAR ENDED
--------------------------- DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Europe ......... $2,344,000 $2,407,000 $ 775,000 $2,599,000
Japan .......... 1,485,000 1,177,000 548,000 911,000
Canada ......... 149,000 894,000 28,000 1,188,000
Other .......... 94,000 73,000 7,000 192,000
---------- ---------- ---------- ----------
$4,072,000 4,551,000 1,358,000 $4,890,000
========== ========== ========== ==========
</TABLE>
(14) SUBSEQUENT EVENTS
On January 9, 1997, the Company purchased substantially all of the assets of
Mainstream Software Solutions, a corporation organized under the laws of England
primarily engaged in the business of marketing, selling, distributing and
supporting Bitstream type products in the United Kingdom, for approximately
$505,000. As a result, Bitstream will now directly distribute its own products
in the United Kingdom. The acquisition will be accounted for as a purchase and
will result in approximately $500,000 of goodwill.
On March 10, 1997, the Board of Directors approved the 1997 Stock Plan under
which the Company is authorized to grant incentive stock options and
nonqualified stock options (including warrants) to purchase up to 1,000,000
shares of Class A Common Stock (however, in the event the Merger (described
below) is not consummated by September 30, 1997, such number of shares of Class
A Common Stock will be reduced to 500,000). Options granted under this plan
shall expire no later than 10 years from the date of the grant and vest over
periods of up to three years. The 1997 Stock Plan will be submitted for approval
of Bitstream's stockholders at the 1997 Annual Stockholders' Meeting.
On March 27, 1997, the Company entered into a Plan and Agreement of Merger
(the "Merger Agreement") with Archetype, Inc. ("Archetype"), a Delaware
corporation primarily engaged in the business of developing and marketing
server-based information management software for the graphic arts industry. The
Merger Agreement provides for the merger (the "Merger") of Archetype into
Archetype Acquisition Corporation, a newly organized wholly-owned subsidiary
of Bitstream. The Merger is intended to qualify as a tax free reorganization
under the Internal Revenue Code.
The Merger Agreement provides that, upon consummation of the Merger, each
Archetype stockholder will receive, in exchange for their shares of Archetype
capital stock, a certain amount of cash and Class A Common Stock (the "Merger
Consideration") depending on the class of Archetype capital stock exchanged
therefor. It is expected that the Merger Consideration will consist of
approximately $1.64 million in cash, in aggregate, and approximately 531,427
shares of Class A Common Stock, in aggregate, subject to certain adjustments. On
the closing of the Merger, it is expected that Bitstream will repay up to
$800,000, in aggregate, of indebtedness owed by Archetype to certain of its
stockholders. Additionally, following the Merger, the Company expects to issue
options or warrants (the "Options") to purchase up to approximately 650,000
shares of Class A Common Stock, in order to induce the former Archetype
employees and other persons receiving such Options to become employees of, or
perform certain services for, the Company and/or to replace certain outstanding
options and warrants issued by Archetype. Of these Options, 450,000 will be
issued at an exercise price of $.90 per share and the remaining 200,000 will be
issued at an exercise price per share equal to the fair market value of the
Class A Common Stock on the date of the consummation of the Merger. The
acquisition will be accounted for as a purchase with a significant portion of
the purchase price being allocated to, and expensed, as in process research and
development.
Consummation of the Merger is subject to various conditions and there can
be no assurance that the Merger will be consummated on the terms referenced
above if at all.
F-19
<PAGE> 1
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
BITSTREAM INC.
Pursuant to Section 242 of
the General Corporation Law of the State of Delaware
The undersigned, Bitstream Inc. (the "Corporation"), in order to amend its
Certificate of Incorporation, hereby certifies as follows:
FIRST: The name of the Corporation is
BITSTREAM INC.
SECOND: The Corporation hereby amends its Certificate of Incorporation as
follows:
The introductory paragraph to Article FOURTH of the Certificate of
Incorporation, which sets forth the authorized capital stock of the Corporation,
is hereby deleted in its entirety and the following is substituted therefor:
"FOURTH: The total number of shares of stock that the
Corporation shall have authority to issue is 36,500,000,
divided as follows: (a) 30,500,000 shares of Common Stock
(i) 30,000,000 shares of which shall be Class A Common
Stock, par value $.01 per share, and (ii) 500,000 shares of
which shall be Class B Common Stock, par value $.01 per
share, and (b) 6,000,000 shares of Preferred Stock, par
value $.01 per share."
Article FOURTH, Part A, paragraph 4.7.3, which sets forth the definition of
"Regulated Stockholder," is hereby deleted in its entirety and the following is
substituted therefor:
"4.7.3. "Regulated Stockholder" shall mean (i) any
stockholder that is subject to the provisions of Regulation
Y of the Board of Governors of the Federal Reserve System
(12 C.F.R. Part 225) or any successor to such regulation
("Regulation Y") and which holds shares of Class B Common
Stock of the Corporation immediately following the
conversion of Class B Preferred Stock into Class B Common
Stock upon the effectiveness of the Corporation's initial
public offering, so long as such stockholder shall hold such
shares of Common Stock or shares issued upon conversion of
such shares, (ii) any Affiliate of any such Regulated
Stockholder that is a transferee of any shares of
<PAGE> 2
Common Stock of the Corporation, so long as such Affiliate
shall hold, and only with respect to, such shares of Common
Stock or shares issued upon conversion of such shares and
(iii) any Person to which such Regulated Stockholder or any
of its Affiliates has transferred such shares, so long as
such transferee shall hold, and only with respect to, any
shares transferred by such stockholder or Affiliates or any
shares issued upon conversion of such shares but only if
such Person (or any Affiliate of such Person) falls subject
to the provisions of Regulation Y."
Article FOURTH, Part C, which sets forth the rights, powers,
qualifications, limitations and restrictions of the Corporation's Class A
Preferred Stock and Class B Preferred Stock, is hereby deleted in its entirety.
THIRD: The amendment effected herein was authorized by the consent in
writing, setting forth the action so taken, signed by the holders of at least a
majority of the outstanding shares entitled to vote thereon, and due notice so
taken has been given to those shareholders who have not consented in writing
pursuant to Sections 222, 228 and 242 of the General Corporation Law of the
State of Delaware.
IN WITNESS WHEREOF, I hereunto sign my name and affirm that the statements
made herein are true under the penalties of perjury, this 4th day of November,
1996.
BITSTREAM INC.
By:
------------------------------
Name: C. Raymond Boelig
Title: President and CEO
ATTEST:
- ---------------------------------
Name: Paul A. Gajer
Title: Assistant Secretary
<PAGE> 1
FOURTH AMENDMENT TO LEASE
LESSOR: ATHENAEUM PROPERTY LLC
LESSEE: BITSTREAM, INC.
DATE OF LEASE: MARCH 17, 1992;
(First Amendment September 7, 1993; Second
Amendment July 14, 1994; Third Amendment June
15, 1996)
PREMISES: ATHENAEUM HOUSE, 215 FIRST STREET, CAMBRIDGE,
MASSACHUSETTS
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which
are hereby acknowledged, the lease between Athenaeum Property LLC as Lessor and
Bitstream Inc., a Delaware corporation, as Lessee and March 17, 1992, and
amended on September 7, 1993 and by letter agreement on July 14, 1994 and
amended on June 15, 1996), is hereby amended for the forth time effective March
1, 1997, as follows:
1. Expand Leased Premises. Effective June 1, 1997 (the "Effective Date"),
the Leased Premises shall be expanded to include approximately 4,700
rentable square feet ("Expanded Leased Premises"), more or less, on
the ground floor of the Building as shown on Exhibit A
hereto. Lessee agrees it is leasing the Expanded Leased Premises in
its "as is" condition, except that the Expanded Leased Premises shall
be delivered in vacuumed clean condition, free of debris and personal
effects, and all systems to be maintained by Landlord under the lease
shall be in good working order.
2. Increased Rent. The Base Rent for the Leased Premises shall be
increased as of the Effective Date by $70,500.00 per year, calculated
as 4,700 square feet at $15.00 per rentable square feet.
3. Increased Rent Adjustment. As of the Effective Date, the Rent
Adjustment percentage in Paragraph 5 shall be increased from 7.01
percent to 8.66 percent.
4. Term; Option to Extend. The term of the Lease shall remain unchanged.
In the event Lessee exercises its option to extend the lease, the Base
Rent on the Extended Leased Premises shall be at Fair Market Value as
reasonably determined by Lessor but in no event less that the Base
Rent in Paragraph 2 above.
5. Right to Terminate. If, on or before April 1, 1997, the Lessee decides
it does not wish to occupy the Expanded Leased Premises, it shall give
Lessor written notice on or before April 1, 1997 and the expansion
contemplated herein shall be null and void. As
<PAGE> 2
consideration for this right, Lessee shall, in the event it terminates
this expansion, pay Lessor one month's rent (at the time of its notice
to terminate). Lessor agrees that if the Expanded Leased premises are
then released with less than one month's vacancy, the amount paid by
Lessee will be abated on a pro rata basis for the days the space is
occupied by a new tenant for business.
6. Broker. The Lessor and Lessee each represent and warrant to the other
that each has had no dealings with any Brokers concerning this lease
other than Robert A. Jones & Co., and each party agrees to indemnify
and hold the other harmless for any damages occasioned to the other by
reason of breach of this representation and warranty.
7. Construction; Interpretation. To the extent this lease amendment
conflicts with the existing lease, this amendment shall control. Both
parties acknowledge the lease remains in full force and effect. Other
than stated in this amendment, all other terms and conditions remain
the same.
EXECUTED as sealed instrument this 3rd day of March 1997.
ATHENAEUM PROPERTY LLC
By:
------------------------------------- --------------------------
President Witness
Athenaeum F.A. Inc.
Managing Member
BITSTREAM INC.
By:
------------------------------------- --------------------------
Vice President, Treasurer Witness
and Chief Financial
Officer Duly Authorized
Assuming the lessee does not terminate this expansion, lessee will retain the
right until the effective date (6-1-97), to require the lessor to terminate
lessee's lease obligation on the 2800 square feet on the ground floor referenced
in the Third Amendment.
-2-
<PAGE> 1
AGREEMENT AND PLAN
OF MERGER
DATED AS OF
March 27, 1997
BY AND AMONG
BITSTREAM INC.,
ARCHETYPE ACQUISITION CORPORATION
AND
ARCHETYPE, INC.
<PAGE> 2
TABLE OF CONTENTS
Page
ARTICLE I
THE MERGER AND THE EFFECTIVE TIME............................................1
SECTION 1.1. The Merger.........................................1
SECTION 1.2. Effective Time.....................................1
SECTION 1.3. Effect of the Merger...............................2
SECTION 1.4. Subsequent Actions.................................2
SECTION 1.5. Certificate of Incorporation; Bylaws;
Directors and Officers of Surviving
Corporation........................................2
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS; MERGER CONSIDERATION; EXCHANGE OF CERTIFICATES.................3
SECTION 2.1. Effect of the Merger on Capital Stock
of Constituent Corporations........................3
SECTION 2.2. Merger Consideration; Closing Market
Price Defined......................................4
SECTION 2.3. Adjustments to Merger Consideration................4
SECTION 2.4. Payment of Cash Consideration;
Establishment of Escrow Account....................8
SECTION 2.5. Exchange of Archetype Certificates.................9
SECTION 2.6. Transfer Books................................... 11
SECTION 2.7. No Fractional Share Certificates................. 12
SECTION 2.8. Options/Warrants to Purchase Archetype
Common Stock..................................... 12
SECTION 2.9. Certain Additional Adjustments................... 14
SECTION 2.10. Dissenting Shares................................ 14
ARTICLE III
CLOSING TRANSACTIONS....................................................... 15
SECTION 3.1. Closing Date..................................... 15
SECTION 3.2. Closing Documents................................ 15
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ARCHETYPE................................ 17
SECTION 4.1. Organization and Qualification; Subsid-
iaries........................................... 17
SECTION 4.2. Capitalization................................... 18
SECTION 4.3. Authority Relative to this Agreement............. 18
SECTION 4.4. No Conflict: Required Filings and Consents....... 19
SECTION 4.5. Litigation....................................... 19
SECTION 4.6. No Violation of Law.............................. 20
SECTION 4.7. Board Action: Vote Required...................... 20
-i-
<PAGE> 3
Page
SECTION 4.8. Brokers.......................................... 20
SECTION 4.9. Tax Matters...................................... 20
SECTION 4.10. Material Contracts............................... 21
SECTION 4.11. Financial Statements............................. 23
SECTION 4.12. Absence of Certain Changes or Events............. 23
SECTION 4.13. Employee Benefit Plans........................... 24
SECTION 4.14. Liabilities...................................... 26
SECTION 4.15. Environmental Protection......................... 26
SECTION 4.16. Intellectual Property............................ 29
SECTION 4.17. Real Estate...................................... 30
SECTION 4.18. Records.......................................... 30
SECTION 4.19. Title to and Condition of Personal
Property......................................... 30
SECTION 4.20. No Adverse Actions............................... 31
SECTION 4.21. Labor Matters.................................... 31
SECTION 4.22. Investment Company Act........................... 32
SECTION 4.23. Insurance........................................ 32
SECTION 4.24. Products......................................... 32
SECTION 4.25. Archetype Stockholder Debt....................... 32
SECTION 4.26. 1933 Act Representation.......................... 33
SECTION 4.27. Consents, Waivers, Authorizations................ 33
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BITSTREAM................................ 33
SECTION 5.1. Organization and Qualification; Subsid-
iaries........................................... 33
SECTION 5.2. Capitalization................................... 34
SECTION 5.3. Authority Relative to this Agreement............. 34
SECTION 5.4. No Conflict; Required Filings and Consents....... 34
SECTION 5.5. SEC Filings; Financial Statements................ 35
SECTION 5.6. Litigation....................................... 36
SECTION 5.7. No Violation of Law.............................. 36
SECTION 5.8. Board Action; Vote Required...................... 36
SECTION 5.9. Brokers.......................................... 37
SECTION 5.10. Tax Matters...................................... 37
SECTION 5.11. Material Contracts............................... 37
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF A-Sub.................................... 38
SECTION 6.1. Organization and Qualification................... 38
SECTION 6.2. Capitalization................................... 38
SECTION 6.3. Authority Relative to this Agreement............. 39
SECTION 6.4. No Conflict; Required Filings and Consents....... 39
SECTION 6.5. Board Action; Vote Required:
Applicability of Section 203..................... 40
SECTION 6.6. Brokers.......................................... 40
-ii-
<PAGE> 4
Page
ARTICLE VII
COVENANTS OF ARCHETYPE..................................................... 40
SECTION 7.1. Conduct or Business in the Ordinary
Course........................................... 40
SECTION 7.2. Payment of all Employee Compensation............. 42
SECTION 7.3. Notification of Certain Matters.................. 42
SECTION 7.4. Access and Information........................... 42
SECTION 7.5. Stockholder Approval............................. 43
SECTION 7.6. Benefit Plans.................................... 43
SECTION 7.7. Non Solicitation and Standstill.................. 43
SECTION 7.8. Consents, Waivers, Authorizations................ 43
SECTION 7.9. No Additional Archetype Material Agreements...... 44
SECTION 7.10. Confidentiality.................................. 44
SECTION 7.11. Purchase of Certain Assets from Western
Systems.......................................... 44
SECTION 7.12. Delivery of Financial Statements for
Fiscal Year Ended December 31, 1996.............. 45
SECTION 7.13. Delivery of Quarterly Financial
Statements....................................... 45
SECTION 7.14. Incomplete Matters............................... 45
ARTICLE VIII
COVENANTS OF BITSTREAM AND A-Sub........................................... 45
SECTION 8.1. Consents, Waivers, Authorizations................ 45
SECTION 8.2. Bitstream Stockholder Approval................... 46
ARTICLE IX
ADDITIONAL AGREEMENTS...................................................... 46
SECTION 9.1. Additional Agreements............................ 46
SECTION 9.2. Cooperation...................................... 46
SECTION 9.3. Registration Statement; Registration
Rights........................................... 46
SECTION 9.4. Restrictions on Transfer......................... 47
SECTION 9.5. Post-Merger Bitstream Board of
Directors and Officers........................... 48
SECTION 9.6. Reorganization................................... 48
SECTION 9.7. Letter Agreements................................ 48
SECTION 9.8. Conversion of Trevithick Note;
Nonconversion of Archetype....................... 48
SECTION 9.9. Options to D'anne Hurd........................... 49
ARTICLE X
CONDITIONS TO THE MERGER................................................... 49
SECTION 10.1. Conditions to Obligations of Each Party
to Effect the Merger............................. 49
-iii-
<PAGE> 5
Page
SECTION 10.2. Additional Conditions to Obligations of
Archetype........................................ 50
SECTION 10.3. Additional Conditions to Obligations of
Bitstream and A-Sub.............................. 50
ARTICLE XI
INDEMNIFICATION............................................................ 51
SECTION 11.1. Indemnification.................................. 51
Section 11.2. Defense of Claims................................ 52
Section 11.3. Source of Payment for Losses incurred
by Bitstream; Minimum Threshold.................. 52
ARTICLE XII
TERMINATION, AMENDMENT AND WAIVER.......................................... 53
SECTION 12.1. Termination...................................... 53
SECTION 12.3. Amendment........................................ 53
SECTION 12.4. Waiver........................................... 54
SECTION 12.5. Representative................................... 54
ARTICLE XIII
GENERAL PROVISIONS......................................................... 55
SECTION 13.1. Non-Survival of Representations,
Warranties and Agreements........................ 55
SECTION 13.2. Notices.......................................... 55
SECTION 13.3. Expenses......................................... 56
SECTION 13.4. Certain Definitions.............................. 56
SECTION 13.5. Headings......................................... 57
SECTION 13.6. Severability..................................... 57
SECTION 13.7. Entire Agreement; No Third-Party
Beneficiaries.................................... 58
SECTION 13.8. Assignment....................................... 58
SECTION 13.9. Governing Law.................................... 58
SECTION 13.10. Counterparts..................................... 58
-iv-
<PAGE> 6
INDEX OF DEFINED TERMS
DEFINED TERM PAGE
1933 Act ................................................................56
A-Sub .................................................................1
A-Sub Equity Rights.........................................................38
Accredited Investors........................................................33
Affiliate ................................................................57
Agreement .................................................................1
Archetype .................................................................1
Archetype B Preferred Stock..................................................3
Archetype Benefit Plans.....................................................24
Archetype C Preferred Stock..................................................3
Archetype Certificate; Archetype Certificates................................9
Archetype Common Stock.......................................................3
Archetype Equity Rights.....................................................18
Archetype Material Contracts................................................21
Archetype Preferred Stock....................................................3
Archetype Products..........................................................32
Archetype Stockholders.......................................................3
Archetype Stockholders' Approval............................................20
Bitstream .................................................................1
Bitstream Certificates......................................................10
Bitstream Class B Common Stock..............................................34
Bitstream Common Stock.......................................................3
Bitstream Equity Rights.....................................................34
Bitstream Material Contracts................................................38
Bitstream Options...........................................................12
Bitstream SEC Reports.......................................................35
Cash Consideration...........................................................4
Certificate of Merger........................................................1
Closing Market Price.........................................................4
Code .................................................................1
Common Stock Conversion Rate.................................................3
Commonly Controlled Entity..................................................24
Control ................................................................57
Delaware Law.................................................................1
Dissenting Shares...........................................................14
Effective Time...............................................................2
Employees ................................................................24
Environment ................................................................28
Environmental Claims........................................................28
Environmental Compliance Costs..............................................28
ERISA ................................................................24
Escrow Agent.................................................................9
Escrow Agreement.............................................................9
Escrow Amount................................................................9
Exchange Act................................................................57
Exchange Agent...............................................................9
Exchange Fund...............................................................10
GAAP ................................................................57
Governmental Body...........................................................29
-v-
<PAGE> 7
Hazardous Substance.........................................................29
Hurd Release................................................................49
Knowledge ................................................................57
Legal Requirements..........................................................20
Loss ................................................................51
Material Adverse Effect.....................................................57
Merger .................................................................1
Merger Cash Payment..........................................................4
Merger Consideration.........................................................4
Mills ................................................................49
Mills Shares................................................................49
Nasdaq .................................................................4
OEM ................................................................22
Party; Parties...............................................................1
Permits ................................................................20
Person ................................................................57
Pre-Surrender Dividends.....................................................11
Preferred Stock Conversion Rate..............................................4
Release ................................................................29
Remedial Action.............................................................29
Representative..............................................................54
Safety and Environmental Laws...............................................29
SEC ................................................................57
Service ................................................................24
Stock Consideration..........................................................4
Surviving Corporation........................................................1
Termination Date............................................................53
Threshold Amount.............................................................5
Trevithick Note.............................................................41
WARN Act ................................................................31
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Exhibits
Exhibit 2.4(b) Form of Escrow Agreement
Exhibit 2.8(i) Form of Option
Exhibit 2.8(ii) Form of Warrant
Exhibit 3.2(a)(vii) Form of Non-Competition Agreement
Exhibit 3.2(a)(viii) Form of Confidentiality Agreement
Exhibit 3.2(a)(ix)(A) Form of Employment Agreement between
Bitstream and Paul Trevithick
Exhibit 3.2(a)(ix)(B) Form of Employment Agreement between
Bitstream and Susan Robertson
Exhibit 3.2(a)(xv) Form of Lock-Up Agreements
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Schedules Provided by Archetype
Schedule 2.4 List of Archetype Stockholder Debt
Schedule 3.2(a)(vii) List of Employees Entering Non-Competition
Agreements
Schedule 3.2(a)(viii) List of Employees Entering Confidentiality
Agreements
Schedule 4.2(b) List of Holders of Record of Issued and
Outstanding Capital Stock
Schedule 4.2(c) List of Holders of Record of Archetype Equity
Rights
Schedule 4.5 List of Claims, Actions, Suits, Proceedings
or Investigations Pending or Threatened
Against Archetype
Schedule 4.9 List of Tax Matters
Schedule 4.10 List of Archetype Material Contracts
Schedule 4.12 List of Sale, Disposition, License or other
Transfer of Assets
Schedule 4.13(a) List of Employee Benefit Plans
Schedule 4.13(e) List of Welfare Plans
Schedule 4.14 Certain Liabilities of Archetype
Schedule 4.15 List of Environmental Protection Claims
Schedule 4.16 List of Intellectual Property
Schedule 4.17(a) List of Real Property
Schedule 4.17(b) List of Real Property Impairments
Schedule 4.19 Inventory of Personal Property
Schedule 4.23 Insurance Policies
Schedule 4.24(a) List Product Liability Claims
Schedule 4.27 Archetype Required Consents
Schedule 7.14 Incomplete Matters
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of March 27, 1997 (this
"Agreement"), by and among Bitstream Inc., a Delaware corporation ("Bitstream"),
Archetype Acquisition Corporation, a Delaware corporation and a direct
wholly-owned subsidiary of Bitstream ("A-Sub"), and Archetype, Inc., a Delaware
corporation ("Archetype").
W I T N E S S E T H:
WHEREAS, the Boards of Directors of each of Bitstream, Archetype and
A-Sub have each determined that it is in the best interests of their respective
stockholders to effect the Merger (as defined in Section 1.1 hereof) and the
other transactions contemplated hereby relating to the Merger, and such parties
desire to make certain representations, warranties and agreements in connection
with the Merger;
WHEREAS, the Parties intend that the Merger constitute a
reorganization within the meaning of Section 368(a)(2)(d) of the Internal
Revenue Code of 1986, as amended (the "Code") and that the payment of the Merger
Cash Payment at closing and pursuant to the terms of the Escrow constitute an
installment sale within the meaning of Section 453 of the Code; and
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein contained, and intending to be legally bound
hereby, the Parties hereby agree as follows:
ARTICLE I
THE MERGER AND THE EFFECTIVE TIME
SECTION 1.1. The Merger. At the Effective Time (as defined in
Section 1.2 hereof) and subject to and upon the terms and subject to the
conditions of this Agreement and the Delaware General Corporation Law ("Delaware
Law"), Archetype shall be merged with and into A-Sub, the separate corporate
existence of Archetype shall cease, and A-Sub shall continue as the surviving
corporation which shall be a wholly-owned subsidiary of Bitstream (the
"Merger"). A-Sub as the surviving corporation of the Merger is herein sometimes
referred to as the "Surviving Corporation", Archetype, Bitstream and A-Sub are
herein referred to collectively as the "Parties" and each individually as a
"Party."
SECTION 1.2. Effective Time. Simultaneously with the consummation of
the Closing referred to in Article III hereof, the Parties shall cause the
Merger to be consummated by filing a Certificate of Merger (the "Certificate of
Merger") with the
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Secretary of State of the State of Delaware with respect to the Merger, in such
form as required by, and executed in accordance with, the relevant provisions of
Delaware Law. The Merger shall become effective on the date and at the time
agreed upon by the Parties and specified in the Certificate of Merger, or, if no
time is so specified, on the date and at the time the Certificate of Merger has
been duly filed with the Secretary of State of the State of Delaware (such time
of effectiveness is hereinafter referred to as the "Effective Time").
SECTION 1.3. Effect of the Merger. At the Effective Time, the effect
of the Merger shall be as provided in the applicable provisions of Delaware Law.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time all of the property, rights, privileges, powers and franchises of
Archetype shall continue with, or vest in, as the case may be, A-Sub as the
Surviving Corporation, and all debts, liabilities and duties of Archetype shall
continue to be, or become, as the case may be, the debts, liabilities and duties
of A-Sub as the Surviving Corporation. As of the Effective Time, the Surviving
Corporation shall be a direct wholly-owned subsidiary of Bitstream.
SECTION 1.4. Subsequent Actions. If, at any time after the Effective
Time, the Surviving Corporation shall consider or be advised that any deeds,
bills of sale, assignments, assurances or any other actions or things are
necessary or desirable to continue in, vest, perfect or confirm of record or
otherwise in the Surviving Corporation its right, title or interest in, to or
under any of the rights, properties, privileges, franchises or assets of
Archetype as a result of, or otherwise to carry out, this Agreement, the
officers and directors of the Surviving Corporation shall be directed and
authorized to execute and deliver, in the name and on behalf of Archetype all
such deeds, bills of sale, assignments and assurances and to take and do, in the
name and on behalf of Archetype, all such other actions and things as may be
necessary or desirable to vest, perfect or confirm any and all right, title and
interest in, to and under such rights, properties, privileges, franchises or
assets in the Surviving Corporation or otherwise to carry out this Agreement.
SECTION 1.5. Certificate of Incorporation; Bylaws; Directors and
Officers of Surviving Corporation. At the Effective Time:
(a) the Certificate of Incorporation of the Surviving
Corporation shall be the Certificate of Incorporation of A-Sub as in effect
immediately prior to the Effective Time, until thereafter amended as provided by
Delaware Law and such Certificate of Incorporation;
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(b) the Bylaws of the Surviving Corporation shall be the
Bylaws of A-Sub immediately prior to the Effective Time, until thereafter
amended as provided by Delaware Law and the Certificate of Incorporation and
such Bylaws of the Surviving Corporation; and
(c) the directors and officers of A-Sub shall continue to
serve in their respective offices in the Surviving Corporation from and after
the Effective Time, until their successors are elected or appointed and
qualified or until their resignation or removal. If, at the Effective Time, a
vacancy shall exist on the Board of Directors or in any office of the Surviving
Corporation, such vacancy may thereafter be filled in the manner provided by
Delaware Law and the Bylaws of the Surviving Corporation.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS; MERGER CONSIDERATION; EXCHANGE OF CERTIFICATES
SECTION 2.1. Effect of the Merger on Capital Stock of Constituent
Corporations.(a) At the Effective Time, each share of Common Stock, par value
$.0001 per share, of Archetype ("Archetype Common Stock"), each share of Class B
Preferred Stock, par value $.0001 per share, of Archetype ("Archetype B
Preferred Stock"), and each share of Class C Preferred Stock, par value $.0001
per share, of Archetype ("Archetype C Preferred Stock, and together with the
Archetype B Preferred Stock, the "Archetype Preferred Stock"), other than
Dissenting Shares (as hereinafter defined) shall, by virtue of the Merger and
without any action on the part of any of the Parties or the holder of any of
such securities (the "Archetype Stockholders"), be converted into the right to
receive a portion of a share of Class A Common Stock, par value $.01 per share,
of Bitstream ("Bitstream Common Stock") and cash as follows (subject to
adjustment as hereinafter set forth in this Article II):
(i) each outstanding share of Archetype
Common Stock (other than Dissenting Shares) shall be converted into the right to
receive $0.54418 per share in cash and .57950 fully paid non-assessable shares
of Bitstream Common Stock (such fraction of a share of Bitstream Common Stock
issuable for each share of Archetype Common Stock being hereinafter referred to
as the "Common Stock Conversion Rate"), and
(ii) each outstanding share of Archetype
Preferred Stock (other than Dissenting Shares) shall be converted into the right
to receive $2.32 per share in cash and .32233 fully paid non-assessable shares
of Bitstream Common Stock (such fraction of a share of Bitstream Common Stock
issuable for each
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share of Archetype Preferred Stock being hereinafter referred to as the
"Preferred Stock Conversion Rate").
(b) At the Effective Time, each issued and outstanding share
of capital stock of A-Sub shall continue unchanged and remain issued and
outstanding as a share of capital stock of the Surviving Corporation.
SECTION 2.2. Merger Consideration; Closing Market Price Defined. The
term "Merger Consideration," as used in this Agreement, shall mean the sum of
(i) the total amount of cash to be paid under Sections 2.1(a)(i) and (ii) in
respect of Archetype Common Stock and Archetype Preferred Stock (the "Merger
Cash Payment"), (ii) the aggregate value of shares of Bitstream Common Stock
(valued at the Closing Market Price) to be issued under Section 2.1(a)(i) and
(ii) in respect of Archetype Common Stock and Archetype Preferred Stock, and
(iii) the aggregate amount of Archetype Stockholder Debt (as hereinafter
defined) to be repaid by Bitstream on the Closing Date pursuant to Section 2.4
(the Merger Cash Payment and the amount referred to in clause (iii) hereof is
hereinafter referred to as the "Cash Consideration" and the portion of the
Merger Consideration to be paid in Bitstream Common Stock referred to in clause
(ii) hereof is hereinafter referred to as the "Stock Consideration"). The term
"Closing Market Price" shall mean the average of the last bid prices per share
of Bitstream Common Stock as reported on the Nasdaq National Market (the
"Nasdaq") for [the trading days] in the thirty (30) consecutive calendar days
ending on the business day immediately prior to the Closing Date (as hereinafter
defined).
SECTION 2.3. Adjustments to Merger Consideration. The following
adjustments to the Merger Consideration specified in Section 2.2 shall be made
in the order indicated below:
(a) first, the number of shares to be issued as Stock
Consideration shall be adjusted (x) upward if the Closing Market Price shall be
less than $3.125 per share, by multiplying the Common Stock Conversion Rate or
the Preferred Stock Conversion Rate (as the case may be) by a fraction, the
numerator of which shall equal 3.125 and the denominator of which shall equal
the Closing Market Price, and (y) downward if the Closing Market Price shall be
greater than $6.50 per share, by multiplying the Common Stock Conversion Rate or
the Preferred Stock Conversion Rate (as the case may be) by a fraction, the
numerator of which shall equal 6.50 and the denominator of which shall equal the
Closing Market Price;
(b) second, valuing the Stock Consideration at the Closing
Market Price, the Parties will equitably adjust up or down the Common Stock
Conversion Rate and the Preferred Stock Conversion Rate such that the sum of the
Merger Cash Payment and the Stock Consideration per share of Archetype Preferred
Stock
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shall be 10% higher than the sum of the Merger Cash Payment and the Stock
Consideration per share of Archetype Common Stock, provided, however, that any
such adjustments shall not increase or decrease the amount of the Cash
Consideration, the total amount of the Stock Consideration or the total number
of shares to be issued as the Stock Consideration on the Effective Time; and
(c) third, valuing the Stock Consideration at the Closing
Market Price, the Cash Consideration shall be reduced and the Stock
Consideration shall be increased to the extent necessary to result in the Cash
Consideration being no greater than 50% of the total Merger Consideration.
(d) (i) After making the adjustments set forth in (a), (b) and
(c) above, the Merger Consideration shall be subject to further adjustment (x)
downward, to the extent the Threshold Amount does not exceed $300,000 and (y)
upward, to the extent the Threshold Amount exceeds $300,000. The "Threshold
Amount" shall be an amount equal to, without duplication, (A) the aggregate
amount, as of the Closing Date, of all cash, cash equivalents, and accounts
receivable (net of bad debt reserves of Archetype computed in accordance with
GAAP and excluding any receivables or other amounts owed to Archetype from any
director, officer or stockholder thereof), minus (B) the aggregate amount, as of
the Closing Date, of all liabilities in respect of accounts payable, deposits,
prepayments, accrued expenses, taxes, indebtedness and other liabilities and
obligations of Archetype (excluding up to $800,000 in aggregate amount of
Archetype Stockholder Debt to be repaid by Bitstream at the Closing in
accordance with Section 2.4 and the amount of the Western Payment referred to in
Section 7.11). Any such adjustments shall be applied to both the Merger Cash
Payment and the Stock Consideration on a pro rata basis.
(ii) The Threshold Amount shall be computed
as of the close of business on the Closing Date, in accordance with the general
principle that all items of income, liability and expense shall be prorated as
of the close of business on the Closing Date. In connection with the computation
of the Threshold Amount, any items which relate to both a period of time prior
to the Closing Date and a period of time after the Closing Date shall be
prorated on the basis of a 365/366 day year and for actual days elapsed.
(iii) (A) At least five business days prior
to the Closing Date, Archetype shall provide to Bitstream a certificate executed
by an authorized officer thereof (the "Estimated Threshold Amount Certificate"),
which shall set forth in reasonable detail Archetype's estimated calculation of
the Threshold Amount, which shall be accompanied by reasonably detailed
documentation supporting the calculation of such amount.
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(B) Bitstream shall have the right to review the
Estimated Threshold Amount Certificate, and shall be provided with any
additional supporting documentation as it shall reasonably request. If Bitstream
shall dispute Archetype's calculation of the estimated Threshold Amount, then,
on or prior to the Closing Date, Bitstream shall have the right to deliver to
Archetype a certificate executed by an authorized officer thereof (the
"Bitstream Threshold Certificate"), which shall set forth in reasonable detail
the nature of the dispute and the calculation of the estimated Threshold Amount
by Bitstream, and the extent of any difference from the amount calculated in the
Estimated Threshold Amount Certificate. (The Estimated Threshold Amount
Certificate and the Bitstream Threshold Certificate are sometimes collectively
referred to herein as the Certificates").
(C) Notwithstanding any discrepancy between the
Certificates, the Closing shall occur pursuant to Section 3.1 hereof, with the
amount of the Merger Consideration (minus the Indemnity Escrow Amount, which
shall be paid to the Escrow Agent), as determined pursuant to the Threshold
Amount set forth in the Bitstream Threshold Certificate (or, if none is given,
pursuant to the Estimated Threshold Amount Certificate), to be paid by Bitstream
as specified in Section 2.4 on the Closing Date, and a portion of the Merger
Consideration equal to the portion of the Threshold Amount disputed pursuant to
the Bitstream Threshold Certificate (if any), shall be paid or delivered by
Bitstream to the Escrow Agent in accordance with Section 2.4(c), and held in
escrow until the final determination of the Threshold Amount and related
adjustments pursuant to Section 2.3(d)(iv) below, in accordance with the terms
of the Escrow Agreement (the "Dispute Escrow Amount"). The Dispute Escrow Amount
shall consist of pro rata portions of the Merger Cash Payment and the Stock
Consideration (determined based on the aggregate amounts of the Merger Cash
Payment and the Stock Consideration determined after giving effect to all
adjustments made on the Closing Date under Section 2.3 but disregarding the
effect of the dispute as to the Threshold Amount) and shall be deemed deposited,
on a pro rata basis, from, and reduce the amounts otherwise paid or
distributable to, each Archetype Stockholder (based on the proportion of the
aggregate Merger Cash Payment and Stock Consideration to be paid to each such
stockholder, determined as provided on the preceding parenthetical).
(iv) (A) Within 60 days after the Closing Date,
Bitstream shall deliver to the Representative, as agent for the Archetype
Stockholders, a certificate (the "Final Threshold Amount Certificate"), signed
by an appropriate officer or official of Bitstream, setting forth any proposed
changes in the Threshold Amount set forth in the Bitstream Threshold
Certificate, (or, if none was given, in the Estimated Threshold Amount
Certificate) and setting forth, in reasonable detail, the
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reason for such changes, together with a copy of any working papers or other
documents relating to such as the Representative may reasonably request.
(B) If the Representative shall conclude that the
Final Threshold Amount Certificate does not accurately reflect the Threshold
Amount, then the Representative shall, within thirty (30) days after receipt of
the Final Threshold Amount Certificate, furnish to Bitstream a written statement
of any discrepancy or discrepancies believed by the Representative to exist (the
"Discrepancy Certificate").
(C) The Representative and Bitstream shall attempt
jointly to resolve any discrepancy set forth in the Discrepancy Certificate
within thirty (30) days after receipt thereof, which resolution, if achieved,
shall be binding upon all parties to this Agreement (and all of the Archetype
Stockholders) and not subject to dispute or review. If the Representative and
Bitstream cannot resolve the discrepancy to their mutual satisfaction within
such thirty (30) day period, the Representative or Bitstream may, within the
following ten (10) days, request the Boston office of Arthur Andersen LLP, or
such other independent certified public accounting firm in Boston of national
standing agreed to by them (the "Designated Accountant"), to review and resolve
the matters raised in the Discrepancy Certificate. If Arthur Andersen LLP
declines to act in such capacity and the Representative and Bitstream are unable
to agree upon another firm to act as Designated Accountant within such 10 day
period, then either the Representative or Bitstream may provide a written notice
to the other (the "Selection Notice") setting forth the name of a firm of
certified public accountants designated by the party giving the Selection
Notice. The other party shall designate a second firm of certified public
accountants by notice ("Response Notice") given within ten days of the giving of
the Selection Notice. The two firms designated as aforesaid shall promptly
select a third firm of certified public accountants to resolve the dispute,
provided, however, that if the parties fail to designate two firms of certified
public accountants as aforesaid within the period during which a Response Notice
may be given, or if the firms so designated are unable to agree upon a third
firm, within ten days after the giving of the Response Notice, then the third
firm of certified public accountants shall be a firm of certified public
accountants designated by the American Arbitration Association at the request of
any party participating in the resolution of such dispute. The cost of retaining
the Designated Accountant and such firm of certified public accountants shall be
paid one-half by Bitstream and one-half out of the Escrow Amount. The Designated
Accountant or such firm shall report its conclusions as to the determination of
the Threshold Amount and the related adjustments (if any) to the amount of the
Merger Consideration, and such report shall be conclusive and binding on all
parties to this Agreement (and on
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all of the Archetype Stockholders) and not subject to dispute or review, and
judgment thereon may be entered in any court of competent jurisdiction.
(D) If the Threshold Amount, either as agreed to by
the parties or as determined in accordance with this Section 2.3(d)(iv) (the
"Final Threshold Amount"), shall be:
(i) greater than the Estimated Threshold
Amount, the amount of the difference in such amount (the "Archetype Payment")
shall be paid to the Representative, on behalf of the Archetype Stockholders as
follows:
(x) each of Bitstream and Archetype
shall instruct the Escrow Agent to pay to the Representative an amount equal to
the Archetype Payment out of the Dispute Escrow Amount; and
(y) if the Dispute Escrow Amount
shall be less than the amount of the Archetype Payment, then Bitstream shall
itself pay to the Representative the amount of such insufficiency; or
(ii) less than the Estimated Thres-
hold Amount, the amount of the difference in such amount (the "Bitstream
Payment") shall be paid to Bitstream as follows:
(x) each of Bitstream and Archetype
shall instruct the Escrow Agent to pay to Bitstream an amount equal to the
Bitstream Payment out of the Dispute Escrow Amount; and
(y) if the Dispute Escrow Amount
shall be less than the amount of the Bitstream Payment, each of Bitstream and
Archetype shall instruct the Escrow Agent to pay to Bitstream the amount of such
insufficiency out of the Indemnification Escrow Amount.
All payments under this clause (D) shall consist of Merger Cash
Payment and Stock Consideration, in the same proportions as the proportions in
which Merger Cash Payment and Stock Consideration were used to create the
Dispute Escrow Amount (or, if none, in the same relative proportions that the
aggregate Merger Cash Payment and the aggregate Stock Consideration constituted
a portion of the Merger Consideration). Moreover, payments shall be made to or
from each former Archetype Stockholder based on its respective pro rata portion
of the aggregate Merger Cash Payment and Stock Consideration.
SECTION 2.4. Payment of Cash Consideration; Establishment of
Escrow Account. (a) Subject to Section 2.3, all payments of the Merger Cash
Payment to be made pursuant to Section
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2.1 (excluding the portion includable in the Escrow Amount pursuant to
subsection (c) hereof) shall be made on the Closing Date by wire transfer of
immediately available funds to such account and such bank as the Representative
shall designate by notice to Bitstream given not less than three business days
prior to the Closing Date.
(b) Subject to Section 2.3, on the Closing Date Bitstream
shall cause to be repaid up to $800,000 of indebtedness currently owed by
Archetype to certain stockholders thereof, which indebtedness is described on
Schedule 2.4 hereto (the "Archetype Stockholder Debt"), by wire transfer of
immediately available funds to such account(s) and such bank(s) as shall be
specified by Archetype by written notice given at least three days prior to the
Closing Date.
(c) On the Closing Date, Bitstream shall deposit an amount
equal to ten percent (10%) of the Merger Cash Payment and 10% of the Bitstream
Options, and shall deposit or instruct the Exchange Agent to deposit 10% of the
shares of Bitstream Common Stock comprising the Stock Consideration
(collectively, the "Indemnification Escrow Amount," and together with the
Dispute Escrow Amount, the "Escrow Amount"), with State Street Bank & Trust
Company (the "Escrow Agent"), to be held in escrow by the Escrow Agent pursuant
to an escrow agreement (the "Escrow Agreement") substantially in the form of
Exhibit 2.4(c) hereto. The parties agree that, until disbursement of the Escrow
Amount pursuant to the terms of the Escrow Agreement, Bitstream shall be treated
as the owner of the portion of the Merger Cash Payment included within the
Escrow Amount and that the Escrow Agent shall hold the portion of the Merger
Cash Payment included within the Escrow Amount in the name and taxpayer
identification number of Bitstream. However, upon the disbursement of any
portion of the Merger Cash Payment included within the Escrow Amount the
Representative, acting on behalf of the Archetype Stockholders, and Bitstream
shall cause to be paid to the Representative interest on the amount so disbursed
equal to the actual amount of interest earned on the amount of such disbursement
while such was held by the Escrow Agent under the Escrow Agreement. The portion
of the shares of Bitstream Common Stock that are to be deposited in escrow as
part of the Escrow Amount are hereinafter referred to as the "Escrowed Shares"
and the portion of the Bitstream Options that are to be deposited in escrow as
part of the Escrow Amount are hereinafter referred to as the "Escrowed Options."
SECTION 2.5. Exchange of Archetype Certificates. (a) Subject to the
terms and conditions hereof, at or prior to the Effective Time, Bitstream shall
appoint an exchange agent (the "Exchange Agent") to effect the exchange of
certificates representing shares of Archetype Common Stock and Archetype
Preferred Stock, other than Dissenting Shares (collectively, "Archetype
Certificates") for certificates representing shares of
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Bitstream Common Stock (collectively, "Bitstream Certificates") in accordance
with the provisions of this Article II (the "Exchange Agent"). From time to time
after the Effective Time, Bitstream shall deposit, or cause to be deposited,
Bitstream Certificates for conversion of Archetype Certificates in accordance
with the provisions of this Article II (such certificates, together with any
dividends or distributions with respect thereto, being herein referred to as the
"Exchange Fund"). As soon as reasonably practicable after the Effective Time,
Bitstream shall cause to be mailed to each holder of record of a Archetype
Certificate, (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Archetype Certificates
shall pass, only upon proper delivery of the Archetype Certificates to the
Exchange Agent and shall be in such form and have such other provisions as
Bitstream reasonably may specify) and (ii) instructions for use in effecting the
surrender of the Archetype Certificates in exchange for Bitstream Certificates
and payment of cash in lieu of fractional shares. Commencing immediately after
the Effective Time and until the appointment of the Exchange Agent shall be
terminated, each holder of a Archetype Certificate may surrender the same to the
Exchange Agent, and, after the appointment of the Exchange Agent shall be
terminated, any such holder may surrender any such Archetype Certificate to
Bitstream. Such holder shall be entitled upon such surrender, together with a
letter of transmittal, duly executed, and such other customary documents as may
be required by the Exchange Agent, to receive in exchange therefor a Bitstream
Certificate or Bitstream Certificates representing a number of full shares of
Bitstream Common Stock equal to (x) the number of full shares of Bitstream
Common Stock into which the shares of Archetype Common Stock or Archetype
Preferred Stock, as the case may be, theretofore represented by the Archetype
Certificates so surrendered shall have been converted in accordance with the
provisions of Article II, minus (y) the number of Escrowed Shares issued in the
name of and delivered to the Escrow Agent on behalf of such Archetype
Stockholder pursuant to Section 3.2(b)(ix) below, together with a cash payment
in lieu of fractional shares in accordance with Section 2.7, and all such shares
of Bitstream Common Stock shall be deemed to have been issued at the Effective
Time. It is understood and agreed that separate certificates shall be issued in
the name of the Escrow Agent representing the Escrowed Shares and such
certificates shall be delivered directly to the Escrow Agent, together with duly
executed stock powers, and become part of the Escrow Amount. Until so
surrendered and exchanged, each outstanding Archetype Certificate shall be
deemed for all corporate purposes of Bitstream, other than the payment of
dividends and other distributions, if any, to evidence ownership of the number
of full shares of Bitstream Common Stock into which the shares of Archetype
Common Stock theretofore represented by the Archetype Certificate shall have
been converted at the Effective Time. Unless and until any such Archetype
Certificate
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is so surrendered, no dividend or other distribution, if any, payable to the
holders of record of Bitstream Common Stock as of any date subsequent to the
Effective Time shall be paid to the holder of such Archetype Certificate in
respect thereof. Upon the surrender of any Archetype Certificate, however, the
record holder of the Bitstream Certificate or Bitstream Certificates
representing shares of Bitstream Common Stock issued in exchange therefor shall
receive from the Exchange Agent or from Bitstream, as the case may be, payment
of the amount of dividends and other distributions, if any, which as of any date
subsequent to the Effective Time and until such surrender shall have become
payable with respect to such number of shares of Bitstream Common Stock
("Pre-Surrender Dividends"), except that any Pre-Surrender Dividends in respect
of the Escrowed Shares shall be paid to the Escrow Agent and become part of the
Escrow Amount. No interest shall be payable with respect to the payment of
Pre-Surrender Dividends upon the surrender of Archetype Certificates. After the
appointment of the Exchange Agent shall have been terminated, such holders of
Bitstream Common Stock which have not received payment of PreSurrender Dividends
shall look only to Bitstream for payment thereof. Notwithstanding the foregoing
provisions of this Section 2.5(a), none of the Exchange Agent, Bitstream,
Archetype or A-Sub shall be liable to a holder of Archetype Certificates for any
Bitstream Common Stock or dividends or distributions thereon delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law or to a transferee pursuant to Section 2.5 hereof.
(b) In the event any Archetype Certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit of that effect by the
Person claiming such Archetype Certificate to be lost, stolen or destroyed and,
if required by Bitstream or the Exchange Agent, the posting by such Person of a
bond in such amount as Bitstream or the Exchange Agent may direct as indemnity
against any claim that may be made against it with respect to such Archetype
Certificate, the Exchange Agent will issue, in exchange for such lost, stolen or
destroyed Certificate, Bitstream Common Stock, cash in lieu of fractional shares
and unpaid dividends and distributions on Bitstream Common Stock deliverable in
respect thereof pursuant to this Article II.
(c) Any portion of the Exchange Fund which remains
undistributed for six months after the Effective Time shall be delivered to
Bitstream, upon demand, and any holders of Archetype Common Stock who have not
theretofore complied with the provisions of this Article II shall thereafter
look only to Bitstream for satisfaction of their claims for Bitstream Common
Stock or any cash in lieu of fractional shares of Bitstream Common Stock and any
Pre-Surrender Dividends.
SECTION 2.6. Transfer Books. The stock transfer books of Archetype
with respect to the Archetype Certificates shall
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each be closed at the Effective Time and no transfer of any Archetype
Certificates will thereafter be recorded on any of such stock transfer books. In
the event of a transfer of ownership of a Archetype Certificate that is not
registered in the stock transfer records of Archetype at the Effective Time, a
certificate or certificates representing the number of full shares of Bitstream
Common Stock into which the Archetype Common Stock represented by such Archetype
Certificate shall have been converted shall be issued to the transferee together
with a cash payment in lieu of fractional shares in accordance with Section 2.7
hereof, and a cash payment in the amount of Pre-Surrender Dividends, if any, in
accordance with Section 2.5(a) hereof, if the Archetype Certificate surrendered
as provided in Section 2.5 hereof, accompanied by all documents required to
evidence and effect such transfer and by evidence of payment of any applicable
stock transfer tax.
SECTION 2.7. No Fractional Share Certificates. (a) No scrip or
fractional share certificate for Bitstream Common Stock will be issued upon the
surrender for exchange of Archetype Certificates, and an outstanding fractional
share interest will not entitle the owner thereof to vote, to receive dividends
or to any rights of a stockholder of Bitstream or of the Surviving Corporation
with respect to such fractional share interest.
(b) In lieu of such fractional share, Bitstream shall pay to
the Exchange Agent an amount sufficient for the Exchange Agent to pay each
holder of such fractional share an amount in cash equal to the product obtained
by multiplying (i) the fractional share interest to which such holder would
otherwise be entitled (after taking into account all shares of Archetype Common
Stock held at the Effective Time by such holder) by (ii) Closing Market Price.
(c) As soon as practicable after the determination of the
amount of cash, if any, to be paid to holders of Archetype Common Stock with
respect to any fractional share interests, the Exchange Agent shall make
available such amounts, net of any required withholding, to such holders of
Archetype Common Stock, subject to and in accordance with the terms of Section
2.7 hereof.
SECTION 2.8. Options/Warrants to Purchase Archetype Common Stock. At
the Effective Time, each option or warrant granted by Archetype to purchase
shares of Archetype Common Stock or Archetype Preferred Stock, as the case may
be, that is outstanding and unexercised as of the date hereof (the "Archetype
Options") shall be assumed by Bitstream and converted into an option or warrant
to purchase shares of Bitstream Common Stock, substantially in the forms
attached as Exhibits 2.8(i) and 2.8(ii), respectively (the "Bitstream Options"),
each of which shall be issued under Bitstream's 1996 Stock Plan, in such amount
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and at such exercise price as provided below and otherwise having the same terms
and conditions as are in effect immediately prior to the Effective Time (except
to the extent that such terms, conditions and restrictions may be altered in
accordance with their terms as a result of the transactions contemplated
hereby):
(a) the number or shares of Bitstream Common Stock issuable on
the exercise of each Bitstream Option shall be equal to the number of shares of
Archetype Common Stock or Archetype Preferred Stock, as the case may be,
issuable, as of the date hereof, under the Archetype Option which it replaces,
except for the Archetype Option to purchase 144,928 shares of Archetype Common
Stock held by Messrs. Charles Ying and Richard Ying, which shall be converted
into Bitstream Options to purchase 50,000 shares of Bitstream Common Stock;
(b) the exercise price per share of Bitstream Common Stock
under each Bitstream Option shall be equal to $.90 per share;
(c) each Bitstream Option shall vest and be exercisable on the
same terms as the original Archetype Option; provided, that no Bitstream Option
shall be exercisable within six months of the Effective Time or more than seven
(7) years after the Effective Time; and
(d) no Bitstream Option shall be issued to any employee of
Archetype who, upon consummation of the Merger, is offered the opportunity to
enter the employ of Bitstream, unless such employee enters the employ of
Bitstream and executes and delivers to Bitstream on the Closing Date the
Non-Competition Agreement and the Confidentiality Agreement such employee is
required to deliver to Bitstream pursuant to Sections 3.2(a)(vii) and (viii),
respectively (any Archetype Options held by any Archetype Employee who does not
so enter the employ of Bitstream or does not execute such agreements is a
"Disqualified Option"). Moreover, the Bitstream Options shall provide that such
option, and such employees' rights thereunder, shall be void and of no further
force and effect if such employee breaches any of its obligations under the
Confidentiality Agreement or the Non-Competition Agreement or fails to remain
an employee of Bitstream for at least six months after the Closing Date (except
if such employment is terminated by Bitstream without cause).
All Disqualified Options and all options and warrants granted by
Archetype to purchase shares of Archetype Common Stock or Preferred Stock, other
than Archetype Options, shall at the Effective Time be null and void and no
longer exercisable in any respect, and, on or prior to the Effective Time,
Archetype shall take such action as shall be necessary to give effect to the
foregoing, including obtaining the written agreement of any
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holder of Archetype Options or Disqualified Options to the provisions set forth
in this Section 2.8.
SECTION 2.9. Certain Additional Adjustments. If between the date of
this Agreement and the Effective Time, the outstanding shares of Bitstream
Common Stock or of Archetype Common Stock or Archetype Preferred Stock shall be
changed into a different number of shares by reason of any reclassification,
recapitalization, split-up, combination or exchange of shares, or any dividend
payable in stock or other securities shall be declared thereon with a record
date within such period, the Bitstream Options, the Merger Consideration , any
options to be pursuant to certain employment agreements described in Section
3.2(a)(ix) and the options to be issued to Mr. Ying pursuant to Section 9.5,
shall each be adjusted accordingly to provide the persons entitled thereto with
the same economic effect as contemplated by this Agreement prior to such
reclassification, recapitalization, split-up, combination, exchange or dividend.
SECTION 2.10. Dissenting Shares. Notwithstanding any other
provisions of this Agreement to the contrary, to the extent the Closing has
occurred, any shares of Archetype Common Stock and Archetype Preferred Stock
that are outstanding immediately prior to the Effective Time and that are held
by Archetype Stockholders who shall have not voted in favor of the Merger and
who shall have demanded properly in writing appraisal for such shares in
accordance with Section 262 of Delaware Law (collectively, the "Dissenting
Shares") shall not be converted into or represent the right to receive the
Merger Consideration pursuant to Section 2.2 hereof. Such Archetype Stockholders
instead shall be entitled to receive payment of the appraised value of such
shares of Archetype Common Stock and Archetype Preferred Stock held by them in
accordance with the provisions of such Section 262, except that all Dissenting
Shares held by Archetype Stockholders who shall have failed to perfect or who
effectively shall have withdrawn or lost their rights to appraisal of such
shares of Archetype Common Stock and Archetype Preferred Stock under such
Section 262 shall thereupon be deemed to have been converted into and to have
become exchangeable, as of the Effective Time, for the right to receive, without
any interest thereon, the Merger Consideration upon surrender in the manner
provided in this Article II, of the Archetype Certificates that formerly
evidenced such shares of Archetype Common Stock and Archetype Preferred Stock.
Archetype shall give Bitstream prompt notice of any demands for appraisal of
shares of Archetype Common Stock and Archetype Preferred Stock received by it
and the opportunity to direct all negotiations and proceedings with respect to
any such demands. Archetype shall not, without the prior written consent of
Bitstream, make any payment with respect to, or settle, offer to settle, or
otherwise negotiate any such demands.
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ARTICLE III
CLOSING TRANSACTIONS
SECTION 3.1. Closing Date. The closing of the Merger (the "Closing")
shall take place at such time and on such date as shall be designated by
Bitstream pursuant to notice given at least three business days in advance,
provided such notice may only be given after each of the conditions set forth in
Article X have been satisfied or waived by the Party or Parties entitled to the
benefit of such conditions (other than such conditions which are to be satisfied
at the Closing). The Closing shall be held at the offices of Rubin Baum Levin
Constant & Friedman, 30 Rockefeller Plaza, 29th Floor, New York, New York 10112,
or at such time and place as the Parties mutually agree. The date on which the
Closing occurs is herein referred to as the "Closing Date." If by June 30, 1997
the conditions referred to in the foregoing sentence have not been satisfied (or
waived by Archetype, on the one hand, or Bitstream and A-Sub, on the other
hand), then any party hereto may terminate this Agreement on notice to the other
Parties, provided that the Party giving such notice is not in default of its
obligations hereunder which default is the basis of the failure of the
conditions to be satisfied.
SECTION 3.2. Closing Documents.
(a) At the Closing, Archetype shall deliver the
following documents to Bitstream and A-Sub:
(i) Evidence of the approval of the Merger
Agreement by the Archetype Stockholders and a copy of the Merger Agreement upon
which the fact of such approval has been certified.
(ii) A copy of Archetype's Certificate of
Incorporation certified by the Secretary of State of the State of Delaware,
which certification shall be dated no earlier than three days prior to Closing.
(iii) A good standing certificate with
respect to Archetype, dated no earlier than two days prior to the Closing,
issued by the State of Delaware and each state in which Archetype is qualified
to transact business.
(iv) Archetype's minute books, stock book
and stock transfer ledger. (In addition, all of Archetype's files of
correspondence, lists, records, in whatever medium the records are stored,
manuals and books of account shall be delivered to Bitstream and A-Sub at
Bitstream's principal place of business on the Closing Date.)
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(v) All documents relating to Archetype Equity
Rights, including the Archetype Options.
(vi) Copies of the instruments, authorizations,
approvals, consents and orders of third parties referred to in Section 4.27
hereof, including the Required Consents.
(vii) Non-Competition Agreements duly executed by
each Archetype employee entering the employ of Bitstream, including each of the
parties designated in Schedule 3.2(a)(vii) hereto in substantially the form of
Exhibit 3.2(a)(vii).
(viii) Confidentiality Agreements duly executed by
each of the Archetype employee entering into the employ of Bitstream, including
each of the persons listed on Schedule 3.2(a)(viii) hereto, substantially in the
form of Exhibit 3.2(a)(viii).
(ix) Employment Agreements substantially in the form
of Exhibits 3.2(a)(ix)(A) and 3.2(a)(ix)(B), respectively (collectively the
"Employment Agreements"), duly executed by Paul Trevithick and Susan Robertson,
respectively.
(x) A copy of the Escrow Agreement duly executed by
Archetype, together with separate stock powers executed in blank by or on behalf
of the Archetype Stockholders for use with respect to the Escrowed Shares.
(xi) The Trevithick Note marked "canceled."
(xii) The Hurd Release.
(xiii) Evidence that the Archetype Stockholders
have duly appointed the Representative and granted the Representative the power
of attorney referred to in Section 12.5.
(xiv) The Certificates described in Section 10.3(c)
hereof.
(xv) An opinion, dated the Closing Date and addressed
to Bitstream and A-Sub from Peabody & Arnold, in form and substance reasonably
satisfactory to Bitstream and its counsel.
(xvi) Executed Lock-Up Agreements, in the form of
Exhibit 3.2(xvi), from each of the Persons referred to in Section 9.4.
(b) At the Closing, Bitstream and A-Sub shall make the
payments referred to in Section 2.4, and shall deliver
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the following documents to Archetype or the other persons referred to below:
(i) A copy of the Certificate of Merger duly executed
on behalf of A-Sub.
(ii) A copy of the Bitstream Threshold Certificate,
if any.
(iii) The requisite number of Bitstream Options to
each holder of Archetype Options (other than Disqualified Options), except that
Bitstream shall deliver directly to the Escrow Agent the Escrowed Options.
(iv) Good standing certificates with respect to
Bitstream and A-Sub, dated no earlier than three days prior to the Closing,
issued by the Secretary of State of Delaware.
(v) The Employment Agreements duly executed by
Bitstream.
(vi) The certificate described in Section 10.2(c)
hereof.
(vii) An opinion, dated the Closing Date and
addressed to Archetype, from Rubin Baum Levin Constant & Friedman, counsel to
Bitstream and A-Sub, in form and substance reasonably satisfactory to Archetype
its counsel.
(viii) A copy of the Escrow Agreement duly executed
by Bitstream.
(ix) A stock certificate or certificates, issued in
the name of the Escrow Agent, representing the Escrowed Shares.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ARCHETYPE
Archetype hereby represents and warrants to Bitstream and A-Sub as
follows:
SECTION 4.1. Organization and Qualification; Subsidiaries. Archetype
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware. Archetype has the requisite corporate power and
authority and any necessary governmental authority, franchise, license or permit
to own, operate or lease the properties that it purports to own, operate or
lease and to carry on its business as it is now being conducted, and is duly
qualified as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of its properties owned, operated or
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leased or the nature of its activities makes such qualification necessary.
Archetype has heretofore delivered or made available to Bitstream and A-Sub
accurate and complete copies of the Certificate of Incorporation and By-laws, or
equivalent governing instruments, as currently in effect of Archetype.
SECTION 4.2. Capitalization. (a) The authorized capital stock of
Archetype consists of (i) 575,365 shares of preferred stock, par value $.0001
per share, (x) 320,110 shares of which are Class B Preferred Stock of which
310,110 shares are outstanding, and (y) 255,255 shares of which are Class C
Preferred Stock, of which 255,255 shares are outstanding, and (ii) 2,350,000
shares of Archetype Common Stock, of which, 556,212 shares outstanding. Except
as permitted under Section 7.1(i), no additional shares of Archetype Common
Stock or Archetype Preferred Stock will be issued or become issuable at any time
from the date hereof through the Effective Time. Except as set forth above,
there are no outstanding Archetype Equity Rights. For purposes of this
Agreement, "Archetype Equity Rights" shall mean subscriptions, options,
warrants, calls, commitments, agreements, conversion rights or other rights of
any character (contingent or otherwise) to purchase or otherwise acquire from
Archetype at any time, or upon the happening of any stated event, any shares of
the capital stock of Archetype.
(b) Schedule 4.2(b) lists all holders of record of the issued
and outstanding capital stock of Archetype and the amounts and classes of
capital stock held by such holders.
(c) Schedule 4.2(c) lists all holders of Archetype Equity
Rights and the title and capital stock underlying the Archetype Equity Right
held by such holders.
(d) There are no outstanding obligations of Archetype or any
of Archetype's Subsidiaries to repurchase, redeem or otherwise acquire any
shares of capital stock of Archetype or any Archetype Equity Rights.
(e) All of the issued and outstanding shares of
Archetype Common Stock and Archetype Preferred Stock are validly
issued, fully paid and nonassessable.
(f) There are no voting trusts or other agreements or
understandings to which Archetype or any Archetype Stockholders is a party with
respect to the voting of the capital stock of Archetype.
SECTION 4.3. Authority Relative to this Agreement. Archetype has the
necessary corporate power and authority to enter into this Agreement and,
subject to obtaining any necessary stockholder approval of the Merger, to carry
out its obligations hereunder. The execution and delivery of this Agreement by
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Archetype and the consummation by Archetype of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of Archetype, subject to the approval of this Agreement by Archetype's
Stockholders required by Delaware Law. This Agreement has been duly executed and
delivered by Archetype and, assuming the due authorization, execution and
delivery thereof by the other Parties, constitutes a legal, valid and binding
obligation of Archetype, enforceable against it in accordance with its terms,
subject, as to enforceability, to bankruptcy, insolvency, reorganization and
other laws of general applicability relating to or affecting creditors' rights
and to general principles of equity, and except that Archetype's obligation to
effect the Merger is subject to the approval of this Agreement by Archetype's
stockholders referred to in Section 4.7(b) below.
SECTION 4.4. No Conflict: Required Filings and Consents. (a) Except
as described in subsection (b) below, the execution and delivery of this
Agreement by Archetype do not, and, subject to the obtaining of the Archetype
Stockholder Approval (as defined below), the performance of this Agreement by
Archetype will not, (i) violate or conflict with the Certificate of
Incorporation or Bylaws of Archetype, (ii) conflict with or violate any law,
regulation, court order, judgment or decree applicable to Archetype or by which
its property is bound or affected, (iii) result in any breach of or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination or cancellation of,
or result in the creation of a lien or encumbrance on any of the properties or
assets of Archetype pursuant to, result in the loss of any benefit under, or
require the consent of any other party to, any contract, instrument, permit,
license or franchise to which Archetype is a party or by which Archetype or any
of its property is bound or affected.
(b) Except for applicable requirements, if any, of the 1933
Act (as hereinafter defined), filing and recordation of appropriate merger or
other documents as required by Delaware Law and any filings required pursuant to
any state securities or "blue sky" laws, Archetype is not required to submit any
notice, report or other filing with, or obtain any consent or approval of, any
governmental authority, domestic or foreign, in connection with the execution,
delivery or performance of this Agreement.
SECTION 4.5. Litigation. Except as disclosed on Schedule 4.5 hereto,
there are no claims, actions, suits, proceedings or investigations pending or,
to Archetype's knowledge, threatened against Archetype, or any properties or
rights of Archetype, before any court, administrative, governmental, arbitral,
mediation or regulatory authority or body, domestic or foreign, adversely
affecting this Agreement or any action taken
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or to be taken or documents executed or to be executed pursuant to or in
connection with the provisions of this Agreement, or which, if decided adversely
to Archetype could have a material adverse effect on the business, assets,
results of operations, condition (financial or otherwise) or prospects of
Archetype (a "Material Adverse Effect").
SECTION 4.6. No Violation of Law. The business of Archetype and its
Subsidiaries is not being conducted in material violation of any statute, law,
ordinance, regulation, judgment, order or decree of any domestic or foreign
governmental or judicial entity (including any stock exchange or other self
regulatory body) ("Legal Requirements"), or in material violation of any
permits, franchises, licenses, authorizations or consents that are granted by
any domestic or foreign government or judicial entity (including any stock
exchange or other self-regulatory body) ("Permits"). No investigation or review
by any domestic or foreign governmental or regulatory entity with respect to
Archetype in relation to any alleged violation of law or regulation is pending
or, to Archetype's knowledge, threatened, nor has any governmental or regulatory
entity indicated an intention to conduct the same.
SECTION 4.7. Board Action: Vote Required. (a) The Board of Directors
of Archetype has unanimously determined that the transactions contemplated by
this Agreement are in the best interests of Archetype and the Archetype
Stockholders and has resolved to recommend to the Archetype Stockholders that
they vote in favor thereof.
(b) The approval of the Merger by a majority of the votes
entitled to be cast by all holders of Archetype Common Stock and Archetype
Preferred Stock , voting together as a single class, as well as by two-thirds of
the votes entitled to be cast by the holders of Archetype Series B Preferred
Stock and Series C Preferred Stock, voting separately (the "Archetype
Stockholders' Approval") is the only vote of the holders of any class or series
of the capital stock of Archetype required to approve this Agreement, the Merger
and the other transactions contemplated hereby.
SECTION 4.8. Brokers. No broker, finder or investment banker is
entitled to any brokerage, finder's, investment banking or other fee or
commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of Archetype.
SECTION 4.9. Tax Matters. Except as set forth on Schedule 4.9
hereto:
(a) All federal and foreign tax returns and tax reports
required to be filed by Archetype on or prior to the Closing Date or with
respect to taxable periods ending on or
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prior to the Closing Date have been or will be filed with the appropriate
governmental authorities on or prior to the Effective Time or by the due date
thereof including extensions;
(b) All state and local tax returns and tax reports required
to be filed by Archetype on or prior to the Closing Date or with respect to
taxable periods ending on or prior to the Closing Date which relate to income,
profits, franchise, property, sales, use or other taxes, have been or will be
filed with the appropriate governmental authorities on or prior to the Closing
Date or by the due date thereof including extensions;
(c) The tax returns and tax reports referred to in subparts
(a) and (b) of this Section 4.9 correctly reflect (and as to returns not filed
as of the date hereof, will correctly reflect) all tax liabilities of Archetype
for the periods covered thereby;
(d) As of the date hereof, there are no outstanding agreements
or waivers extending the statutory period of limitations applicable to any
federal, state, local or foreign tax which Archetype has executed or granted and
there are no tax audits or investigations pending as of the date hereof before
Governmental Body with respect to any taxes owed by Archetype.
(e) Neither Archetype nor any of its Affiliates has taken or
agreed to take any action that would (i) prevent or impede the Merger from
qualifying as a reorganization under Section 368(a)(2)(d) of the Code, or (ii)
prevent the payout of the Merger Cash Payment at the Closing and pursuant to the
Escrow Agreement from qualifying as an installment sale pursuant to Section 453
of the Code.
SECTION 4.10. Material Contracts. (a) Each material contract to
which Archetype is a party is listed on Schedule 4.10 hereto (the "Archetype
Material Contracts"); including, without limitation:
(i) each "material contract" (as such term is defined
in Regulation S-K promulgated by the SEC) to which Archetype is a party;
(ii) any partnership or joint venture agreement
between Archetype and any other Person or Persons;
(iii) all agreements pursuant to which any third
party is performing any research or development services for Archetype or in
respect of any Archetype Products;
(iv) any agreement (or group of related agreements)
under which Archetype has created, incurred, assumed
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or guaranteed indebtedness for borrowed money or under which any lien securing
such indebtedness has been imposed (or may be imposed) on any asset of
Archetype;
(v) all agreements pursuant to which Archetype has
agreed to render any research or development services to any third party or in
respect of any products of a third party;
(vi) any restrictive covenant or noncompetition
agreement which restricts the ability of Archetype to conduct and operate its
business or any such agreement which would restrict the ability of Archetype to
conduct any other business;
(vii) any agreement among any of Archetype's
employees, (including any agreement with any employee in the nature of a
collective bargaining agreement, employment agreement or severance agreement),
directors, officers or Affiliates, on the one hand, and Archetype on the other;
(viii) any agreement which would have a remaining
amount payable thereunder as of the Closing Date in excess of $25,000; and
(ix) any agreement having a remaining term of more
than one year after the date of this Agreement and any agreement with respect to
the provision of services by Archetype;
(x) all deeds and title insurance policies in respect
of owned real property and all leases, subleases, licenses or other agreements
under which Archetype uses or occupies, or has the right to use or occupy, now
or in the future, any real property or improvements thereon (the "Real Property
Leases");
(xi) all licenses or other agreements by which
Archetype has obtained ownership of, or the right to use, Intellectual Property
from, or granted an ownership interest, or the right to use Intellectual
Property to, a third party; and
(xii) any agreement giving any party the right to use
or have access to the source code of any Archetype Products or any agreement
with any original equipment manufacturer ("OEM") which gives such OEM the right
to incorporate any Archetype Products into any other products or separately sell
Archetype Products, all of the foregoing OEM and source code agreements being
specifically designed as such on Schedule 4.10.
(b) Each Archetype Material Contract is in full force and
effect and is enforceable in all respects against the parties thereto in
accordance with its terms, subject, as to enforceability, to bankruptcy,
insolvency, reorganization and
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other laws of general applicability relating to or affecting creditors' rights
and to general principles of equity, and no condition or state of facts exists
that, with notice or the passage of time, or both, would constitute a default by
Archetype or, to Archetype's knowledge, any third party under any Archetype
Material Contract. True, correct and complete copies of each Archetype Material
Contract together with all amendments thereto have heretofore been delivered to
Bitstream. Archetype is not party to any effective or enforceable contact,
agreement or understanding with Apple Computer, Inc., and has no liability
thereto under any instrument or agreement and has not granted or agreed to grant
to Apple Computer, Inc. any license with respect to any Archetype Product.
SECTION 4.11. Financial Statements. The balance sheet of Archetype
as of December 31, 1995 and the related statements of operations, stockholders'
equity and cash flows for the years then ended, including the footnotes thereto,
certified by Arthur Andersen LLP, Archetype's independent certified public
accountants, and the unaudited balance sheet of Archetype for the twelve (12)
months ended December 31, 1996, and the related statements of operations,
stockholders' equity and cash flows, including the footnotes thereto have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the periods involved and fairly present the financial
position of Archetype as of the dates thereof and the results of their
operations for the periods then ended.
SECTION 4.12. Absence of Certain Changes or Events. Since December
31, 1996, there has not been: (i) any material adverse change in the business,
assets, prospects, condition (financial or other) or the results of operations
of Archetype; (ii) any declaration, payment or setting aside for payment of any
dividend or any redemption, purchase or other acquisition of any shares of
capital stock or securities of Archetype; (iii) any return of any capital or
other distribution of assets to stockholders of Archetype; (iv) any material
investment of a capital nature by Archetype either by the purchase of any
property or assets or by any acquisition (by merger, consolidation or
acquisition of stock or assets) of any corporation, partnership or other
business organization or division thereof; (v) except as set forth on Schedule
4.12, any sale, disposition, license or other transfer of assets or properties
of Archetype in excess of $10,000 individually or $25,000 in the aggregate for
sales, dispositions or transfers of assets; (vi) any employment or consulting
agreement entered into by Archetype with any officer or consultant of Archetype
or any amendment or modification to, or termination of, any current employment
or consulting agreement to which Archetype is a party; (vii) any agreement to
take, whether in writing or otherwise, any action which, if taken prior to the
date hereof, would have made any representation or warranty in this Article III
untrue, incomplete or incorrect in any material
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respect; (viii) any change in accounting methods or practices or any change in
depreciation or amortization policies or rates; or (ix) any failure by Archetype
to conduct its business only in the ordinary course consistent with past
practice.
SECTION 4.13. Employee Benefit Plans. (a) Except as set forth on
Schedule 4.13(a), there are and there have been no employee benefit plans or
arrangements of any type, including (i) plans described in section 3(3) of the
Employee Retirement Income Safety Act of 1974, as amended, and the regulations
thereunder ("ERISA") and any other plans, programs, practices or policies,
including, but not limited to, any pension, profit sharing, retirement, thrift,
stock purchase or stock option plan, or any other compensation, welfare, fringe
benefit or retirement plan, program, policy, understanding or arrangement of any
kind whatsoever, whether formal or informal, providing for benefits for or the
welfare of any or all of the current or former employees or agents of Archetype
and their beneficiaries or dependents ("Employees"), or (ii) multi-employer
plans as defined in section 3(37) of ERISA, or (iii) multiple employer plans as
defined in Section 413 of the Code, under which Archetype has or in the future
could have, directly or indirectly through a "Commonly Controlled Entity"
(within the meaning of sections 414(b), (c), (m) and (o) of the Code), any
liability with respect to any current or former employee of Archetype or any
Commonly Controlled Entity (collectively, "Archetype Benefit Plans").
(b) With respect to each Archetype Benefit Plan (where
applicable), Archetype has delivered to Bitstream complete and accurate copies
or summaries of (i) all plan texts and material agreements, (ii) all material
employee communications, (iii) the three most recent annual reports, (iv) the
most recent annual and periodic accounting of plan assets, (v) the most recent
determination letter received from the Internal Revenue Service, if not yet
received, the application to the Internal Revenue Service for such determination
letter, and (vi) the most recent actuarial valuation, except to the extent that
any of the foregoing is not delivered to Bitstream prior to the date hereof,
such shall be delivered to Bitstream at least five (5) days prior to the Closing
and shall be in form and substance satisfactory to Bitstream and its counsel.
(c) With respect to each Archetype Benefit Plan: (i) if
intended to qualify under Code sections 401(a) or 403(a), (x) such Archetype
Benefit Plan has received a favorable determination letter from the Internal
Revenue Service (the "Service") indicating that such Plan meets such
requirements, and such determination by the Service includes any new or modified
requirements under the Tax Reform Act of 1986 and subsequent legislation enacted
thereafter, or (y) an application for a favorable determination letter including
such legislation was filed with the Service prior to the expiration of the
remedial
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amendment period (as defined in Code section 401(b) and regulations thereunder,
and as extended pursuant to notices and revenue rulings of the Service) for
filing such an application and such plan has been substantially amended to
comply with the Tax Reform Act of 1986 and subsequent legislation enacted, or
(z) the remedial amendment period (as defined in (y) above) with respect to such
plan has not yet expired, and an application for a favorable determination
letter including such legislation will be timely filed with the Service prior to
the expiration of such period and such plan will be amended to comply with the
Tax Reform Act of 1986 and subsequent legislation prior to the expiration of
such period, and such plan is currently in compliance with Section 4.01(a) or
4.03(a), as applicable, (ii) such Archetype Benefit Plan has been administered
in compliance with its terms and applicable law, (iii) no event has occurred and
there exists no circumstance under which Archetype could, directly or indirectly
through a Commonly Controlled Entity, incur liability under ERISA, the Code or
otherwise (other than routine claims for benefits), (iv) there are no actions,
suits or claims pending (other than routine claims for benefits) or, to
Archetype's knowledge, threatened or anticipated, with respect to any Archetype
Benefit Plan or against the assets of any Archetype Benefit Plan, (v) no
"accumulated funding deficiency" (as defined in ERISA section 302) has occurred,
no "prohibited transaction" (as defined in ERISA section 406 or in Code section
4975) has occurred, and no "reportable event" (as defined in ERISA section 4043)
has occurred, (vi) all contributions and PBGC premiums or premiums due under an
insurance contract that insures benefits payable under an Archetype Benefit
Plan, as applicable, have been made on a timely basis and (vii) all
contributions made or required to be made under any Archetype Benefit Plan which
have been treated as deductible for purposes of one or more federal income tax
returns of Archetype meet the requirements for deductibility under the Code and
all contributions that have not been made have been properly recorded on the
books of Archetype or a Commonly Controlled Entity in accordance with generally
accepted accounting principles.
(d) With respect to each Archetype Benefit Plan that is
subject to Title IV of ERISA: (i) as of the date hereof and on the Closing Date,
the market value of assets (exclusive of any contribution due to such Archetype
Benefit Plan) equals or exceeds the present value of benefit liabilities as of
the latest actuarial valuation date shown for such plan (but not prior to 12
months prior to the date hereof), determined on the basis of a shutdown of
Archetype and termination of such Archetype Benefit Plan in accordance with
actuarial assumptions used by the Pension Benefit Guaranty Corporation in
single-employer plan terminations and since its last valuation date, there have
been no amendments to such Archetype Benefit Plan that materially increased the
present value of benefit liabilities (determined as provided above) nor any
other adverse changes in the funding status of
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such Archetype Benefit Plan, and (ii) Archetype has not incurred, directly or
indirectly through a Commonly Controlled Entity, any liability arising from a
plan termination or plan withdrawal from a multiemployer plan.
(e) With respect to each Archetype Benefit Plan that is a
"welfare plan" (as defined in ERISA section 3(1)), except as set forth on
Schedule 4.13(e): (i) no such plan provides medical or death benefits (whether
or not insured) with respect to Employees beyond their termination of employment
or the end of the month of their termination of employment (other than coverage
mandated by law), and Archetype has never represented to or contracted with any
Employee that such post termination benefits would be provided, (ii) there are
no reserves, assets, surplus or prepaid premiums under any such plan and (iii)
Archetype and any Commonly Controlled Entity have complied with the requirements
of Code section 4980B.
(f) No Archetype Benefit Plan constitutes a multiemployer
plan, a multiple employer plan or a defined benefit plan within the meaning of
Section 335 of ERISA.
(g) The consummation of the transactions contemplated by this
Agreement will not (a) entitle any individual to severance pay, or (b)
accelerate the time of payment, vesting of benefits (including stock options and
restricted stock) or increase the amount of compensation due to any individual.
SECTION 4.14. Liabilities. Except (i) as set forth on Schedule 4.14
or (ii) as reflected in the financial statements for the period ended December
31, 1996 referred to in Section 4.11, Archetype does not have any direct or
indirect liabilities, whether or not of a kind required by generally accepted
accounting principles to be set forth in a financial statement, other than
liabilities incurred since December 31, 1996 in the ordinary course of business
which, either individually or in the aggregate, will not have a Material Adverse
Effect. Except as set forth on Schedule 4.14, Archetype does not have (i) any
obligations in respect of borrowed money, (ii) obligations evidenced by bonds,
debentures, notes or other similar instruments, (iii) obligations which would be
required by generally accepted accounting principles to be classified as
"capital leases", (iv) obligations to pay the deferred purchase price of
property or services, except trade accounts payable arising in the ordinary
course of business and payable not more than twelve (12) months from the date of
incurrence, and (v) any guaranties of any obligations of any other person.
SECTION 4.15. Environmental Protection. Except as disclosed on
Schedule 4.15:
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(a) Archetype is not and has not been in material violation in
any respect of any applicable Safety and Environmental Law (as defined below).
(b) Archetype has all Permits required pursuant to Safety and
Environmental Laws that are material to the conduct of the business of
Archetype, all such Permits are in full force and effect, no action or
proceeding to revoke, limit or modify any of such Permits is pending, and
Archetype is in compliance in all respects with all terms and conditions
thereof.
(c) Archetype has filed all notices required under Safety and
Environmental Laws indicating the past or present Release (as defined below),
generation, treatment, storage or disposal of Hazardous Substances (as defined
below).
(d) Archetype has not entered into any written agreement with
any Governmental Body (as defined below)] or any other person by which Archetype
has assumed responsibility, either directly or as a guarantor or surety, for the
remediation of any condition arising from or relating to a Release (as defined
below) or threatened Release of Hazardous Substances into the Environment.
(e) There is not now and has not been at any time in the past
a Release or threatened Release of Hazardous Substances into the Environment for
which Archetype may be directly or indirectly responsible.
(f) There is not now and, to the best of Archetype's
knowledge, has not been at any time in the past at, on or in any of the real
properties owned, leased or operated by Archetype and, was not at, on or in any
real property previously owned, leased or operated by Archetype or any
predecessor: (A) any generation, use, handling, Release, treatment, recycling,
storage or disposal of any Hazardous Substances, (B) any underground storage
tank, surface impoundment, lagoon or other containment facility (past or
present) for the temporary or permanent storage, treatment or disposal of
Hazardous Substances, (C) any landfill or solid waste disposal area, (D) any
asbestos- containing material in a condition requiring abatement, (E) any
polychlorinated biphenyls (PCBs) used in hydraulic oils, electrical transformers
or other equipment, (F) any Release or threatened Release, or any visible signs
of Releases or threatened Releases, of a Hazardous Substance to the Environment
in form or quantity requiring Remedial Action (as defined below) under Safety
and Environmental Laws, or (G) any Hazardous Substances present at such
property, excepting such quantities as are handled in accordance with all
applicable manufacturer's instructions and Safety and Environmental Laws and in
proper storage containers, and as are necessary for the operations of Archetype.
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(g) Archetype has not received or incurred, and, to the best
of Archetype's knowledge, there is no basis or reasonably anticipated basis for
any Environmental Claim (as defined below) or Environmental Compliance Costs (as
defined below).
(h) Archetype has not transported, stored, treated or
disposed, nor has it allowed or arranged for any third persons to transport,
store, treat or dispose, any Hazardous Substance at any time to or at any
location whatsoever.
For purposes of this Agreement, the following terms have the
following meanings:
(i) "Environment" means navigable waters, waters of
the contiguous zone, ocean waters, natural resources, surface waters, ground
water, drinking water supply, land surface, subsurface strata, ambient air, both
inside and outside of buildings and structures, man-made buildings and
structures, and plant and animal life on earth.
(ii) "Environmental Claims" means any notification,
whether direct or indirect, formal or informal, written or oral, pursuant to
Safety and Environment or health and safety, that any of the current or past
operations of any of the Parties or any of their Subsidiaries, or any by-product
thereof, or any of the property currently or formerly owned, leased or operated
by any of the Parties or any of their Subsidiaries is or may be implicated in or
subject to any proceeding, action, investigation, claim, lawsuit, order,
agreement or evaluation by any Governmental Body or any other person.
(iii) "Environmental Compliance Costs" means any
expenditures, costs, assessments or expenses (including, without limitation, any
expenditures, costs, assessments or expenses in connection with the conduct of
any Remedial Action, as well as reasonable fees, disbursements and expenses or
attorneys, experts, personnel and consultants), whether direct or indirect,
necessary to cause the operations, real property, assets, equipment or
facilities owned, leased, operated or used by any of the Parties or by any of
their Subsidiaries to be in compliance with any and all requirements, as in
effect as of the date hereof, of Safety and Environmental Laws, principles of
common law concerning pollution, protection of the Environment or health and
safety, or Permits issued pursuant to Safety and Environmental Laws; provided,
however, that Environmental Compliance Costs do not include expenditures, costs,
assessments or expenses necessary in connection with normal maintenance of such
real property, assets, equipment or facilities or the replacement of equipment
in the normal course of events due to ordinary wear and tear.
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(iv) "Governmental Body" means any government or
political subdivision thereof, whether federal, state, local or foreign, or any
agency, regulatory entity or instrumentality of any such government or political
subdivision, or any court or arbitrator.
(v) "Hazardous Substance" means any toxic waste,
pollutant, hazardous substance, toxic substance, hazardous waste, special waste,
industrial substance or waste, petroleum or petroleum derived substance or
waste, radioactive substance or waste, or any constituent of any such substance
or waste, or any other substance regulated under or defined by any Safety and
Environmental Law.
(vi) "Release" means any release, spill, emission,
leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching
or migration into or through the indoor or outdoor Environment or into, through
or out of any property, including the movement of Hazardous Substances through
or in the air, soil, surface water, ground water or property.
(vii) "Remedial Action" means all actions whether
voluntary or involuntary, reasonably necessary to comply with Safety and
Environmental Laws to (A) clean up, remove, treat, over or in any other way
adjust Hazardous Substances in the indoor or outdoor Environment; (B) prevent or
control the Release of Hazardous Substances so that they do not migrate or
endanger or threaten to endanger public health or welfare or the Environment; or
(c) perform remedial studies, investigations, restoration and post-remedial
studies, investigations and monitoring on, about or in any real property.
(viii) "Safety and Environmental Laws" means all
federal, state and local laws and orders relating to pollution, protection of
the Environment, public or worker health and safety, or the emission, discharge,
release or threatened release of pollutants, contaminants or industrial, toxic
or hazardous substances or wastes into the Environment or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants or industrial, toxic or
hazardous substances or wastes.
SECTION 4.16. Intellectual Property. Schedule 4.16 sets forth a list
of all of Archetype's registered patents, registered trademarks, registered
service marks, registered trade names, registered copyrights and franchises, all
applications for any of the foregoing and all permits, grants and licenses or
other rights running to Archetype relating to any of the foregoing that are
material to the business of Archetype (collectively, "Intellectual Property").
Except as set forth on Schedule 4.16 (i) Archetype owns, or is licensed to, or
otherwise has, the right to use all patents, trademarks, service marks, trade
names,
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copyrights and franchises set forth on Schedule 4.16, and such represent all of
the trademarks, patent rights, copyrights and similar rights necessary for
Archetype to conduct its business as currently conducted and proposed to be
conducted, and (ii) Archetype's rights in the Intellectual Property set forth on
such list are free and clear of any liens or other encumbrances and Archetype
has not received notice of any adversely-held patent, invention, trademark,
service mark or trade name of any other person, or notice of any charge or claim
of any person relating to such Intellectual Property or any process or
confidential information of Archetype and to Archetype's knowledge there is no
basis for any such charge or claim, and (iii) Archetype and its predecessors, if
any, has not conducted business at any time during the period beginning five
years prior to the date hereof under any corporate or partnership, trade or
fictitious names other than their current corporate or partnership names.
SECTION 4.17. Real Estate. (a) Schedule 4.17(a) sets forth a true,
correct and complete schedule of all real property owned by Archetype. Archetype
is the owner of fee title to the real property described on Schedule 4.17(a) and
to all of the buildings, structures and other improvements located thereon free
and clear of any mortgage, deed of trust, lien, pledge, security interest,
claim, lease, charge, option, right of first refusal, easement, restrictive
covenant, encroachment or other survey defect, encumbrance or other restriction
or limitation except for the matters listed on Schedule 4.17(a).
(b) Except for the matters listed on Schedule 4.17(b),
Archetype holds the leasehold estate under and interest in each Archetype Real
Property Lease free and clear of all liens, encumbrances and other rights of
occupancy. Except as set forth on Schedule 4.17(b), all Archetype Real Property
Leases are valid and binding on the lessors thereunder in accordance with their
respective terms and to Archetype's knowledge, there is not under any such
Archetype Real Property Leases any existing default, or any condition, event or
act which with notice or lapse of time or both would constitute such a default.
SECTION 4.18. Records. The minute books, and stock record books of
Archetype made available to Bitstream contain accurate and complete records of
all corporate actions of the stockholders and directors (and committees)
thereof.
SECTION 4.19. Title to and Condition of Personal Property. Set forth
on Schedule 4.19 is an inventory of all personal property owned by Archetype,
including, without limitation, all of Archetype's computer equipment, office
equipment, vehicles and office furniture, the personal property so listed
represents all of the personal property reflected in the financial statements of
Archetype described in Section 4.11 above, and all such personal property will
be on hand as of the Closing Date, except for such
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personal property that has become obsolete in the ordinary course of Archetypes
business and has been replaced by a product of equal or superior quality and
function. Archetype has good and marketable title to such personal property
(other than leased property), and such property is free and clear of all liens,
claims, charges, security interests, options, or other title defects or
encumbrances. All such personal property is in good operating condition and
repair, ordinary wear and tear excepted, is suitable for the use to which the
same is customarily put, is free from defects and is merchantable and is of a
quality and quantity presently usable in the ordinary course of the operation of
the businesses of Archetype.
SECTION 4.20. No Adverse Actions. There is no existing, pending or,
to Archetype's knowledge, threatened termination, cancellation, modification or
change in the business relationship of Archetype with any supplier, customer or
other person or entity except those which do not and will not have an Material
Adverse Effect. To Archetype's knowledge, none of Archetype, or any stockholder,
director, officer, agent, employee or other person associated with or acting on
behalf of any of the foregoing has used any corporate funds for unlawful
contributions, payments, gifts, entertainment or other unlawful expenses
relating to political activity, or made any direct or indirect unlawful payments
to governmental or regulatory officials.
SECTION 4.21. Labor Matters. (a) Archetype has no obligations,
contingent or otherwise, under any employment or consulting agreement,
collective bargaining agreement or other contract with a labor union or other
labor or employee group. There are no efforts presently being made or, to
Archetype's knowledge, threatened by or on behalf of any labor union with
respect to employees of Archetype. No unfair labor practice complaint against
Archetype is pending or, to Archetype's knowledge, threatened before the
National Labor Relations Board; there is no labor strike, dispute, slowdown or
stoppage pending or, to Archetype's knowledge, threatened against or involving
Archetype; no collective bargaining representation question exists respecting
the employees of Archetype; no grievance or internal or informal complaint
exists under any collective bargaining agreement, no arbitration proceeding
arising out of or under any collective bargaining agreement is pending and no
claim therefor has been asserted; no collective bargaining agreement is
currently being negotiated by Archetype; and Archetype has not experienced any
labor difficulty.
(b) In the last three years, Archetype has not effectuated,
nor will Archetype at any time before the Effective Time, effectuate (i) a
"plant closing" within the scope of the Worker Adjustment and Restraining
Notification Act (and applicable similar state law (the "WARN Act"))affecting
any site of employment or one or more facilities or operating units within
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any site of employment or facility of Archetype; or (ii) a "mass layoff" (as
defined in the WARN Act) affecting any site of employment or facility of
Archetype; nor has Archetype been affected by any transaction or engaged in
layoffs or employment terminations sufficient in number to trigger application
of any similar state or local law.
(c) Archetype is in compliance with all federal and state laws
respecting immigration, employment and employment practices, fair labor
practices, family and medical leave, terms and conditions of employment
(including nondiscrimination in race, age, sex, religion, disability, etc.) and
wages and hours.
(d) At or prior to the Closing, Archetype will cause all loans
or advances made by it to any director, officer, employee or agent to be repaid
in full.
SECTION 4.22. Investment Company Act. Archetype is not an
"investment company," or a company "controlled" by, or an "affiliated company"
with respect to, an "investment company," within the meaning of the Investment
Company Act.
SECTION 4.23. Insurance. Schedule 4.23 hereto contains a true and
complete list of all policies of insurance and fidelity or surety bonds
currently in force covering Archetype's rights, assets and property. Archetype
has not received notice of default under, or intended cancellation or nonrenewal
of, any policies of insurance which insure the properties, business or liability
of Archetype.
SECTION 4.24. Products. (a) Except set forth on Schedule 4.24(a),
there are no product liability claims against or involving Archetype or any of
its Subsidiaries or any product manufactured, marketed or distributed at any
time by Archetype ("Archetype Products") and no such claims have been settled,
adjudicated or otherwise disposed of since December 31, 1993.
(b) All Archetype Products were either invented or developed
by Archetype or all rights in respect thereof, which are necessary or useful for
the manufacture, sale or distribution thereof, were acquired by Archetype
pursuant to Archetype Material Contracts listed on Schedule 4.10.
SECTION 4.25. Archetype Stockholder Debt. Schedule 4.25 sets forth
as of the date hereof, the amount of the Archetype Stockholder Debt outstanding
including accrued interest thereon, and the names and addresses of the holders
thereof. Copies of all documents evidencing or relating to the Archetype
Stockholder Debt have been delivered to Bitstream. Except for the Archetype
Stockholder Debt and the indebtedness evidenced by the Trevithick Note,
Archetype is not and will not at the Closing
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be indebted to any officer, director or stockholder of Archetype or any
Affiliate of any of them.
SECTION 4.26. 1933 Act Representation. Each person to receive Common
Stock or a Bitstream Option pursuant to this Agreement shall acquire such Common
Stock or Bitstream Option for investment and without a view to the distribution
thereof. The Common Stock and Bitstream Options to be issued pursuant to the
Agreement will be issued in a transaction that is exempt from registration
imposed under the 1933 Act, pursuant to Section 4(2) thereof, and the Common
Stock and the Common Stock issued upon exercise of the Bitstream Options will be
"restricted securities" (as such term is defined in the 1933 Act). Except as
disclosed to Bitstream, to the best of Archetype's knowledge, each Archetype
Stockholder receiving Common Stock is an "accredited investor" (as such term is
defined in the 1933 Act).
SECTION 4.27. Consents, Waivers, Authorizations. Schedule 4.27 sets
forth each consent, waiver, authorization, order and approval of, and all
filings and registrations with, any governmental commission, board or other
regulatory body or any nongovernmental third party, required for, or in
connection with, the performance by Archetype of this Agreement and the
consummation by it of the transactions contemplated hereby, or as may be
required in order not to accelerate, violate, breach or terminate any agreement
to which Archetype may be subject, (collectively, the "Archetype Required
Consents").
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BITSTREAM
Bitstream hereby represents and warrants to Archetype as follows:
SECTION 5.1. Organization and Qualification; Subsidiaries. Bitstream
is duly organized, validly existing and in good standing under the laws of the
State of Delaware. Bitstream has the requisite corporate power and authority and
any necessary governmental authority, franchise, license or permit to own,
operate or lease the properties that it purports to own, operate or lease and to
carry on its business as it is now being conducted, and is duly qualified as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned, operated or leased or
the nature of its activities makes such qualification necessary, except for such
failure which, when taken together with all other such failures, would not
reasonably be expected to have a Material Adverse Effect on Bitstream. The
Bitstream Subsidiaries are disclosed in the Bitstream SEC Reports (as
hereinafter defined).
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SECTION 5.2. Capitalization. (a) The authorized capital stock of
Bitstream consists of (i) 30,500,000 shares of Common Stock (x) 30,000,000 of
which are Class A Common Stock, par value $.01 per share, of which 5,506,771
shares are outstanding as of March 14, 1997, and (y) 500,000 shares of Class B
Common Stock, par value $.01 per share ("Bitstream Class B Common Stock"), of
which 422,026 shares are outstanding as of March 14, 1997 and (ii) 6,000,000
shares of Preferred Stock, par value $.01 per share, of which no shares are
outstanding. As of December 31, 1996, there were 1,907,390 shares of Bitstream
Common Stock and 13,038 shares of Bitstream Class B Common Stock, respectively,
issuable upon exercise of options or warrants. Except as set forth above, as of
December 31, 1996, there were no outstanding Bitstream Equity Rights. For
purposes of this Agreement, "Bitstream Equity Rights" shall mean subscriptions,
options, warrants, calls, commitments, agreements, conversion rights or other
rights of any character (contingent or otherwise) to purchase or otherwise
acquire from Bitstream at any time, or upon the happening of any stated event,
any shares of the capital stock of Bitstream.
(b) Except as disclosed in the Bitstream SEC Reports, there
are no outstanding obligations of Bitstream or any of Bitstream's Subsidiaries
to repurchase, redeem or otherwise acquire any shares of capital stock of
Bitstream.
(c) All of the issued and outstanding shares of Bitstream
Common Stock and Bitstream Class B Common Stock are validly issued, fully paid
and nonassessable.
SECTION 5.3. Authority Relative to this Agreement. Bitstream has the
necessary corporate power and authority to enter into this Agreement and,
subject to obtaining any necessary stockholder approval of the Merger, to carry
out its obligations hereunder. The execution and delivery of this Agreement by
Bitstream and the consummation by Bitstream of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of Bitstream required by Delaware Law. This Agreement has been duly executed and
delivered by Bitstream and, assuming the due authorization, execution and
delivery thereof by the other Parties, constitutes a legal, valid and binding
obligation of Bitstream, enforceable against it in accordance with its terms,
subject, as to enforceability, to bankruptcy, insolvency, reorganization and
other laws of general applicability relating to or affecting creditors' rights
and to general principles of equity.
SECTION 5.4. No Conflict; Required Filings and Consents. (a) Except
as described in subsection (b) below, the execution and delivery of this
Agreement by Bitstream do not, and the performance of this Agreement by
Bitstream will not, (i) violate or conflict with the Certificate of
Incorporation or
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Bylaws of Bitstream, (ii) conflict with or violate any law, regulation, court
order, judgment or decree applicable to Bitstream or by which any of its
property is bound or affected, or (iii) result in any breach of or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination or cancellation of,
or result in the creation of a lien or encumbrance on any of the properties or
assets of Bitstream pursuant to, result in the loss of any material benefit
under, or require the consent of any other party to, any contract, instrument,
permit, license or franchise to which Bitstream is a party or by which Bitstream
or any of its property is bound or affected, except, in the case of clauses (ii)
or (iii) above, for conflicts, violations, breaches, defaults, results or
consents which, individually or in the aggregate, would not have a Material
Adverse Effect on Bitstream.
(b) Except as for applicable requirements, if any, of the 1933
Act, the Exchange Act, filing and recordation of appropriate merger or other
documents as required by Delaware Law and any filings required pursuant to any
state securities or "blue sky" laws or the rules of Nasdaq, Bitstream is not
required to submit any notice, report or other filing with, or obtain any
consent or approval of, any governmental authority, domestic or foreign, in
connection with the execution, delivery or performance of this Agreement, the
failure to obtain, make or give which would have, in the aggregate, a Material
Adverse Effect on Bitstream.
SECTION 5.5. SEC Filings; Financial Statements. (a) Bitstream has
filed all forms, reports and other documents required to be filed with the SEC
since October 30, 1996, and has heretofore delivered or made available to
Archetype, in the form filed with the SEC, together with any amendments thereto,
its (i) Quarterly Report on Form 10-Q for the fiscal quarters ended September
30, 1996, and (ii) all other reports or registration statements (including all
amendments thereto) filed by Bitstream with the SEC on or after October 30, 1996
(collectively, the "Bitstream SEC Reports"). The Bitstream SEC Reports (i) were
prepared substantially in accordance with the requirements of the 1933 Act or
the Exchange Act, as the case may be, and the rules and regulations promulgated
under each of such respective acts, and (ii) did not at the time they were filed
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(b) The financial statements, including all related notes and
schedules, contained in the Bitstream SEC Reports (or incorporated by reference
therein) fairly present the consolidated financial position of Bitstream and its
Subsidiaries
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as at the respective dates thereof and the consolidated results of operations
and cash flows of Bitstream and its Subsidiaries for the periods indicated in
accordance with GAAP applied on a consistent basis throughout the periods
involved (except for changes in accounting principles disclosed in the notes
thereto) and subject in the case of interim financial statements to normal
year-end adjustments.
SECTION 5.6. Litigation. Except as disclosed in the Bitstream SEC
Reports, there are no claims, actions, suits, proceedings or investigations
pending or, to Bitstream's knowledge, threatened against Bitstream or any of its
Subsidiaries, or any properties or rights of Bitstream or any of its
Subsidiaries, before any court, administrative, governmental, arbitral,
mediation or regulatory authority or body, domestic or foreign, adversely
affecting this Agreement or any action taken or to be taken or documents
executed or to be executed pursuant to or in connection with the provisions of
this Agreement, or which if adversely determined would have a Material Adverse
Effect.
SECTION 5.7. No Violation of Law. The business of Bitstream is not
being conducted in violation of any Legal Requirements or in violation of any
Permits, except for possible violations none of which, individually or in the
aggregate, may reasonably be expected to have a Material Adverse Effect on
Bitstream and for matters disclosed in the Bitstream SEC Reports. Except as
disclosed in the Bitstream SEC Reports, no investigation or review by any
domestic or foreign governmental or regulatory entity (including any stock
exchange or other self regulatory body) with respect to Bitstream in relation to
any alleged violation of law or regulation is pending or, to Bitstream's
knowledge, threatened, nor has any governmental or regulatory entity (including
any stock exchange or other self-regulatory body) indicated an intention to
conduct the same, except for such investigations which, if they resulted in
adverse findings, would not reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect on Bitstream.
SECTION 5.8. Board Action; Vote Required. The Board of Directors of
Bitstream has unanimously determined that the transactions contemplated by this
Agreement are in the best interests of Bitstream and has approved such
transactions and counsel to Bitstream has received a letter dated March 18, 1997
from the NASDAQ (the "NASDAQ Letter") concurring with Bitstream's position that
the approval of Bitstream's Stockholders is not required under the NASDAQ
Marketplace Rules to effect the transactions contemplated by this Agreement.
Accordingly, provided that the NASDAQ Letter is not withdrawn or modified, such
Board of Directors' approvals are the only votes required to approve this
Agreement, the Merger and the other transactions contemplated hereby.
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SECTION 5.9. Brokers. No broker, finder or investment banker is
entitled to any brokerage, finder's, investment banking or other fee or
commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of Bitstream or any of its
Subsidiaries.
SECTION 5.10. Tax Matters.
(a) All material federal and foreign tax returns and tax
reports required to be filed by Bitstream on or prior to the Closing Date or
with respect to taxable periods ending on or prior to the Closing Date have been
or will be filed with the appropriate governmental authorities on or prior to
the Closing Date or by the due date thereof including extensions;
(b) All material state and local tax returns and tax reports
required to be filed by Bitstream on or prior to the Closing Date or with
respect to taxable periods ending on or prior to the Closing Date which relate
to income, profits, franchise, property, sales, use or other taxes, have been or
will be filed with the appropriate governmental authorities on or prior to the
Closing Date or by the due date thereof including extensions;
(c) The tax returns and tax reports referred to in subparts
(a) and (b) of this Section 5.10 correctly reflect (and as to returns not filed
as of the date hereof, will correctly reflect) all material tax liabilities of
Bitstream and its Subsidiaries required to be shown thereon;
(d) As of the date hereof, there are no outstanding agreement
or waivers extending the statutory period of limitations applicable to any
federal, state, local or foreign tax which Bitstream has executed or granted and
there are no tax audits or investigations pending as of the date hereof before
Governmental Body with respect to any tax owed by Bitstream; and
(e) Neither Bitstream nor any of its Affiliates has knowingly
taken or agreed to take any action that would (i) prevent or impede the Merger
from qualifying as a reorganization under Section 368(a)(2)(d) of the Code, or
(ii) prevent the payment of the Merger Cash Payment at Closing and pursuant to
the Escrow Agreement from qualifying as an installment sale pursuant to Section
453 of the Code (although the failure of such payment to so qualify as an
installment sale shall not be a condition to the obligations of Archetype to
consummate the Merger and the other transactions set forth herein).
SECTION 5.11. Material Contracts. (a) The Bitstream SEC Reports list
each material contract (as such term is used in Regulation S-K promulgated by
the SEC) to which Bitstream or any
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of its Subsidiaries is a party (the "Bitstream Material Contracts").
(b) Each Bitstream Material Contract is in full force and
effect and is enforceable in all material respects against the parties thereto
in accordance with its terms, subject, as to enforceability, to bankruptcy,
insolvency, reorganization and other laws of general applicability relating to
or affecting creditors' rights and to general principles of equity, and no
condition or state of facts exists that, with notice or the passage of time, or
both, would constitute a material default by Bitstream or any of its
Subsidiaries or any third party under any Bitstream Material Contract, except
for such failure to be in full force or effect or enforceable or such defaults
which, individually or in the aggregate, would not have a Material Adverse
Effect on Bitstream.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF A-SUB
A-Sub hereby represents and warrants to Archetype as follows:
SECTION 6.1. Organization and Qualification. A-Sub is duly
organized, validly existing and in good standing under the laws of the State of
Delaware. A-Sub has the requisite corporate power and authority and any
necessary governmental authority, franchise, license or permit to own, operate
or lease the properties that it purports to own, operate or lease and to carry
on its business as it is now being conducted, and is duly qualified as a foreign
corporation to do business, and is in good standing, in each jurisdiction where
the character of its properties owned, operated or leased or the nature of its
activities makes such qualification necessary, except for such failure which,
when taken together with all other such failures, would not reasonably be
expected to have a Material Adverse Effect on A-Sub.
SECTION 6.2. Capitalization. The authorized capital stock of A-Sub
consists of (a) 1,000 shares of Common Stock, par value $.01 per share, ("A-Sub
Common Stock") of which 1,000 shares are outstanding. There are no outstanding
A-Sub Equity Rights. For purposes of this Agreement, "A-Sub Equity Rights" shall
mean subscriptions, options, warrants, calls, commitments, agreements,
conversion rights or other rights of any character (contingent or otherwise) to
purchase or otherwise acquire from A-Sub at any time, or upon the happening of
any stated event, any shares of the capital stock of A-Sub.
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(b) All of the issued and outstanding shares of A-Sub Common
Stock are validly issued, fully paid and nonassessable.
SECTION 6.3. Authority Relative to this Agreement. A-Sub has the
necessary corporate power and authority to enter into this Agreement and,
subject to obtaining any necessary stockholder approval of the Merger, to carry
out its obligations hereunder. The execution and delivery of this Agreement by
A-Sub and the consummation by A-Sub of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of A-Sub,
subject to the approval of the Merger by A-Sub's Stockholder required by
Delaware Law. This Agreement has been duly executed and delivered by A-Sub and,
assuming the due authorization, execution and delivery thereof by the other
Parties, constitutes a legal, valid and binding obligation of A-Sub, enforceable
against it in accordance with its terms, subject, as to enforceability, to
bankruptcy, insolvency, reorganization and other laws of general applicability
relating to or affecting creditors' rights and to general principles of equity.
SECTION 6.4. No Conflict; Required Filings and Consents. (a) Except
as described in subsection (b) below, the execution and delivery of this
Agreement by A-Sub do not, and, subject to the obtaining of the A-Sub
Stockholder Approval (as defined below), the performance of this Agreement by
A-Sub will not, (i) violate or conflict with the Certificate of Incorporation or
Bylaws of A-Sub, (ii) conflict with or violate any law, regulation, court order,
judgment or decree applicable to A-Sub or by which any of their respective
property is bound or affected, or (iii) result in any breach of or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination or cancellation of,
or result in the creation of a lien or encumbrance on any of the properties or
assets of A-Sub pursuant to, result in the loss of any material benefit under,
or require the consent of any other party to, any contract, instrument, permit,
license or franchise to which A-Sub is a party or by which A-Sub or any of its
property is bound or affected.
(b) Except as for applicable requirements, if any, of the 1933 Act,
the Exchange Act, filing and recordation of appropriate merger or other
documents as required by Delaware Law and any filings required pursuant to any
state securities or "blue sky" laws or the rules of Nasdaq, A-Sub is
not-required to submit any notice, report or other filing with, or obtain any
consent or approval of, any governmental authority, domestic or foreign, in
connection with the execution, delivery or performance of this Agreement, the
failure to obtain, make or give which would have, in the aggregate, a Material
Adverse Effect on the Surviving Corporation.
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SECTION 6.5. Board Action; Vote Required: Applicability of Section
203. The Board of Directors of A-Sub has unanimously determined that the
transactions contemplated by this Agreement are in the best interests of A-Sub
and Bitstream, as the sole stockholder of A-Sub, has approved this Agreement
(the "A-Sub Stockholder Approval"), the Merger and the transactions contemplated
hereby. The approval of the Merger by Bitstream, as sole stockholder of A-Sub,
is the only vote required of holders of any class of or series of the capital
stock of A-Sub to approve this Agreement, the Merger and the other transactions
contemplated hereby.
SECTION 6.6. Brokers. No broker, finder or investment banker is
entitled to any brokerage, finder's, investment banking or other fee or
commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of A-Sub.
ARTICLE VII
COVENANTS OF ARCHETYPE
SECTION 7.1. Conduct or Business in the Ordinary Course. Archetype
covenants and agrees that between the date of this Agreement and the Effective
Time, unless Bitstream shall otherwise consent in writing, the business of
Archetype shall be conducted only in, and Archetype shall not take any action
except in, the ordinary course of business and in a manner consistent with past
practice; and Archetype will use its best efforts to preserve substantially
intact its business organization, to keep available the services of those of its
present officers, employees and consultants who are integral to the operation of
its businesses as presently conducted and contemplated to be conducted and to
preserve their present relationships with significant customers and suppliers
and with other persons with whom they have significant business relations. By
way of amplification and not limitation, except as expressly contemplated by
this Agreement, Archetype agrees that it will not, without the prior consent of
Bitstream, between the date of this Agreement and the Effective Time:
(i) directly or indirectly, issue, sell,
pledge, dispose of, encumber, authorize, or propose the issuance, sale, pledge,
disposition, encumbrance or authorization of any shares of capital stock of any
class, or any options, warrants, convertible securities or other rights of any
kind to acquire any shares of capital stock of, or any other ownership interest
in, Archetype, except for (A) the issuance of shares of Archetype Common Stock
upon the due exercise of Archetype Options outstanding on the date hereof in
accordance with their present terms, and (B) the issuance of shares of Archetype
Common Stock to Mr. Paul Trevithick upon conversion of a convertible promissory
note
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in the original principal amount of $43,000 made by Archetype in favor of Mr.
Trevithick at a conversion rate of $1.42 per share (the "Trevithick Note").
(ii) amend or propose to amend its Certificate of
Incorporation or By-laws (or comparable governing instruments);
(iii) split, combine, subdivide or reclassify any
shares of its capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock or declare, pay or set aside any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect of
its capital stock, or redeem, purchase or otherwise acquire or offer to acquire
any shares of its own capital stock or any of its Subsidiaries or any other
securities thereof or any rights, warrants or options to acquire any such shares
or other securities;
(iv) (a) create, incur or assume any short- term
debt, long-term debt or obligations in respect of capital leases; (b) assume,
guarantee, endorse or otherwise become liable or responsible (whether directly,
indirectly, contingently or otherwise) for the obligations of any other person;
(c) make any capital expenditures or make any loans, advances or capital
contributions to, or investments in, any other person (other than customary
travel or business advances to employees, representatives, consultants,
directors or advisors made in the ordinary course of business consistent with
past practice and currently committed or budgeted capital expenditures not in
excess of $10,000); or (d) incur any material liability or obligation (absolute,
accrued, contingent or otherwise) other than in the ordinary and usual course of
business and consistent with past practice;
(v) sell, transfer, mortgage, or otherwise dispose
of, or encumber, or agree to sell, transfer, mortgage or otherwise dispose of or
encumber, any material assets or properties, real, personal or mixed, except for
the sale or licensing of Archetype Products in the ordinary course of business
consistent with past practice;
(vi) increase in any manner the compensation of any
of its officers or employees, make any arrangement for any new profit sharing,
pension or retirement plan, relating to employees or agents who render services
to Archetype, or effect a change in personnel policies or Archetype Benefit
Plans without the prior written consent of Bitstream; or
(vii) agree, commit or arrange to do any of the
foregoing.
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SECTION 7.2. Payment of all Employee Compensation. Archetype shall
pay or cause to be paid to Archetype's employees all compensation, including
salaries, commission, bonuses, deferred compensation, accrued vacation and sick
pay, severance and all benefits under Archetype Benefit Plans to which they are
entitled for any periods through the Closing Date.
SECTION 7.3. Notification of Certain Matters. Archetype shall give
prompt written notice to Bitstream specifying in reasonable detail: (i) any
notice of, or other communication relating to, a default or event which, with
notice or lapse of time or both, would become a default under any Archetype
Material Contract or any other agreement or instrument material to the business,
assets, property, condition (financial or otherwise) or the results of
operations of Archetype to which Archetype is a party or is subject; (ii) any
notice or other communication from any third party alleging that the consent of
such third party is or may be required in connection with the transactions
contemplated by this Agreement including the Merger; (iii) any material notice
or other communication from any Governmental Body; (iv) any event which has or
may have Material Adverse Effect on Archetype or the occurrence of an event
which, so far as reasonably can be foreseen at the time of its occurrence, would
result in such a Material Adverse Effect; (v) any claims, actions, proceedings
or investigations commenced or, to Archetype's knowledge, threatened, involving
or affecting Archetype or any of its property or assets, or, to Archetype's
knowledge, any employee, consultant, director or officer, in his or her capacity
as such, of Archetype which, if pending on the date hereof, would have been
required to have been disclosed in a Schedule pursuant to this Agreement or
which relates to the consummation of the Merger; and (vi) any event or action
which if known on the date hereof (a) would have caused a representation or
warranty set forth in Article IV to be untrue or incomplete or incorrect in any
material respect or (b) would have been required to have been disclosed on a
Schedule pursuant to this Agreement.
SECTION 7.4. Access and Information. Archetype will give Bitstream
and its authorized representatives (including in each case financial advisors,
accountants and legal counsel) at all reasonable times and on reasonable advance
notice access to all plants, offices, warehouses and other facilities and to all
contracts, agreements, commitments, books and records (including tax returns) of
it, will permit Bitstream to make such inspections as it may require and will
cause its officers promptly to furnish Bitstream with (a) such financial and
operating data and other information with respect to the business and properties
of Archetype as Bitstream may from time to time request, and (b) a copy of each
report, schedule and other document filed or received by Archetype pursuant to
the requirements of any Governmental Body.
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SECTION 7.5. Stockholder Approval. Within five (5) business days of
the date hereof, Archetype will take all steps necessary to duly call, give
notice of, and, no later than April 30, 1997, convene and hold a meeting of its
stockholders for the purpose of adopting and approving this Agreement and the
Merger and for such other purposes as may be necessary or desirable in
connection with effectuating the transactions contemplated hereby. The Board of
Directors of Archetype, subject to applicable law and the fiduciary duties of
loyalty and care, (i) will not change its recommendation to the stockholders of
Archetype that they adopt and approve this Agreement and the Merger and (ii)
will use its best efforts obtain any necessary approval by its stockholders of
the transactions contemplated hereby.
SECTION 7.6. Benefit Plans. Except as otherwise provided in this
Agreement, no award or grant under any of Archetype's stock option plans or any
other benefit plan or program, including, without limitation, the Archetype
Benefit Plans, shall be made without the consent of Bitstream; nor shall
Archetype take any action or permit any action to be taken to accelerate the
vesting of any options or other restricted securities previously granted
pursuant to any stock option plans or other benefit plan. Archetype shall not
make any amendment to any (i) stock option plan or options outstanding
thereunder, (ii) any other option or warrant agreement or other stock-based
benefit plan, (iii) any Archetype Benefit Plan, or (iv) the terms of any other
security convertible into or exchangeable for Archetype Common Stock without the
consent of Bitstream.
SECTION 7.7. Non Solicitation and Standstill. Archetype and its
directors, officers, employees and principal stockholders will not solicit
offers from, negotiate with, provide information to or enter into any agreement
or understanding with any other Person, in connection with or relating to the
acquisition of, merger with or investment in Archetype or of all or any part of
its capital stock or assets, directly or indirectly. If any unsolicited offer or
indication of interest is received, Archetype will promptly so inform Bitstream.
SECTION 7.8. Consents, Waivers, Authorizations. Archetype will use
its best efforts to obtain all consents, waivers, authorizations, orders and
approvals of and make all filings and registrations with, any governmental
commission, board or other regulatory body or any nongovernmental third party,
required for, or in connection with, the performance by it of this Agreement and
the consummation by it of the transactions contemplated hereby, or as may be
required in order not to accelerate, violate, breach or terminate any agreement
to which Archetype may be subject, including each of the Archetype Required
Consents. Archetype will not take any action which could reasonably be
anticipated to have the effect of delaying, impairing
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or impeding the receipt of any required approvals, regulatory or otherwise,
including any documents referred to in the preceding sentence, including the
Archetype Required Consents. Bitstream will be afforded the opportunity to
review and approve (such approval not to be unreasonably withheld or delayed)
each form of Required Consent prior to delivery to the party whose consent is
sought. Archetype shall consult with, and permit Bitstream to participate in,
all proceedings for or negotiations with respect to any transactions
contemplated by the Agreement obtaining the consent of any Person with respect
to the transactions, and Bitstream agrees it shall be reasonably available to do
so, as and when requested to do so.
SECTION 7.9. No Additional Archetype Material Agreements. Archetype
will not, after the date hereof, without prior written consent of Bitstream,
enter into any agreement which, if entered into prior to the date hereof, would
constitute an Archetype Material Agreement.
SECTION 7.10. Confidentiality. Except with respect to any specific
information publicly announced by Bitstream, Archetype shall keep strictly
confidential the existence and terms of this Agreement and all instruments and
documents executed in connection therewith or contemplated thereby (collectively
the "Transaction Documents"), the transactions contemplated hereby and thereby,
and the fact of discussions between the parties, except that Archetype may make
such disclosures to its partners, officers, directors, stockholders, employees,
professional advisors and lenders as shall be necessary to carry out the intent
of the Transaction Documents, or as required by applicable laws, rules and
regulations. Archetype shall not make any press release or other public
announcement with respect to the Transaction Documents and the transactions
contemplated thereby without the prior consent of Bitstream and the prior
approval by Bitstream of the content and language of such release or
announcement.
SECTION 7.11. Purchase of Certain Assets from Western Systems. Prior
to the Effective Time, Archetype shall enter into an agreement with Western
Systems (the "Purchase Agreement"), pursuant to which Archetype will purchase,
on or prior to the Closing Date, all of Western Systems right, title and
interest to the Products and Derivative Products and all of Western Systems
rights in respect thereof, each, as described in, and arising under the Restated
Software License Agreement dated as of June 2, 1995 (the "Restated Agreement")
among Archetype and Western Systems, free and clear of all liens, claims and
encumbrances, for an amount not to exceed $700,000 (the "Western Payment"),
provided, that any such Purchase Agreement shall provide that any and all of
Archetype's obligations under the Restated Purchase Agreement, the Demand Note
(as described in the Restated Agreement) and the amounts due, if any, on demand
notes due to
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Western Systems, as well as any other obligations of Archetype to Western, shall
be satisfied in full and cancelled upon Western Systems receipt of the Western
Payment. Bitstream agrees that the Purchase Agreement may provide that, subject
to the consummation of the Merger, Bitstream or the Surviving Corporation shall
pay to Western Systems, on the Closing Date and in the manner provided in the
Purchase Agreement, the Western Payment. The Western Payment shall not be
included in the calculation of the Threshold Amount pursuant to Section 2.3.
SECTION 7.12. Delivery of Financial Statements for Fiscal Year Ended
December 31, 1996. Within thirty (30) days after the execution of this
Agreement, Archetype shall deliver its audited balance sheet for the twelve (12)
months ended December 31, 1996, and the related statements of operations,
stockholders' equity and cashflows, including footnotes thereto, certified by
Arthur Andersen LLP, Archetype's independent certified public accountants, that
the foregoing have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
and fairly present the financial position of Archetype and the results of their
operations for the periods then ended, which financial statements shall not be
materially different form the unaudited financial statements with respect to the
period ended December 31, 1996 referred to in Section 4.11.
SECTION 7.13. Delivery of Quarterly Financial Statements. Within
forty-five (45) days after the end of each first quarter commencing after
December 31, 1996, Archetype shall deliver copies of its unaudited balance sheet
for the quarter then ended and the related statements of operations,
stockholders' equity and cashflows, including footnotes thereto.
SECTION 7.14. Incomplete Matters. Archetype recognizes that certain
Archetype Material Contracts and other documents, instruments or other materials
requested by Bitstream to be provided to it in connection with its due diligence
review have not been provided prior to the date hereof. Such agreements,
documents, instruments or other materials are listed or described on Schedule
7.14 hereto. Archetype agrees that, within five business days of the date
hereof, it will provide to Bitstream all of the agreements, documents or other
materials so specified on Schedule 7.14 and all of such shall be reasonably
satisfactory in form and substance to Bitstream.
ARTICLE VIII
COVENANTS OF BITSTREAM AND A-Sub
SECTION 8.1. Consents, Waivers, Authorizations. Each of Bitstream
and A-Sub will use its best efforts to obtain all consents, waivers,
authorizations, orders and approvals of and
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make all filings and registrations with, any governmental commission, board or
other regulatory body or any nongovernmental third party, required for, or in
connection with, the performance by it of this Agreement and the consummation by
it of the transactions contemplated hereby. Neither Bitstream nor A-Sub will
take any action which could reasonably be anticipated to have the effect of
delaying, impairing or impeding the receipt of any such required approvals,
regulatory or otherwise.
SECTION 8.2. Bitstream Stockholder Approval. In the event that the
NASDAQ Letter shall be withdrawn or modified to such extent that counsel to
Bitstream shall determine that approval of the Merger by the stockholders of
Bitstream might be deemed required under the NASDAQ Marketplace Rules, Bitstream
shall reasonably promptly thereafter prepare and file with the SEC the necessary
proxy material and schedule a meeting of Bitstream's stockholders, and the Board
of Directors of Bitstream, subject to applicable law and the fiduciary duties of
loyalty and care, will recommend that the Bitstream's stockholders approve this
Agreement and the transactions contemplated hereby.
ARTICLE IX
ADDITIONAL AGREEMENTS
SECTION 9.1. Additional Agreements. Each of the Parties will comply
in all material respects with all applicable laws and with all applicable rules
and regulations of any governmental authority in connection with its execution,
delivery and performance of this Agreement and the transactions contemplated
hereby. Each of the Parties agrees to use best efforts to obtain in a timely
manner all necessary waivers, consents and approvals and to effect all necessary
registrations and filings, and to use best efforts to take, or cause to be
taken, all other actions and to do, or cause to be done, all other things
necessary, proper or advisable to consummate and make effective as promptly as
practicable the transactions contemplated by this Agreement.
SECTION 9.2. Cooperation. Upon the terms and subject to the
conditions hereof, each of the Parties agrees to use its best efforts to take or
cause to be taken all actions and to do or cause to be done all things
necessary, proper or advisable to consummate the transactions contemplated by
this Agreement and shall use its best efforts to obtain all necessary waivers,
consents and approvals, and to effect all necessary filings under the 1933 Act,
the Exchange Act and under any applicable state securities or "blue sky" laws.
The Parties shall cooperate in responding to inquiries from, and making
presentations to, regulatory authorities.
SECTION 9.3. Registration Statement; Registration Rights. Bitstream
shall prepare, and file with the SEC within 90
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days after the Closing Date, and use its best efforts to cause to become
effective, a Registration Statement on Form S-8 covering certain previously
outstanding options and warrants to purchase Bitstream Common Stock as well as
those of the Bitstream Options eligible for inclusion therein. In addition, at
any time following November 15, 1997, the holders of at least twenty-five
percent (25%) of the Bitstream Common Stock issued in the Merger shall have the
right to request that Bitstream prepare and file a registration statement on
Form S-3 registering for resale from time to time in open market transactions
the Bitstream Common Stock issued in the Merger (the "Resale Registration
Statement"). Promptly following receipt of such request, Bitstream shall request
an opinion of its counsel (or, if requested by such holders of Bitstream Common
Stock, a private letter ruling from the Service) that the preparation and filing
by Bitstream of such Resale Registration Statement, and the sale of Bitstream
Common Stock by former Archetype Stockholders pursuant thereto, will not
adversely affect the qualification of the Merger as a reorganization under
Section 368(a)(2)(d) of the Code. If Bitstream receives a favorable opinion of
counsel (or, if applicable, a private letter ruling) to such effect it shall
promptly thereafter prepare, cause to be filed and use its best efforts to cause
to become effective such Resale Registration Statement. Such Resale Registration
Statement shall be available for sales of Bitstream Common Stock thereunder for
a period of 10 consecutive trading days each quarter following the public
announcement of Bitstream's earnings and financial results for the prior
quarter; provided, however, that any former Archetype Stockholder desiring to
include shares of Bitstream Common Stock in the Resale Registration Statement
shall, as a condition thereto, enter into an agreement with Bitstream prior to
the initial filing thereof containing such representations, warranties,
covenants and indemnities which are customarily given by selling stockholders in
the context of such a registration statement.
SECTION 9.4. Restrictions on Transfer. To further insure that the
Merger shall qualify as a reorganization under Section 368(a)(2)(d) of the Code,
no former Archetype Stockholder receiving shares of Bitstream Common Stock on
the Merger shall sell or otherwise dispose of any shares of Bitstream Common
Stock for a period of two years following the Closing Date and the Bitstream
Certificates shall bear a restrictive legend setting forth such transfer
restrictions and Bitstream shall receive, on the Closing Date, an instrument,
executed by each Archetype Stockholder who is an officer, director or owner of
5% or more of any class of Archetype capital stock to the effect that such
holder is aware of the aforesaid restrictions on transfer and has consented to
them (each, a "Lock-Up Agreement"); provided, however, such transfer
restrictions and Lock-Up Agreements may be waived by Bitstream in its sole
discretion, and shall terminate or be waived on receipt by Bitstream of an
opinion of its
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counsel, in form satisfactory to it (or, if requested by Bitstream or by the
holders of at least twenty-five percent (25%) of Bitstream Common Stock issued
in the Merger, a private letter ruling from the Service), that the termination
or waiver of transfer restrictions shall not adversely affect the qualification
of the Merger as a tax free reorganization under Section 368(a) of the Code. In
addition to the foregoing, each Bitstream Certificate shall bear a legend
setting forth certain restrictions on transfer on the shares of Bitstream Common
Stock represented thereby imposed under the 1933 Act. The foregoing restrictions
and the provisions of the Lock Up Agreement shall not apply to the sale of
Escrowed Shares and the exercise of Escrowed Options and sale of the shares of
common stock of Bitstream issued upon such exercise pursuant to the terms of the
Escrow Agreement.
SECTION 9.5. Post-Merger Bitstream Board of Directors and Officers.
Effective at or as soon as practicable the Closing, it is the intention of
Bitstream that it will obtain the necessary director and/or stockholder
approvals to increase the number of directors constituting the full Board of
Directors of Bitstream to five directors and to elect Mr. Charles Ying as a
member of the Board of Directors of Bitstream. Upon Mr. Ying becoming a director
of Bitstream, Mr. Ying will receive a warrant to purchase 40,000 shares of
Bitstream Common Stock substantially in the form of Exhibit 9.5(a) hereto,
exercisable at the price of $.90 per share and vesting ratably over a 3 year
period (i.e. 1/3 as of the first anniversary of the Closing, an additional 1/3
as of the second anniversary and the final 1/3 as of the third anniversary of
the Closing). Continued vesting will be subject to Mr. Ying's continuing to
serve as a member of the Board of Directors of Bitstream. Such warrant shall be
issued to Mr. Ying under Bitstream's 1996 Stock Plan.
SECTION 9.6. Reorganization. Each of the Parties will use its best
efforts to cause the Merger to qualify as a reorganization under Section
368(a)(2)(d) of the Code, which shall generally be tax-free to both Archetype
and its shareholders except with respect to any cash received in lieu of
fractional shares by Archetype Stockholders in connection with the Merger and
cash received by Archetype Stockholders who properly exercise their dissenters
rights.
SECTION 9.7. Letter Agreements. Simultaneously, with the execution
of this Agreement, Archetype shall cause each of Paul Trevithick and Susan
Robertson to deliver a letter agreement, providing for, among other things, the
execution by them of their respective Employment Agreements on the Closing Date.
SECTION 9.8. Conversion of Trevithick Note; Nonconversion of
Archetype. Prior to the Closing Date, Archetype shall use its best efforts to
cause Paul Trevithick to convert the
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Trevithick Note into shares of Archetype Common Stock, and shall, at all times
prior to the Closing Date, use its best efforts to cause the holders of the
Archetype Stockholder Debt to refrain from converting any portion of the
Archetype Stockholder Debt into shares of Archetype capital stock.
SECTION 9.9. Options to D'anne Hurd. On the Closing Date, the
Company shall grant D'anne Hurd a Non-Qualified Option to purchase 10,000 shares
of Bitstream Common Stock with an exercise price equal to the Closing Market
Price in exchange for a general release, in form and substance satisfactory to
Bitstream and its counsel (the "Hurd Release"), pursuant to which Ms. Hurd will
release Archetype, and any successor thereof, including Bitstream and A-Sub,
from all claims Ms. Hurd has against Archetype.
SECTION 9.10. Shares Issuable to Mills-Davis. On the Closing Date,
the Company shall issue a number of shares of Bitstream Common Stock (the "Mills
Shares") valued at $49,200 (valued at the Closing Market Price) to Mills-Davis
("Mills") as payment in full of all amounts owed by Archetype to Mills;
provided, that the $42,900 value of the Mills Shares shall be included as a
liability of Archetype when computing the Final Threshold Amount.
ARTICLE X
CONDITIONS TO THE MERGER
SECTION 10.1. Conditions to Obligations of Each Party to Effect the
Merger. The respective obligations of each Party to effect the Merger shall be
subject to the following conditions:
(a) Stockholder Approval. The Merger and this Agreement shall
have been approved and adopted by the requisite vote of the Archetype
Stockholders in accordance with applicable law and, if required pursuant to
Section 8.2, by the requisite vote of the Bitstream's stockholders in accordance
with applicable law;
(b) Legality. No federal, state or foreign statute, rule,
regulation, executive order, decree or injunction shall have been enacted,
entered, promulgated or enforced by any court or governmental authority which is
in effect and has the effect of making the Merger illegal or otherwise
prohibiting the consummation of the Merger;
(c) Blue Sky. All state securities or blue sky permits or
approvals required to carry out the transactions contemplated hereby shall
have been received;
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SECTION 10.2. Additional Conditions to Obligations of Archetype. The
obligations of Archetype to effect the Merger are also subject to the
fulfillment of the following conditions:
(a) Representations and Warranties. The representations and
warranties of Bitstream and A-Sub contained in this Agreement shall be true and
correct in all material respects on the date hereof and (except to the extent
such representations and warranties speak as of an earlier date) shall also be
true and correct in all material respects on and as of the Closing Date, with
the same force and effect as if made on and as of the Closing Date;
(b) Agreements, Conditions and Covenants. Bitstream and A-Sub
shall have performed or complied in all material respects with all agreements,
conditions and covenants required by this Agreement to be performed or complied
with by them on or before the Effective Time, including, without limitation, the
repayment of the Archetype Stockholder Debt; and
(c) Certificates. Archetype shall have received
a certificate of an executive officer of Bitstream to the effect
set forth in paragraphs (a) and (b) above.
SECTION 10.3. Additional Conditions to Obligations of Bitstream and
A-Sub. The obligations of Bitstream and A-Sub to effect the Merger are also
subject to the fulfillment of the following conditions:
(a) Representations and Warranties. The representations and
warranties of Archetype contained in this Agreement shall be true and correct in
all material respects on the date hereof and (except to the extent such
representations and warranties speak as of an earlier date) shall also be true
and correct in all material respects on and as of the Closing Date, with the
same force and effect as if made on and as of the Closing Date;
(b) Agreements, Conditions and Covenants. Archetype shall
have performed or complied in all material respects with all agreements,
conditions and covenants required by this Agreement to be performed or complied
with by them on or before the Effective Time;
(c) Certificates. Bitstream and A-Sub shall have received a
certificate of an executive officer of Archetype to the effect set forth in
paragraphs (a) and (b) above;
(d) No Material Adverse Changes. There shall have been no
material adverse change in the assets, properties (including intangible
properties), condition (financial or other-
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wise), operations, results of operations or business of Archetype since December
31, 1996.
(e) Bitstream Stock Price. The Closing Market Price shall not
be less than $2.00 (subject to appropriate upward or downward adjustment in the
event of a stock split, stock dividend or recapitalization or other similar
event applicable to shares of Common Stock prior to the Closing Date).
(f) Conversion of Trevithick Note. The Trevithick Note shall
have been converted into shares of Archetype Common Stock.
(g) Required Consents. All Required Consents or approvals of
any person to the Merger or the transactions contemplated hereby shall have
been obtained and be in full force and effect.
(h) Execution of Purchase Agreement. The Purchase Agreement
shall have been duly executed and the transactions contemplated thereby shall
have been consummated.
(i) Dissenters' Rights. Archetype shall not have received
pursuant to Section 262 of Delaware Law written notices of intent to demand
appraisal in connection with the Merger with respect to shares of Archetype
Common Stock and/or Archetype Preferred Stock representing more than 40,000
shares, other than notices which were withdrawn or are otherwise not in full
force or effect at the Effective Time;
ARTICLE XI
INDEMNIFICATION
SECTION 11.1. Indemnification. (a) Indemnification of Bitstream and
Surviving Corporation. Subject to the limitations specified in this Article XI,
from and after the Closing, each of Bitstream and the Surviving Corporation
shall be indemnified, defended and held harmless (solely out of the Closing
Escrow Fund) from, against and with respect to any and all loss, damage, claim,
obligation, liability, cost, expense, interest and penalty (including reasonable
attorneys' fees and costs and expenses incurred in investigating, preparing,
defending against or prosecuting any litigation, claim, proceeding or demand)
of any kind or character (a "Loss") borne by it arising out of or in connection
with any of the following:
(i) any breach of any of the representations and
warranties of Archetype contained in any Transaction Document;
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(ii) any failure by Archetype to perform or observe,
or to have performed or observed, any covenant, agreement or condition to be
performed or observed by it pursuant to any Transaction Document;
(iii) Any act or omission of Archetype occur- ring
prior to the Closing Date or any liability or obligation of Archetype relating
to the period prior to the Closing Date, except to the extent such is taken into
account in connection with the computation of the Threshold Amount; or
(iv) any claim made by any Archetype Stock- holder or
director or officer of Archetype, including, without limitation, any claim
against the Representative.
Section 11.2. Defense of Claims. Bitstream shall give prompt notice
to the Representative of any claim against it or the Surviving Corporation which
might give rise to a claim based upon any indemnity contained herein. The notice
shall set forth in reasonable detail the nature and basis of the claim and the
actual or estimated amount thereof. Bitstream shall have the right to defend
such action, suit or proceeding and shall keep the Representative reasonably
informed as to the status thereof; provided, that any cost and expense incurred
by Bitstream in connection therewith shall be deemed a Settlement Amount under
the Escrow Agreement and shall be paid out of the Indemnification Escrow Amount
in accordance with the terms of the Escrow Agreement. Upon prompt written notice
to Bitstream, which notice must be received by Bitstream no later than three
days after Bitstream notified the Representative of any action, the
Representative shall have the right, at the sole cost and expense of Archetype's
stockholders, to defend such action in the name and on behalf of Bitstream and
in connection with any such action, suit or proceeding. If the Representative so
elects to assume such defense, Bitstream shall have the right to participate, at
its own expense and with counsel of its choosing, in the defense of any claim
against which it is indemnified hereunder and it shall be kept fully informed
with respect thereto. Bitstream shall not make any settlement of any claim which
might give rise to liability under any indemnity contained herein without the
prior written consent of the Representative, which consent shall not be
unreasonably withheld.
Section 11.3. Source of Payment for Losses incurred by Bitstream;
Minimum Threshold. Bitstream and A-Sub acknowledge and agree that the Escrow
Amount shall constitute the sole source of payment in respect of any claim for
indemnification under this Article XI. In addition, no payment shall be made in
respect of any claim for indemnification until the aggregate amount of Losses
shall exceed $25,000, at which time the entire amount of Losses shall be payable
out of the Escrow Amount.
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ARTICLE XII
TERMINATION, AMENDMENT AND WAIVER
SECTION 12.1. Termination. This Agreement may be terminated at any
time before the Effective Time, in each case as authorized by the respective
Board of Directors of Archetype, Bitstream and A-Sub:
(a) By mutual written consent of each of Archetype and
Bitstream and A-Sub;
(b) By either Archetype, Bitstream or A-Sub if the Merger
shall not have been consummated on or before June 30, 1997, (the "Termination
Date"); provided, however, that the right to terminate this Agreement under this
Section 12.1(b) shall not be available to any Party whose failure to fulfill any
obligation under this Agreement has been the cause of, or resulted in, the
failure of the Effective Time to occur on or before the Termination Date;
(c) By either Archetype, Bitstream or A-Sub if a court of
competent jurisdiction or governmental, regulatory or administrative agency or
commission shall have issued an order, decree or ruling or taken any other
action (which order, decree or ruling the Parties shall use their commercially
reasonable efforts to lift), in each case permanently restraining, enjoining or
otherwise prohibiting the transactions contemplated by this Agreement, and such
order, decree, ruling or other action shall have become final and nonappealable;
(d) By either Archetype, Bitstream or A-Sub if any of the
required approvals of the stockholders of Archetype or Bitstream shall fail to
have been obtained at a duly held stockholders meeting of either of such
companies, including any adjournments thereof.
SECTION 12.2. Effect of Termination. In the event of termination of
this Agreement as provided in Section 12.1 hereof, and subject to the provisions
of Section 13.1 hereof, this Agreement shall forthwith become void and there
shall be no liability on the part of any of the Parties, nothing herein shall
relieve any Party from liability for a breach hereof.
SECTION 12.3. Amendment. This Agreement may be amended by the
Parties pursuant to a writing adopted by action taken by all of the Parties at
any time before the Effective Time; provided, however, that, after approval of
the Agreement by the Archetype Stockholders, no amendment may be made which
would (a) alter or change the amount or kinds of consideration to be received by
the Archetype Stockholders upon consummation of the Merger, (b) alter or change
any term of the Certificate of Incorporation of the Surviving Corporation
(except for the implementation
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of any amendments contemplated hereby), or (c) alter or change any of the terms
and conditions of this Agreement if such alteration or change would adversely
affect the holders of any class or series of securities of Archetype or
Bitstream. This Agreement may not be amended except by an instrument in writing
signed by the Parties.
SECTION 12.4. Waiver. At any time before the Effective Time, any
Party may (a) extend the time for the performance of any of the obligations or
other acts of the other Parties, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a Party to any such
extension or waiver shall be valid only as against such Party and only if set
forth in an instrument in writing signed by such Party.
SECTION 12.5. Representative.
(a) For purposes of this Agreement, the "Representative" shall
be Deepak Jain and, if she/he shall be unable to act as Representative, the
Archetype Stockholders of record (acting by majority vote of the common and
preferred stockholders, voting together as a single class) shall appoint a
successor Representative to act thereafter as the Representative. In the event
that the Representative determines in his or her sole discretion that the
interests of the Archetype Shareholders would be better served by the
appointment of a new Representative, he or she shall so notify the Archetype
Shareholders and shall be entitled to thereafter resign. If the Archetype
Stockholders shall fail to elect a successor Representative or do not notify
Bitstream and A-Sub of the name of such successor within ten days after being
requested to do so by Bitstream or A-Sub, then Bitstream shall elect a successor
Representative from among the Archetype Stockholders and such choice shall be
binding upon each of the Archetype Stockholders; provided, that any
Representative selected by Bitstream may be replaced by a vote of a majority of
the Archetype Stockholders.
(b) By adoption of the Agreement as required by Delaware law,
the Archetype Shareholders shall be deemed to have irrevocably constitute and
appointed the Representative, acting alone, as their true and lawful attorney to
perform on their behalf all acts which by the provisions of this Agreement are
to be performed by them; to execute and give and received on their behalf all
notices, requests, consents, amendments, demands and other communications to
them hereunder; to delegate to any persons in writing all or any of such
Representative's power and authority hereunder in the event of absence or
incapacity to act, and generally to act for each Archetype Shareholder and on
each such Archetype Shareholders' behalf in all matters connected with
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this Agreement as fully and with the same force and effect as each such
Archetype Shareholder might act in person. This power of attorney is deemed to
be coupled with an interest, shall be irrevocable and shall not be affected by
the subsequent death, disability or incompetence of any of the Archetype
Shareholders.
(c) The foregoing power of attorney in favor of the
Representative shall be set forth in the Noncompetition Agreement to be executed
by holders of Archetype Options (other than Disqualified Options) and the
Lock-Up Agreements to be executed by directors, officers and 5% stockholders of
Archetype.
(d) The Representative shall act, without compensation, on
behalf of the Archetype Shareholders, and the Representative shall not be liable
to any Archetype Shareholder for any action taken in good faith on behalf of
such Archetype Shareholder.
(e) Bitstream and A-Sub shall be entitled to rely on the full
power and authority of the Representative to act hereunder on behalf of the
Archetype Shareholders, and shall not be liable in any way whatsoever for any
action it takes or omits to take in reliance upon such power and authority.
ARTICLE XIII
GENERAL PROVISIONS
SECTION 13.1. Non-Survival of Representations, Warranties and
Agreements. The representations, warranties and agreements in this Agreement
shall not terminate at the Effective Time or upon the termination of this
Agreement pursuant to Section 11.1 hereof, as the case may be, but shall survive
the Effective Time for a period of one (1) year after the Effective Time.
SECTION 13.2. Notices. All notices and other communications given or
made pursuant hereto shall be in writing and shall be deemed to have been duly
given or made as of the date of receipt and shall be delivered personally or
mailed by registered or certified mail (postage prepaid, return receipt
requested), sent by overnight courier or sent by telecopy, to the Parties at the
following addresses or telecopy numbers (or at such other address or telecopy
number for a Party as shall be specified by like notice):
(a) if to Bitstream:
Bitstream Inc.
215 First Street
Cambridge, MA 02142
Attention: C. Raymond Boelig
Telecopy No.: 617-868-4732
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<PAGE> 65
with a copy to:
Rubin Baum Levin Constant & Friedman
30 Rockefeller Plaza
New York, New York 10112
Attention: Paul A. Gajer, Esq.
Telecopy No.: (212) 698-7825
(b) if to A-Sub:
Bitstream Inc.
215 First Street
Cambridge, MA 02142
Attention: C. Raymond Boelig
Telecopy No.: (617) 868-4732
with a copy to:
Rubin Baum Levin Constant & Friedman
30 Rockefeller Plaza
New York, New York 10112
Attention: Paul A. Gajer, Esq.
Telecopy No.: (212) 698-7825
(c) if to Archetype:
Archetype, Inc.
32 Third Avenue
Burlingham, MA 01803
Attention: Paul Trevithick
Telecopy No.: 617-229-1151
with a copy to:
Peabody & Arnold
50 Rowes Wharf
Boston, MA 02110
Attention: William E. Kelly, Esq.
Telecopy No.: (617) 951-2125
SECTION 13.3. Expenses. All costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall be
paid by the Party incurring such costs and expenses.
SECTION 13.4. Certain Definitions. For purposes of this Agreement,
the following terms shall have the following meanings:
(a) "1933 Act" means the Securities Act of 1933, as the same
may be amended from time to time.
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(b) "Affiliate" of a Person means a Person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, the first mentioned Person.
(c) "Exchange Act" means the Securities Exchange Act of 1934
as the same may be amended from time to time.
(d) "control" (including the terms "controlled by" and "under
common control with") means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of stock, as trustee or executor, by contract or
credit arrangement or otherwise.
(e) "GAAP" means generally accepted accounting principles.
(f) "Knowledge" of any Party shall mean the actual knowledge
of the executive officers of such Party.
(g) "Material Adverse Effect" means any change in or effect on
the business of the referenced corporation or any of its Subsidiaries that is or
will be materially adverse to the business, operations (including the income
statement), properties (including intangible properties), condition (financial
or otherwise), assets or liabilities of such referenced corporation and its
Subsidiaries taken as a whole.
(h) "Person" means an individual, corporation, partnership,
association, trust, unincorporated organization, entity or group (as defined in
the Exchange Act).
(i) "SEC" mean the United States Securities and Exchange
Commission.
SECTION 13.5. Headings. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 13.6. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
adverse to any Party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the Parties shall negotiate
in good faith to modify this Agreement so as to effect the original intent of
the
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Parties as closely as possible in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the maximum extent possible.
SECTION 13.7. Entire Agreement; No Third-Party Beneficiaries. This
Agreement constitutes the entire agreement and, except as expressly set forth
herein, supersedes any and all other prior agreements and undertakings, both
written and oral, among the Parties, or any of them, with respect to the subject
matter hereof and is not intended to confer upon any Person other than
Archetype, Bitstream and A-Sub and, after the Effective Time, their respective
stockholders, any rights or remedies hereunder.
SECTION 13.8. Assignment. This Agreement shall not be assigned by
operation of law or otherwise.
SECTION 13.9. Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Delaware applicable
to contracts executed in and to be performed entirely within that State, without
regard to the conflicts of laws provisions thereof.
SECTION 13.10. Counterparts. This Agreement may be executed in one
or more counterparts, and by the different Parties in separate counterparts,
each of which when executed shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
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IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed as of the date first written above by their respective officers
thereunto duly authorized.
BITSTREAM INC.
By: _______________________________
Name:
Title:
ARCHETYPE ACQUISITION CORPORATION
By: _______________________________
Name:
Title:
ARCHETYPE, INC.
By: _______________________________
Name:
Title:
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<PAGE> 1
BITSTREAM INC. - 1997 STOCK PLAN
<PAGE> 2
TABLE OF CONTENTS
PAGE
1. PURPOSE....................................................................1
2. ADMINISTRATION OF THE PLAN.................................................1
A. BOARD OR COMPENSATION COMMITTEE ADMINISTRATION....................1
B. COMMITTEE ACTION..................................................3
C. GRANT OF STOCK RIGHTS TO MEMBERS OF THE BOARD.....................3
D. COMPLIANCE WITH FEDERAL SECURITIES LAWS...........................3
3. ELIGIBLE EMPLOYEES AND OTHERS..............................................4
4. STOCK SUBJECT TO OPTIONS, AWARDS AND PURCHASES.............................4
5. GRANTING OF STOCK RIGHTS...................................................4
6. MINIMUM OPTION PRICE; ISO LIMITATIONS......................................5
A. PRICE FOR WARRANTS OR NON-QUALIFIED OPTIONS.......................5
B. PRICE FOR ISOS....................................................5
C. $100,000 ANNUAL LIMITATION FOR ISOS...............................5
D. DETERMINATION OF FAIR MARKET VALUE.........................................5
7. OPTION DURATION............................................................6
8. EXERCISE OF OPTION.........................................................6
A. FULL VESTING OR PARTIAL VESTING...................................6
B. FULL VESTING OF INSTALLMENTS......................................6
C. PARTIAL EXERCISE..................................................6
D. ACCELERATION OF VESTING...........................................6
E. EMPLOYEES OWNING GREATER THAN TEN PERCENT OF VOTING STOCK.........6
9. EMPLOYMENT.................................................................7
A. TERMINATION OF EMPLOYMENT.........................................7
B. LEAVES OF ABSENCE.................................................7
C. CHANGES OF EMPLOYMENT.............................................7
10. DEATH; DISABILITY..........................................................7
A. DEATH.............................................................7
B. DISABILITY........................................................8
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<PAGE> 3
Page
11. ASSIGNABILITY.............................................................8
12. TERMS AND CONDITIONS OF OPTIONS...........................................8
13. ADJUSTMENTS...............................................................8
A. STOCK DIVIDENDS AND STOCK SPLITS.................................8
B. CONSOLIDATIONS OR MERGERS........................................9
C. RECAPITALIZATION OR REORGANIZATION...............................9
D. MODIFICATION OF ISOS............................................10
E. DISSOLUTION OR LIQUIDATION......................................10
F. ISSUANCES OF SECURITIES.........................................10
G. FRACTIONAL SHARES...............................................10
H. ADJUSTMENTS.....................................................10
14. MEANS OF EXERCISING STOCK RIGHTS........................................ 10
15. TERM AND AMENDMENT OF PLAN.............................................. 11
16. CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS; CANCELLATION OF ISOS......12
17. APPLICATION OF FUNDS.....................................................12
18. GOVERNMENT REGULATION....................................................12
19. WITHHOLDING OF ADDITIONAL INCOME TAXES...................................12
20. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION...........................13
21. RESTRICTIONS ON EXERCISE OF OPTIONS AND ISSUANCE OF SHARES...............13
22. PURCHASE FOR INVESTMENT; RIGHTS OF HOLDER ON SUBSEQUENT REGISTRATION.....14
23. DUTIES OF THE COMPANY............................................ .......14
24. NOTICES. ................................................................14
25. GOVERNING LAW -- CONSTRUCTION............................................15
-ii-
<PAGE> 4
1997 STOCK PLAN
1. PURPOSE. This 1997 Stock Plan (the "Plan") is intended to provide
incentives to:
A. Directors, officers, employees and consultants of Bitstream Inc.
(the "Company"), its parent (if any) and any present or future subsidiaries
(collectively, "Related Corporations") by providing them with awards of
stock in the Company ("Awards"); and
B. Officers and other employees of the Company and Related
Corporations by providing them with options granted hereunder that qualify
as "incentive stock options" under Section 422(b) of the Internal Revenue
Code of 1986, as amended (the "Code") ("ISO" or "ISOs") substantially in
the form attached hereto as Exhibit 8A;
C. Directors, officers, employees and consultants of the Company and
Related Corporations by providing them with opportunities to purchase stock
in the Company pursuant to warrants granted hereunder which do not qualify
as ISOs ("Warrant" or "Warrants"), substantially in the form attached
hereto as Exhibit 8B;
D. Directors, officers, employees and consultants of the Company and
Related Corporations by providing them with opportunities to purchase stock
in the Company pursuant to Non-Qualified Options granted hereunder which do
not qualify as ISOs ("Non-Qualified Option" or "Non-Qualified Options"),
substantially in the form attached hereto as Exhibit 8C;
E. Directors, officers, employees and consultants of the Company and
Related Corporations by providing them with opportunities to make direct
purchases of stock in the Company ("Purchases").
ISOs, Warrants and Non-Qualified Options are referred to hereafter individually
as an "Option" and collectively as "Options". Options, Awards and authorizations
to make Purchases are referred to hereafter collectively as "Stock Rights". As
used herein, the terms "parent" and "subsidiary" mean "parent corporation" and
"subsidiary corporation", respectively, as those terms are defined in Section
424 of the Code.
2. ADMINISTRATION OF THE PLAN.
A. BOARD OR COMPENSATION COMMITTEE ADMINISTRATION. The Plan shall be
administered by the Board of Directors of the Company (the "Board"). The
Board may appoint a Compensation Committee of two or more of its members to
administer this Plan,
<PAGE> 5
Bitstream Inc.
1997 Stock Plan
as assisted by the officers of the Company. Subject to ratification of the
grant or authorization of each Stock Right by the Board (if so required by
applicable state law), and subject to the terms of the Plan, the Committee
shall have the authority to
(i) determine the employees of the Company and Related
Corporations (from among the class of employees eligible under
paragraph 3 to receive ISOs) to whom ISOs may be granted, and to
determine (from among the class of individuals and entities eligible
under paragraph 3 to receive Warrants, Non-Qualified Options and
Awards and to make Purchases) to whom Warrants, Non-Qualified Options,
Awards and authorizations to make Purchases may be granted;
(ii) determine the time or times at which Options or Awards may
be granted or Purchases made;
(iii) determine the option price of shares subject to each
Option, which price shall not be less than the minimum price specified
in paragraph 6, and the purchase price of shares subject to each
Purchase;
(iv) determine whether each Option granted shall be an ISO, a
Warrant or Non-Qualified Option;
(v) determine (subject to paragraph 7) the time or times when
each Option shall become exercisable and the duration of the exercise
period;
(vi) determine whether restrictions such as repurchase options
are to be imposed on shares subject to Options, Awards and Purchases
and the nature of such restrictions, if any, and
(vii) interpret the Plan and prescribe and rescind rules and
regulations relating to it.
If the Committee determines to issue a Warrant or Non-Qualified Option, it shall
take whatever actions it deems necessary, under Section 422 of the Code and the
regulations promulgated thereunder, to ensure that such Option is not treated as
an ISO. The interpretation and construction by the Committee of any provisions
of the Plan or of any Stock Right granted under it shall be final unless
otherwise determined by the Board. The Committee may from time to time adopt
such rules and regulations for carrying out the Plan as it may deem best. No
member of the Board or the Committee shall be held liable for any action or
determination made in good faith with respect to the Plan or any Stock Right
granted under it.
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Bitstream Inc.
1997 Stock Plan
B. COMMITTEE ACTION. The Committee may select one of its
members as its chairman and shall hold meetings at such time and places
as it may determine. Acts by a majority of the Committee, or acts
reduced to or approved in writing by a majority of the members of the
Committee, shall be the valid acts of the Committee. All references in
this Plan to the Committee shall mean the Board if no Committee has
been appointed. From time to time the Board may increase the size of
the Committee and appoint additional members thereof, remove members
(with or without cause) and appoint new members in substitution
therefor, fill vacancies however caused, or remove all members of the
Com mittee and thereafter directly administer the Plan.
C. GRANT OF STOCK RIGHTS TO MEMBERS OF THE BOARD.
Notwithstanding the provisions of paragraph 2(A), no Stock Right shall
be granted to any person who serves as a member of the Board at the
time of the proposed grant, unless such grant has been approved by a
majority vote of the disinterested members of the Board and otherwise
approved in accordance with the following paragraph 2(D), if
applicable. [For the purposes of the Plan, a member of the Board shall
be deemed to be "disinterested" only if such person qualifies as a
"disinterested person" within the meaning of paragraph (c)(2) of Rule
16(b)-3 promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as such term the Board is interpreted
from time to time.]
All grants of Stock Rights to members of the Board shall in
all other respects be made in accordance with those provisions of this
Plan that apply to other eligible persons. Members of the Board who are
either (i) eligible for Stock Rights pursuant to the Plan or (ii) have
been granted Stock Rights may vote on any matters affecting the
administration of the Plan or the grant of any Stock Rights pursuant to
the Plan, except that no such member shall act upon the granting to
himself of Stock Rights, but any such member may be counted in
determining the existence of a quorum at any meeting of the Board
during which action is taken with respect to the granting to him of
Stock Rights. The signatures of all the Board members on a unanimous
consent of directors in lieu of a meeting may constitute the majority
vote required by the foregoing paragraph.
D. COMPLIANCE WITH FEDERAL SECURITIES LAWS. The following
shall apply to any grant of Stock Rights to a member of the Board in
the event the Company registers any class of any equity security
pursuant to the Exchange Act, if such grant occurs at any time from the
effective date of such registration until six months after the
termination of such registration: A majority vote of the other members
of the Board must approve such grant. If a majority of the Board is
eligible to participate in the Plan or in any other stock option or
other stock plan of the Company or any of its affiliates, or has been
so eligible at any time within the preceding year, any grant of Stock
Rights to a member of the Board must be made by, or only in accordance
with the recommendation of, the Compensation
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Bitstream Inc.
1997 Stock Plan
Committee or a committee consisting of three or more persons, who may
but need not be directors or employees of the Company, appointed by the
Board but having full authority to act in the matter, none of whom is
eligible to participate in this Plan or any other stock option or other
stock plan of the Company or any of its affiliates, or has been
eligible at any time within the preceding year. The requirements
imposed by the preceding sentence shall also apply with respect to
grants to officers who are not also directors. Once appointed, such
committee shall continue to serve until otherwise directed by the
Board.
3. ELIGIBLE EMPLOYEES AND OTHERS. ISOs may be granted to any employee of
the Company or any Related Corporation. Those officers and directors of the
Company or any Related Corporation who are not employees may not be granted ISOs
under the Plan. Warrants, Non-Qualified Options, Awards and authorizations to
make Purchases may be granted to any director (whether or not an employee),
officer, employee or consultant of the Company or any Related Corporation. The
Compensation Committee may take into consideration a recipient's individual
circumstances in determining whether to grant an ISO, a Warrant, Non-Qualified
Option or an authorization to make a Purchase. Granting of any Stock Right to
any individual or entity shall neither entitle that individual or entity to, nor
disqualify him from, participation in any other grant of Stock Rights.
4. STOCK SUBJECT TO OPTIONS, AWARDS AND PURCHASES. The stock subject to
Options, Awards and Purchases shall be authorized but unissued shares of Class A
Common Stock of the Company, par value $.01 per share (the "Common Stock"), or
shares of Common Stock reacquired by the Company in any manner. The aggregate
number of shares which may be issued pursuant to the Plan equals 1,000,000
provided, that, in the event the acquisition by the Company of Archetype, Inc.
("Archetype"), whether by purchase of stock and/or assets and/or the merger of
Archetype with or into the Company or any subsidiary thereof, is not consummated
on or prior to September 30, 1997, the aggregate number of shares which may be
issued pursuant to the Plan shall be reduced to 500,000, subject to adjustment
from time to time by (i) a vote of stockholders or (ii) otherwise pursuant to
paragraph 13. Any such shares may be issued as ISOs, Warrants, Non-Qualified
Options or Awards, or to persons or entities making Purchases, so long as the
number of shares so issued does not exceed such number, as adjusted or amended.
If any Option granted under the Plan shall expire or terminate for any reason
without having been exercised in full or shall cease for any reason to be
exercisable in whole or in part, or if the Company shall reacquire any unvested
shares issued pursuant to Awards or Purchases, the unpurchased shares subject to
such Options and any unvested shares so reacquired by the Company shall again be
available for grants of Stock Rights under the Plan.
5. GRANTING OF STOCK RIGHTS. Stock Rights may be granted under the Plan
any time after March 10, 1997, and prior to March 9, 2007. The date of grant of
a Stock Right under the Plan will be the date specified by the Compensation
Committee at the time it grants the Stock
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Bitstream Inc.
1997 Stock Plan
Right; provided, however, that such date shall not fall prior to the date on
which the Compensation Committee acts to approve the grant. The Compensation
Committee shall enjoy the right, with the consent of the optionee, to convert an
ISO granted under the Plan to a Non-Qualified Option pursuant to paragraph 16.
6. MINIMUM OPTION PRICE; ISO LIMITATIONS.
A. PRICE FOR WARRANTS OR NON-QUALIFIED OPTIONS. The exercise price per
share specified in the agreement relating to each Warrant or Non-Qualified
Option granted under the Plan shall be as determined by the Board or the
Compensation Committee.
B. PRICE FOR ISOS. The exercise price per share specified in the
agreement relating to each ISO granted under the Plan shall not be less
than the fair market value per share of Common Stock on the date of such
grant. In the case of an ISO to be granted to an employee owning stock
possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or any Related Corporation, the
price per share specified in the agreement relating to such ISO shall not
be less than one hundred ten percent (110%) of the fair market value per
share of Common Stock on the date of grant.
C. $100,000 ANNUAL LIMITATION FOR ISOS. Each eligible employee may be
granted ISOs only to the extent that, in the aggregate under this Plan and
all incentive stock option plans of the Company and any Related
Corporation, such ISOs do not become exercisable for the first time by such
employee during any calendar year in a manner which would entitle the
employee to purchase more than $100,000 in fair market value (determined at
the time the ISOs were granted) of Common Stock in that year. Any options
granted to an employee in excess of such amount will be granted as Warrants
or Non-Qualified Options.
D. DETERMINATION OF FAIR MARKET VALUE. If, at the time an Option is
granted under the Plan, the Company's Common Stock is publicly traded,
"fair market value" shall be determined as of the last business day for
which the prices or quotes discussed in this sentence are available prior
to the date such Option is granted and shall mean
(i) the average (on that date) of the high and low prices of the
Common Stock on the principal national securities exchange on which
the Common stock is traded, if the Common Stock is then traded on a
national securities exchange; or
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Bitstream Inc.
1997 Stock Plan
(ii) the last reported sale price (on that date) of the Common
Stock on the NASDAQ National Market List, if the Common Stock is not
then traded on a national securities exchange; or
(iii) the average of the closing bid and asked prices last quoted
(on that date) by an established quotation service for
over-the-counter securities, if the Common Stock is not reported on
the NASDAQ National Market List.
However, if the Common Stock is not publicly traded at the time that an
Option is granted under the Plan, "fair market value" shall be deemed the
fair value of the Common Stock as determined by the Board or Compensation
Committee after taking into consideration all factors which it deems
appropriate, including, without limitation, recent sale and offer prices of
the Common Stock in private transactions negotiated at arm's length.
7. OPTION DURATION. Subject to earlier termination as provided in
paragraphs 9 and 10 or cancellation as provided in paragraph 16, each Option
shall expire on the date specified by the Board or Compensation Committee, but
not more than ten (10) years from the date of grant.
8. EXERCISE OF OPTION. Subject to the provisions of paragraphs 9 through
12, each Option granted under the Plan shall be exercisable as follows:
A. FULL VESTING OR PARTIAL VESTING. The Option shall either be fully
exercisable on the date of grant or shall become exercisable thereafter in
such installments as the Board or Compensation Committee may specify.
B. FULL VESTING OF INSTALLMENTS. Once an installment becomes
exercisable it shall remain exercisable until expiration or termination of
the Option, unless otherwise specified by the Board or Compensation
Committee.
C. PARTIAL EXERCISE. Each Option or installment may be exercised at
any time or from time to time, in whole or in part, for up to the total
number of shares with respect to which it is then exercisable.
D. ACCELERATION OF VESTING. The Board or Compensation Committee shall
have the right to accelerate the date of exercise of any installment of any
Option; provided that the Board or Compensation Committee shall not
accelerate the exercise date of any installment of any Option granted to
any employee as an ISO (and not previously converted into a Non-Qualified
Option pursuant to paragraph 16) if such acceleration would violate the
annual vesting limitation contained in Section 422(d) of the Code, as
described in paragraph 6(C).
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Bitstream Inc.
1997 Stock Plan
E. EMPLOYEES OWNING GREATER THAN TEN PERCENT OF VOTING STOCK. Any ISO
granted to an employee owning stock possessing more than ten percent (10%)
of the total combined voting power of all classes of stock of the Company
or any Related Corporation shall not be exercisable after the expiration of
five years from the date of grant.
9. EMPLOYMENT.
A. TERMINATION OF EMPLOYMENT. IF an ISO optionee ceases to be employed
by the Company and all Related Corporations other than by reason of death
or disability as defined in paragraph 10, no further installments of his
ISOs shall become exercisable, and his ISOs shall terminate after the
passage of ninety (90) days from the date of termination of his employment,
but in no event later than on their specified expiration dates, except to
the extent that such ISOs (or unexercised installments thereof) have been
converted into Non-Qualified Options pursuant to paragraph 16.
B. LEAVES OF ABSENCE. Employment shall be considered as continuing
uninterrupted during any bona fide leave of absence (such as those
attributable to illness, military obligations or governmental service)
provided that the period of such leave does not exceed ninety (90) days or,
if longer, any period during which such optionee's right to reemployment is
guaranteed by statute. A bona fide leave of absence with the written
approval of the Board or Compensation Committee shall not be considered an
interruption of employment under the Plan, provided that such written
approval contractually obligates the Company or any Related Corporation to
continue the employment of the optionee after the approved period of
absence.
C. CHANGES OF EMPLOYMENT. ISOs granted under the Plan shall not be
affected by any change of employment within or among the Company and
Related Corporations, so long as the optionee continues to be an employee
of the Company or any Related Corporation. Nothing in the Plan shall be
deemed to give any grantee of any Stock Right the right to be retained in
employment or other service by the Company or any Related Corporation for
any period of time.
10. DEATH; DISABILITY.
A. DEATH. If an ISO optionee ceases to be employed by the Company and
all Related Corporations by reason of his death, any ISO of his may be
exercised, to the extent of the number of shares with respect to which he
could have exercised it on the date of his death, by his estate, personal
representative or beneficiary who has acquired the ISO by will or by the
laws of descent and distribution, at any time prior to the earlier of the
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Bitstream Inc.
1997 Stock Plan
specified expiration date of the ISO or ninety (90) days from the date of
the optionee's death.
B. DISABILITY. If an ISO optionee ceases to be employed by the Company
and all Related Corporations by reason of his disability, he shall have the
right to exercise any ISO held by him on the date of termination of
employment, to the extent of the number of shares with respect to which he
could have exercised it on that date, at any time prior to the earlier of
the specified expiration date of the ISO or 180 days from the date of the
termination of the optionee's employment. For the purposes of the Plan, the
term "disability" shall mean "permanent and total disability" as defined in
Section 22(e)(3) of the Code.
11. ASSIGNABILITY. No Option shall be assignable or transferable by the
grantee except by will or by the laws of descent and distribution, and during
the lifetime of the grantee each Option shall be exercisable only by him.
12. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
instruments (which need not be identical) in such forms as the Board or
Compensation Committee may from time to time approve. Such instruments shall
conform to the terms and conditions set forth in paragraphs 6 through 11 hereof
and may contain such other provisions as the Board or Compensation Committee
deems advisable which are not inconsistent with the Plan, including restrictions
applicable to shares of Common Stock issuable upon exercise of Options. In
granting any Warrant or Non-Qualified Option, the Board or Compensation
Committee may specify that such Warrant or Non-Qualified Option shall fall
subject to the restrictions set forth herein with respect to ISOs, or to such
other termination and cancellation provisions as the Board or Compensation
Committee may determine. The Board or Compensation Committee may from time to
time confer authority and responsibility on one or more of its own members and/
or one or more officers of the Company to execute and deliver such instruments.
The proper officers of the Company are authorized and directed to take any and
all action necessary or advisable from time to time to carry out the terms of
such instruments.
13. ADJUSTMENTS. Upon the occurrence of any of the following events, an
optionee's rights with respect to Options granted to him hereunder shall be
adjusted as hereinafter provided, unless otherwise specifically provided in the
written agreement between the optionee and the Company relating to such Option:
A. STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common Stock
shall be subdivided or combined into a greater or smaller number of shares
or if the Company shall issue any shares of Common Stock as a stock
dividend on its outstanding Common Stock, then, in each such case, the
optionee, on exercise of such Option at any time after
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Bitstream Inc.
1997 Stock Plan
the issuance or effective date of such dividend or split, as the case may
be, shall receive, in lieu of the Common Stock issuable upon such exercise
prior to such issuance or effective date, the stock and other securities
and property (including cash) to which such holder would have been entitled
upon such issuance or effective date, if such holder had exercised Options
granted hereunder immediately prior thereto.
B. CONSOLIDATIONS OR MERGERS. If the Company is to be consolidated
with or acquired by another entity in a merger, sale of all or
substantially all of the Company's assets or otherwise (an "Acquisition"),
unless the Board shall otherwise determine by resolution adopted at least
ten (10) days prior to the closing of the Acquisition, all outstanding
Stock Rights shall become fully vested and exercisable as of the closing of
the Acquisition. In addition, the Board or Compensation Committee or the
board of directors of any entity assuming the obligations of the Company
hereunder (the "Successor Board") may take one or more of the following
actions:
(i) make appropriate provision for the continuation of such Stock
Rights by substituting on an equitable basis for the shares then
subject to such Stock Rights the consideration payable with respect to
the outstanding shares of Common Stock in connection with the
Acquisition; or
(ii) make appropriate provision for the continuation of such
Stock Rights by substituting on an equitable basis for the shares then
subject to such Stock Rights any equity securities of the successor
corporation; or
(iii) upon written notice to the holders of the Stock Rights,
provide that all Stock Rights must be exercised, to the extent then
exercisable, within a specified number of days of the date of such
notice, at the end of which period the Stock Rights shall terminate;
or
(iv) terminate all Stock Rights in exchange for a cash payment
equal to the excess of the fair market value of the shares subject to
such Stock Rights (to the extent then exercisable) over the exercise
price thereof; or
(v) terminate all Stock Rights in exchange for the right to
participate in any stock option or other employee benefit plan of any
successor corporation.
C. RECAPITALIZATION OR REORGANIZATION. In the event of a
recapitalization or reorganization of the Company (other than a transaction
described in paragraph B above) pursuant to which securities of the Company
or of another corporation are issued with respect to the outstanding shares
of Common Stock, upon exercising a Stock Right, the
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Bitstream Inc.
1997 Stock Plan
holder thereof shall be entitled to receive for the purchase price paid
upon such exercise the securities he would have received if he had
exercised his Stock Right prior to such recapitalization or reorganization.
D. MODIFICATION OF ISOS. Notwithstanding the foregoing, any
adjustments made pursuant to subparagraphs A, B or C with respect to
ISOs shall be made only after the Board or Compensation Committee,
after consulting with counsel for the Company, determines whether such
adjustments would constitute a "modification" of such ISOs (as that
term is defined in Section 424 of the Code) or would cause any adverse
tax con sequences for the holders of such ISOs. If the Board or
Compensation Committee determines that such adjustments made with
respect to ISOs would constitute a modification of such ISOs, it may
refrain from making such adjustments.
E. DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, each Option will terminate
immediately prior to the consummation of such proposed action or at
such other time and subject to such other conditions as shall be
determined by the Board or Compensation Committee.
F. ISSUANCES OF SECURITIES. Except as expressly provided herein,
no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect
to, the number or price of shares subject to Options. No adjustments
shall be made for dividends paid in cash or in property other than
securities of the Company.
G. FRACTIONAL SHARES. No fractional shares shall be issued under
the Plan and the optionee shall receive from the Company cash in lieu
of such fractional shares.
H. ADJUSTMENTS. Upon the happening of any of the foregoing events
described in subparagraphs A, B or C above, the class and aggregate
number of shares set forth in paragraph 4 hereof that are subject to
Stock Rights which previously have been or subsequently may be granted
under the Plan shall also be appropriately adjusted to reflect the
events described in such subparagraphs. The Board or Compensation
Committee or a Successor Board shall determine the specific
adjustments to be made under this paragraph 13 and, subject to
paragraph 2, its determination shall be conclusive. If any person or
entity owning restricted Common Stock obtained by exercise of a Stock
Right made hereunder receives shares or securities or cash in
connection with a corporate transaction described in subparagraphs A,
B or C above as a result of owning such restricted Common Stock, such
shares or securities or cash shall be subject to all of the conditions
and restrictions applicable to the restricted Common Stock with
respect to which such shares
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Bitstream Inc.
1997 Stock Plan
or securities or cash were issued, unless otherwise determined by the
Board or Compensation Committee or a Successor Board.
14. MEANS OF EXERCISING STOCK RIGHTs. A Stock Right (or any part or
installment thereof) shall be exercised by giving written notice to the Company
at its principal office address. Such notice shall identify the Stock Right
being exercised and specify the number of shares as to which such Stock Right is
being exercised, accompanied by full payment of the purchase price therefor
either
A. In United States dollars in cash or by check;
B. At the discretion of the Board or Compensation Committee, through
delivery of shares of Common Stock having a fair market value equal as of
the date of the exercise to the cash exercise price of the Stock Right;
C. At the discretion of the Board or Compensation Committee, by
delivery of the grantee's personal recourse note bearing interest payable
not less than annually at no less than 100% of the lowest applicable
Federal rate, as defined in Section 1274(d) of the Code, or
D. At the discretion of the Board or Compensation Committee, by any
combination of A, B or C above.
If the Board or Compensation Committee permits payment by means of the methods
set forth in clauses B, C, or D of the preceding sentence, such permission shall
be expressed in writing at the time of the grant of the ISO in question. The
holder of a Stock Right shall not have the rights of a shareholder with respect
to the shares covered until the date of issuance of a stock certificate to him
for such shares. Except as expressly provided above in paragraph 13 with respect
to changes in capitalization and stock dividends, no adjustment shall be made
for dividends or similar rights for which the record date falls prior to the
date such stock certificate is issued.
15. TERM AND AMENDMENT OF PLAN. This Plan was adopted by the Board on
March 10, 1997, subject (with respect to the validation of ISOs granted under
the Plan only) to approval of the Plan by the stockholders of the Company at a
subsequent Meeting of Stockholders or, in lieu thereof, by unanimous written
consent. If the stockholders do not provide their approval by February 28, 1998,
any grants of ISOs under the Plan made prior to that date will be rescinded. The
Plan shall expire on March 9, 2007 (except as to Options outstanding on that
date). Subject to the provisions of paragraph 5 above, Stock Rights may be
granted under the Plan prior to the date of stockholder approval of the Plan.
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Bitstream Inc.
1997 Stock Plan
The Board may at any time terminate the Plan or make such modification or
amendment thereof as it deems advisable; provided, however, (i) the Board may
not, without the approval of the stockholders of the Company obtained in the
manner stated in this Section 15, increase the maximum number of shares for
which Options may be granted or change the designation of the class of persons
eligible to receive Options under the Plan, and (ii) any such modification or
amendment of the Plan shall be approved by a majority of the stockholders of the
Company to the extent that such stockholder approval is necessary to comply with
applicable provisions of the Code, rules promulgated pursuant to Section 16 of
the Exchange Act, applicable state law, or applicable NASD or exchange listing
requirements. Termination or any modification or amendment of the Plan shall
not, without the consent of an optionee, affect his or her rights under an
Option theretofore granted to him or her.
16. CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS; CANCELLATION OF ISOS.
The Board or Compensation Committee, at the written request of any optionee, may
in its discretion take such actions as may be necessary to convert such
optionee's ISOs (or any installments or portions of installments thereof) that
have not been exercised on the date of conversion into Non-Qualified Options at
any time prior to the expiration of such ISOs, regardless of whether the
optionee serves as an employee of the Company or a Related Corporation at the
time of such conversion. Such actions may include, but not be limited to,
extending the exercise period or reducing the exercise price of the appropriate
installments of such Options. At the time of such conversion, the Board or
Compensation Committee (with the consent of the Optionee) may impose such
conditions on the exercise of the resulting Non-Qualified Options as the Board
or Compensation Committee in its discretion may determine, provided that such
conditions shall not be inconsistent with this Plan. Nothing in the Plan shall
be deemed to give any optionee the right to have such optionee's ISOs converted
into Non-Qualified Options, and no such conversion shall occur until and unless
the Board or Compensation Committee takes appropriate action. The Board or
Compensation Committee, with the consent of the optionee, also may cancel any
portion of any ISO that has not been exercised at the time of such cancellation.
17. APPLICATION OF FUNDS. the proceeds received by the Company from the
sale of shares pursuant to Options granted and Purchases authorized under the
Plan shall be used for general corporate purposes.
18. GOVERNMENT REGULATION. The Company's obligation to sell and deliver
shares of the Common Stock under this Plan shall fall subject to the approval of
any governmental authority required in connection with the authorization,
issuance or sale of such shares.
19. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a Warrant
or Non-Qualified Option, the grant of an Award, the making of a Purchase of
Common Stock for less than its fair market value, the making of a Disqualifying
Disposition (as defined in paragraph
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Bitstream Inc.
1997 Stock Plan
20) or the vesting of restricted Common Stock acquired on the exercise of a
Stock Right hereunder, the Company, in accordance with Section 3402(a) of the
Code, may require the optionee, Award recipient or purchaser to pay additional
withholding taxes in respect of the amount that is considered compensation
includible in such person's gross income. The Board or Compensation Committee in
its discretion may condition
A. the exercise of an option,
B. the grant of an Award,
C. the making of a Purchase of Common Stock for less than its fair
market value, or
D. the vesting of restricted Common Stock acquired by exercising a
Stock Right,
on the grantee's payment of such additional withholding taxes.
20. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. Each employee who
receives an ISO must agree to notify the Company in writing immediately after
the employee makes a Disqualifying Disposition of any Common Stock acquired
pursuant to the exercise of an ISO. A Disqualifying Disposition means any
disposition (including any sale) of such Common Stock before the later of (a)
two years after the date the employee was granted the ISO, or (b) one year after
the date the employee acquired Common Stock by exercising the ISO. If the
employee has died before he sells such stock, these holding period requirements
do not apply and no Disqualifying Disposition can occur thereafter. If an
optionee is a person subject to Section 16(b) of the Exchange Act, delivery of
any withholding and employment taxes due may be deferred until ten (10) days
after the date any income on the disposition is recognized under Section 83 of
the Code. The Company may cause a legend to be affixed to certificates
representing shares of Common Stock issued upon exercise of incentive stock
options to ensure that the Board receives notice of a Disqualifying Disposition.
21. RESTRICTIONS ON EXERCISE OF OPTIONS AND ISSUANCE OF SHARES.
A. Notwithstanding anything in this Plan to the contrary, an Option
cannot be exercised, and the Company may delay the issuance of shares
covered by the exercise of an Option and the delivery of a certificate for
such shares, until one of the following conditions shall be satisfied:
13
<PAGE> 17
(i) the shares with respect to which such Option has been
exercised are at the time of the issuance of such shares effectively
registered or qualified under applicable Federal and state securities
acts now in force or as hereafter amended; or
(ii) counsel for the Company shall have given an opinion, which
opinion shall not be unreasonably conditioned or withheld, that the
issuance of such shares is exempt from registration and qualification
under applicable Federal and state securities acts now in force or as
hereafter amended.
B. The Company shall be under no obligation to qualify shares or to
cause a registration statement or a post-effective amendment to any
registration statement to be prepared for the purpose of covering the
issuance of shares in respect of which any Option may be exercised or to
cause the issuance of such shares to be exempt from registration and
qualification under applicable Federal and state securities acts now in
force or as hereinafter amended, except as otherwise agreed to by the
Company in writing in its sole discretion.
22. PURCHASE FOR INVESTMENT; RIGHTS OF HOLDER ON SUBSEQUENT REGISTRATION.
Unless and until the shares to be issued upon exercise of an Option granted
under the Plan have been effectively registered under the Securities Act of
1933, as amended (the "1933 Act"), as now in force or hereafter amended, the
Company shall be under no obligation to issue any shares covered by any Option
unless the person who exercises such Option, in whole or in part, shall give a
written representation and undertaking to the Company which is satisfactory in
form and scope to counsel for the Company and upon which, in the opinion of such
counsel, the Company may reasonably rely, that he or she is acquiring the shares
issued pursuant to such exercise of the Option for his or her own account as an
investment and not with a view to, or for sale in connection with, the
distribution of any such shares, and that he or she will make no transfer of the
same except in compliance with any rules and regulations in force at the time of
such transfer under the 1933 Act, or any other applicable law, and that if
shares are issued without such registration, a legend to this effect may be
endorsed upon the securities so issued.
In the event that the Company shall, nevertheless, deem it necessary or
desirable to register under the 1933 Act or other applicable statutes any shares
with respect to which an Option shall have been exercised, or to qualify any
such shares for exemption from the 1933 Act or other applicable statutes, then
the Company may take such action and may require from each optionee such
information in writing for use in any registration statement, supplementary
registration statement, prospectus, preliminary prospectus, offering circular or
any other document that is reasonably necessary for such purpose and may require
reasonable indemnity to the Company and its officers and directors from such
holder against all losses, claims, damages and liabilities arising from such use
of the information so furnished and caused by any untrue
14
<PAGE> 18
Bitstream Inc.
1997 Stock Plan
statement of any material fact therein or caused by the omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances under which they were
made.
23. DUTIES OF THE COMPANY. The Company shall at all times keep available
for issuance or delivery such number of shares of Common Stock as will be
sufficient to satisfy the requirements of the Plan.
24. NOTICES. Any communication or notice required or permitted to be given
under the Plan shall be in writing, and mailed by registered or certified mail
or delivered by hand, if to the Company, to the attention of the President at
the Company's principal place of business; and, if to an optionee, to his or her
address as it appears on the records of the Company.
25. GOVERNING LAW -- CONSTRUCTION. The validity and construction of the
Plan and the instruments evidencing Stock Rights shall be governed by the laws
of Delaware or the laws of any jurisdiction in which the Company or its
successors in interest may be organized from time to time. In construing this
Plan, the singular shall include the plural and the masculine gender shall
include the feminine and neuter, unless the context otherwise requires.
15
<PAGE> 19
Exhibit 8A
BITSTREAM INC.
INCENTIVE STOCK OPTION AGREEMENT
Under 1997 Stock Plan
IN CONSIDERATION FOR the waiver of any and all pre-existing options to
acquire its stock, Bitstream Inc., a Delaware business corporation (the
"Company"), hereby grants this ____ day of 199_ (the "Option Date") to
<first name> <last name> ("Employee"), an option to purchase a maximum of <no.
shs> shares (the "Option Shares") of Class A Common Stock, $.01 par value (the
"Common Stock"), at the price of $.__ per share, on the following terms and
conditions:
1. GRANT UNDER 1997 STOCK PLAN. This Option is granted pursuant to and is
governed by the Company's 1997 Stock Plan (the "Plan") and, unless the context
otherwise requires, terms used herein shall have the same meaning as in the
Plan. The Plan under which this option is granted was approved by the Company's
directors on May 1, 1997 and by the stockholders on _______________________.
2. EXTENT OF OPTION IF EMPLOYMENT CONTINUES. On the following dates, the
Optionee may exercise this Option for the number of Option Shares set opposite
the applicable date so long as Employee continues to be employed by the Company
or any Related Corporation:
<TABLE>
<CAPTION>
<S> <C>
Less than one year from [ISSUE DATE] -0- Option Shares
One year or more, but less than two years % of the total Option Shares
from [ISSUE DATE]
Two years or more, but less than three years an additional __% of the total Option Shares
from [ISSUE DATE]
Three years or more, but less than four from an additional __% of the total Option Shares
[ISSUE DATE]
Four years or more, but less than five from an additional __% of the total Option Shares
[ISSUE DATE]
Five years or more, but less than six years an additional __% of the total Option Shares
from [ISSUE DATE]
</TABLE>
-1-
<PAGE> 20
The foregoing rights shall cumulate while the Optionee continues in the
employment of the Company, or any Related Corporation, and may be exercised up
to and including the date that falls ten (10) years from the Option Date. All of
the foregoing rights are subject to Sections 3 and 4, as appropriate, if
Employee ceases to be employed by the Company or a Related Corporation, or dies
or becomes disabled while in the employ of the Company or a Related Corporation.
3. TERMINATION OF EMPLOYMENT. If Employee ceases to be employed by the
Company or an Related Corporation, other than by reason of death or disability
as defined in Section 4, no further installments of this Option shall become
exercisable and this Option shall terminate ninety (90) days after the date the
Employment ceases, but in no event later than the scheduled expiration date. In
such an event, Employee may only exercise this Option for the number of Option
Shares which have vested and become exercisable prior to the date of
termination, and this Option may only be exercised with respect to such number
of Option Shares which have become exercisable prior to termination at any time
prior to the end of the period of ninety (90) days after the date the employment
ceases, but not later than the scheduled expiration date.
4. DEATH; DISABILITY. If Employee is a natural person who dies while in the
employ of the Company or any Related Corporation, this Option may be exercised,
to the extent of the number of option Shares with respect to which Employee
could have exercised it on the date of his death, by his estate, personal
representative or beneficiary to whom this option has been assigned pursuant to
Section 9, at any time within ninety (90) days after the date of death, but no
later than the scheduled expiration date. If Employee is terminated by reason of
his disability (as defined in the Plan), this option may be exercised, to the
extent of the number of option Shares with respect to which Employee could have
exercised it on the date the employment was terminated, at any time within one
hundred and eighty (180) days after the date of such termination, but not later
than the scheduled expiration date. At the expiration of such one hundred and
eighty (180) day period or the scheduled expiration date, whichever is the
earlier, this Option shall terminate and the only rights hereunder shall be
those as to which the Option was properly exercised before such termination.
5. PARTIAL EXERCISE. Exercise of this Option up to the extent above stated
may be made in part at any time and from time to time within the above limits,
except that this Option may not be exercised for a fraction of a share unless
such exercise is with respect to the final installment of Option Shares subject
to this Option and a fractional share (or cash in lieu thereof) must be issued
to permit Employee to exercise completely such final installment. Any fractional
share with respect to which an installment of this Option cannot be exercised
because of the limitation contained in the preceding sentence shall remain
subject to this Option and available for later purchase by Employee in
accordance with the terms hereof.
6. PAYMENT OF PRICE. The Option price shall be in United States dollars and
may be paid as follows:
-2-
<PAGE> 21
a) in cash or by check, or any combination of the foregoing, equal in
amount to the Option price; or
b) in the discretion of the Board, in cash, by check, by delivery of
shares of the Company's Common Stock having a fair market value (as
determined by the Board) equal as of the date of exercise to the Option
price, or by any combination of the forego ing, equal in amount to the
Option price.
7. AGREEMENT TO PURCHASE FOR INVESTMENT. By acceptance of this Option,
Employee agrees that a purchase of Option Shares under this Option will not be
made with a view to their distribution, as that term is used in the 1933 Act
unless in the opinion of counsel to the Company such distribution is in
compliance with or exempt from the registration and prospectus requirements of
the 1933 Act and applicable state securities laws, and Employee agrees to sign a
certificate to such effect at the time of exercising this Option and agrees that
the certificate for the Option Shares so purchased may be inscribed with a
legend to ensure compliance with the 1933 Act and applicable state securities
laws.
In the event that for any reason the Option Shares to be issued upon exercise of
the Option shall not be effectively registered under the 1933 Act, upon any date
on which the Option is exercised in whole or in part, the person exercising the
Option shall give a written representation to the Company in the form reasonably
required by the Company and the Company shall place an "investment legend,"
so-called, upon any certificate for the Shares issued by reason of such
exercise.
8. METHOD OF EXERCISING OPTION. Subject to the terms and conditions of this
Agreement, this Option may be exercised by written notice to the Company, at the
principal executive office of the Company, or to such transfer agent as the
Company shall designate. Such notice shall state the election to exercise this
Option and the number of Option Shares in respect of which it is being exercised
and shall be signed by the person or persons so exercising this Option. Such
notice shall be accompanied by payment of the full purchase price of such Option
Shares, and the Company shall deliver a certificate or certificates representing
such Option Shares as soon as practicable after the notice shall be received.
The certificate or certificates for the Option Shares as to which this Option
shall have been so exercised shall be registered in the name of the person or
persons so exercising this Option (or, if this Option shall be exercised by
Employee and if Employee shall so request in the notice exercising this Option,
shall be registered in the name of Employee and another person jointly, with
right of survivorship) and shall be delivered as provided above to or upon the
written order of the person or persons exercising this Option. In the event this
Option shall be exercised, pursuant to Section 4 hereof, by any person or
persons other than Employee, such notice shall be accompanied by appropriate
proof of the right of such person or persons to exercise this Option. All Option
Shares that shall be purchased upon the exercise of this Option as provided
herein shall be fully paid and nonassessable.
-3-
<PAGE> 22
9. OPTION NOT TRANSFERABLE. This Option is not transferable or assignable
except by will or by the laws of descent and distribution. During the Optionee's
lifetime only Employee can exercise this Option.
10. NO OBLIGATION TO EXERCISE OPTION. The grant and acceptance of this
Option imposes no obligation on Employee to exercise it.
11. NO OBLIGATION TO CONTINUE EMPLOYMENT. Neither the Plan nor this Option
shall obligate the Company or any Related Corporations in any manner to continue
Employee in his employment.
12. NO RIGHTS AS STOCKHOLDER UNTIL EXERCISE. Employee shall enjoy no rights
as a stockholder with respect to Option Shares subject to this Agreement until a
stock certificate therefor has been issued to Employee and it is fully paid for
by Employee. Except as expressly provided in the Plan for changes in the
capitalization of the Company, no adjustment shall be made for dividends or
similar rights for which the record date precedes the date upon which such stock
certificate is issued.
13. CAPITAL CHANGES AND BUSINESS SUCCESSIONS. This Option is intended to
encourage Employee to work for the best interests of the Company and its
stockholders. To protect Employee's interest in this Option, the provisions of
the Plan that preserve options at full value in a number of contingencies are
hereby made applicable hereunder and are incorporated herein by reference. Thus,
this Option and the Option price shall be equitably adjusted in the event of any
stock dividend, stock split, recapitalization or other change in the capital
structure of the Company. In lieu of issuing fractional shares upon exercise
thereof, this Option (and the corresponding Option Shares) shall be rounded
upward or downward to the nearest whole share (rounding upward for all amounts
equal to or in excess of .51). In particular, without affecting the generality
of the foregoing, it is understood that for the purposes of Sections 2 through 4
hereof, inclusive, maintaining or being in the employ of the Company includes
maintaining or being in the employ of a Related Corporation.
14. DISQUALIFYING DISPOSITION. Employee agrees to notify the Company in
writing immediately after Employee makes a Disqualifying Disposition of any
Option Shares received pursuant to the exercise of this Option. A Disqualifying
Disposition is any disposition (including any sale) of such Option Shares before
the later of (a) two years after the date Employee was granted this Option, or
(b) one year after the date Employee acquired Option Shares by exercising this
Option. If Employee has died before such Option Shares are sold, these holding
period requirements do not apply and no Disqualifying Disposition can occur
thereafter. Employee also agrees to provide the Company with any information
which it shall request concerning any such disposition. Employee acknowledges
that he or she will forfeit the favorable income tax treatment otherwise
available with respect to the exercise of an incentive so if he or she makes a
Disqualifying Disposition of the Option Shares received on exercise of the
Option.
-4-
<PAGE> 23
15. WITHHOLDING TAXES. If the Company determines in its discretion that it
is obligated to withhold tax with respect to a Disqualifying Disposition (as
defined in the preceding Section) of Option Shares received by the Employee on
exercise of this Option, Employee hereby agrees that the Company may withhold
from Employee's wages or other remuneration the appropriate amount of federal,
state and local withholding taxes attributable to such Disqualifying
Disposition. If any portion of this Option is treated as a non-qualified option,
Employee hereby agrees that the Company may withhold from Employee's wages the
appropriate amount of federal, state and local withholding taxes attributable to
Employee's exercise of such nonqualified option. At the Company's discretion,
the amount required to be withheld may be withheld in cash from such wages or
other remuneration, or in Common Stock (with respect to compensation income
attributable to the exercise of this Option) from the Common Stock otherwise
deliverable to Employee on exercise of this Option; provided however, no such
withholding may be made by an optionee who is an "officer" or "director" within
the meaning of the Exchange Act, except pursuant to a standing election to so
withhold Common Stock purchased upon exercise of an Option, such election to be
made in the form set forth in Exhibit 1 hereto and to be made not less than six
months prior to the date of such exercise. Such election may be revoked by the
optionee only upon six months prior written notice to the Company. Employee
further agrees that, if the Company does not withhold an amount from Employee's
wages or other remuneration sufficient to satisfy the Company's withholding
obligation, Employee will reimburse the Company on de mand, in cash, for the
amount underwithheld.
16. NO EXERCISE OF OPTION IF EMPLOYMENT TERMINATED FOR MISCONDUCT. If the
employment of Employee is terminated for "Misconduct," this Option shall
terminate on the date of such termination and this Option shall thereupon not be
exercisable to any extent whatsoever. "Misconduct" is conduct, as determined by
the Board, involving one or more of the following: (i) disloyalty, gross
negligence, dishonesty or breach of fiduciary duty to the Company or a Related
Corporation; or (ii) the commission of an act of embezzlement, fraud or
deliberate disregard of the rules or policies of the Company or a Related
Corporation which results in loss, damage or injury to the Company or a Related
Corporation; or (iii) the unauthorized disclosure of any trade secret or
confidential information of the Company or a Related Corporation; or (iv) the
commission of an act which constitutes unfair competition with the Company or a
Related Corporation or which induces any customer of the Company or a Related
Corporation to break a contract with the Company or a Related Corporation; or
(v) the substantial and continuing failure of Employee to render services to the
Company or a Related Corporation in accordance with his assigned duties. For
purposes of this Section, termination of employment shall be deemed to occur
when Employee receives notice that his employment is terminated.
17. GOVERNING LAW. This Agreement shall be governed by and interpreted in
accordance with the internal laws of the State of Delaware.
-5-
<PAGE> 24
IN WITNESS WHEREOF the Company and Employee have caused this instrument to
be executed, and Employee whose signature appears below acknowledges receipt of
a copy of the Plan and acceptance of an original copy of this Agreement.
Signature of Employee: BITSTREAM INC.:
_______________________________ By: _________________________
<first name> <last name> Name:
Title: President
-6-
<PAGE> 25
EXHIBIT 1
TO STOCK OPTION AGREEMENT
Gentlemen:
The undersigned Optionee hereby elects and agrees that, whenever the
undersigned exercises a stock option (including any options which now or may
hereafter be granted), the Company shall withhold from the shares issuable upon
such exercise, such number of shares as is equal in value to the federal and
state withholding taxes due upon such exercise. The undersigned further
acknowledges and agrees that this election may not be revoked without six months
prior written notice to the Company.
Optionee
______________________________________
Signature
Name:_________________________________
(Printed)
______________________________________
Social Security
-7-
<PAGE> 26
Exhibit 8B
NEITHER THIS WARRANT NOR THE SHARES OF CLASS A COMMON STOCK ISSUABLE
UPON EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"). THIS WARRANT HAS BEEN ACQUIRED FOR
INVESTMENT AND CANNOT BE SOLD, TRANSFERRED, OR HYPOTHECATED UNLESS AND
UNTIL A REGISTRATION STATEMENT UNDER THE ACT IS IN EFFECT AS TO SUCH
TRANSFER OR UNLESS AND UNTIL THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL
ACCEPTABLE IN FORM AND SUBSTANCE TO THE COMPANY THAT SUCH REGISTRATION IS
NOT REQUIRED IN ORDER FOR SUCH TRANSFER TO COMPLY WITH THE ACT.
Right to Purchase <<NO.SHS.>> Shares of Class A Common Stock
Warrant No. BB-<<WNT. NO.>>
BITSTREAM INC.
CLASS A COMMON STOCK PURCHASE WARRANT
BITSTREAM INC., a Delaware corporation (the "Company"), hereby certifies
that, for value received, <<first names>> <<last name>> (the "Purchaser"), or
assigns, is entitled, subject to the terms set forth below, to purchase from the
Company at any time or from time to time on or after [ISSUE DATE (MUST BE AFTER
________)] and before 5:00 p.m., Delaware time, [ISSUE DATE + 10 YEARS], UP TO
<<NO.SHS.>> fully paid and nonassessable shares of the Company's Class A Common
Stock at the purchase price per share of [PRICE] (such purchase price per share
as adjusted from time to time as herein provided is referred to herein as the
"Exercise Price"). The number and character of such shares of Class A Common
Stock and the Exercise Price are subject to adjustment as provided herein.
As used herein the following terms, unless the context otherwise requires,
have the following respective meanings:
(a) "Company" includes any corporation which shall succeed to or
assume the obligations of the Company hereunder.
(b) "Class A Common Stock" shall mean the Company's Class A Common
Stock, par value $.01 per share.
<PAGE> 27
(c) "Person" shall mean any individual, corporation, partnership,
trust or unincorporated organization, or any government or any agency or
political subdivision thereof.
1. Exercise of Warrant. This Warrant may be exercised in full or in part by
the holder hereof by surrender of this Warrant, with the form of subscription
attached as Annex A hereto duly executed by such holder, to the Company at its
principal office, accompanied by payment, in cash or by certified or official
bank check payable to the order of the Company, of the purchase price of the
shares of Class A Common Stock to be purchased hereunder. For any partial
exercise, the holder shall designate in the subscription the number of shares of
Class A Common Stock (without giving effect to any adjustment therein) that it
wishes to purchase. On any such partial exercise, the Company at its expense
will forthwith issue and deliver to or upon the order of the holder hereof a new
Warrant or warrants of like tenor in the name of the holder hereof or as such
holder (upon payment by such holder of any applicable transfer taxes) may
request, calling in the aggregate on the face or faces thereof for the number of
shares of Class A Common Stock equal (without giving effect to any adjustment
therein) to the number of such shares called for on the face of this Warrant
minus the number of such shares designated by the holder in the subscription.
2. Delivery of Stock Certificates, etc. on Exercise. As soon as practicable
after the exercise of this Warrant in full or in part, and in any event within
ten (10) days thereafter, the Company at its expense (including the payment by
it of any applicable issue taxes) will cause to be issued in the name of and
delivered to the holder hereof, or as such holder (upon payment by such holder
of any applicable transfer taxes) may direct, a certificate or certificates for
the number of fully paid and nonassessable shares (including fractional shares)
of Class A Common Stock to which such holder shall be entitled upon such
exercise, together with any other stock or securities or property to which such
holder is entitled.
3. Stock Splits, Subdivisions and Combinations. Appropriate adjustment
shall be made in the number of shares of Class A Common Stock subject to this
Warrant and in the number, kind and purchase price for shares covered by this
Warrant, to the extent it is outstanding, to give effect to any stock splits,
subdivisions, combinations, and other similar changes in the capital structure
of the Company after the issuance of this Warrant.
4. Adjustment for Reorganization, Consolidation, Merger, etc. In case the
Company after the date hereof shall (a) effect a capital reorganization, (b)
consolidate with or merge with or into any other person, or (c) transfer all or
substantially all of its assets to any other person under any plan or
arrangement contemplating the dissolution of the Company within twenty-four (24)
months from the date of such transfer, then, in each such case, the holder of
this Warrant, on exercise hereof at any time after the consummation of such
reorganization, consolidation or merger or the effective date of such
dissolution, as the case may be, shall receive, in lieu of the Class A Common
Stock issuable upon such exercise prior to such consummation or such effective
date, the stock and other securities and property (including cash) to which such
holder would have been entitled upon such consummation or in connection with
such dissolution, as the case may be,
-2-
<PAGE> 28
if such holder had exercised this Warrant immediately prior thereto. Upon any
reorganization, consolidation, merger or transfer (and any dissolution following
any transfer) referred to in this Section 4, this Warrant shall continue in full
force and effect and the terms hereof shall be applicable to the shares of stock
and other securities and property receivable on the exercise hereof after the
consummation of such reorganization, consolidation or merger or the effective
date of dissolution following any such transfer, as the case may be, and shall
be binding upon the issuer of any such stock or other securities or property,
including, in the case of any such transfer, the person acquiring all or
substantially all of the properties or assets of the Company.
5. Notice of Record Date, etc. In the event of
(a) any taking by the Company of a record of the holders of any class
of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any
class or any other securities or property, or to receive any other right,
(b) any capital reorganization of the Company or any reclassification
or recapitalization of the capital stock of the Company after the date
hereof, or any transfer of all or substantially all the assets of the
Company to or consolidation or merger of the Company with or into any other
person,
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company, or
(d) any proposed issue or grant by the Company of any shares of stock
of any class or any other securities, or any right or option to subscribe
for, purchase or otherwise acquire any shares of stock of any class or any
other securities,
then, and in each such event, the Company will mail to the holder hereof a
notice specifying (i) the date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and stating the amount and
character of such dividend, distribution or right, or (ii) the date on which any
such reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding-up is to take place,
and the time, of any is to be fixed, as of which the holders of record of Class
A Common Stock or other securities shall be entitled to exchange their shares of
Class A Common Stock or other securities for securities or other property
deliverable on such reorganization, reclassification, recapitalization,
transfer, consolidation, merger, dissolution, liquidation or winding-up, or
(iii) the amount and character of any stock or other securities, or rights or
options with respect thereto, proposed to be issued or granted, the date of such
proposed issue or grant and the persons or class of persons to whom such
proposed issue or grant is to be offered or made. Such notice shall be mailed at
least ten (10) days prior to the date therein specified.
-3-
<PAGE> 29
6. Reservation of Shares, etc. The Company will at all times reserve and
keep available out of its authorized capital stock, solely for the purpose of
issuance upon exercise of this Warrant as herein provided, such number of shares
of Class A Common Stock as shall then be issuable upon exercise of this Warrant
in full. The Company covenants that all shares of Class A Common Stock that
shall be issuable upon exercise of this warrant shall be duly and validly issued
and fully paid and nonassessable and free from all taxes, liens and charges with
respect to the issue thereof.
7. Exchange of Warrants. On surrender for exchange of any Warrant, properly
endorsed, to the Company, the Company at its expense will issue and deliver to
or on the order of the holder thereof a new Warrant of like tenor, in the name
of such holder or as such holder (on payment by such holder of any applicable
transfer taxes) may direct, calling in the aggregate on the face or faces
thereof for the number of shares of Class A Common Stock called for on the face
or faces of the Warrant or Warrants so surrendered.
8. Replacement of Warrants. On receipt of evidence reasonably satisfactory
to the Company of the loss, theft, destruction or mutilation of any Warrant and,
in the case of any such loss, theft or destruction of any Warrant, on delivery
of an indemnity agreement reasonably satisfactory in form and amount to the
Company or, in the case of any such mutilation, on surrender and cancellation of
such warrant, the Company at its expense will execute and deliver, in lieu
thereof, a new Warrant of like tenor.
9. Miscellaneous. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Warrant is being delivered in the State of Delaware and shall be
construed and enforced in accordance with and governed by its laws. The headings
in this Warrant are for purposes of reference only, and shall not limit or
otherwise affect any of the terms hereof.
-4-
<PAGE> 30
11. Expiration. The right to exercise this Warrant shall expire at 5:00
p.m., Delaware time, [ISSUE DATE + 10 YEARS].
Dated: [ISSUE DATE]
(Corporate Seal) BITSTREAM INC.
By: ______________________________
Name: C. Ray Boelig
Title: President
-5-
<PAGE> 31
BITSTREAM INC. Class A Common Stock Purchase Warrant [Issue Date]
To <<first name>> <<last name>> Annex A
FORM OF SUBSCRIPTION
(To be signed only upon exercise of Warrant)
TO BITSTREAM INC.
The undersigned holder of the within Warrant hereby irrevocably elects to
exercise the purchase right represented by such Warrant for, and to purchase
thereunder, _______ shares of the Class A Common Stock of Bitstream Inc., and
herewith makes payment of $______________ therefor, and requests that the
certificates for such shares be issued in the name of, and delivered to
__________________ whose address is ________________________.
_______________________________________
(Signature must conform in all respects
to name of holder as specified on the face
of the Warrant or Assignment of Warrant)
Dated: _______________________ ______________________________
(Address)
Signed in the presence of:
______________________________
-6-
<PAGE> 32
BITSTREAM INC. Class A Common Stock Purchase Warrant [Issue Date]
To <<first name>> <<last name>> Annex B
FORM OF ASSIGNMENT
(To be signed only upon transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and
transfers unto ____________________ the right represented by the within Warrant
to purchase __________ shares of Class A Common Stock of Bitstream Inc. to which
the within Warrant relates, and appoints ____________________ Attorney to
transfer such right on the books of Bitstream Inc.
with full power of substitution in the premises.
______________________________________________
(Signature must conform in all respects
to name of holder as specified on the face
of the Warrant or Assignment of Warrant)
Dated: ____________________ ______________________________
(Address)
Signed in the presence of:
_________________________________________
-7-
<PAGE> 33
Exhibit 8C
BITSTREAM INC.
Non-Qualified Stock Option Agreement
Under 1996 Stock Plan
Bitstream Inc., a Delaware business corporation (the "Company"), hereby
grants this ___ DAY OF 199_ (the "Option Date") to <<FIRST NAME>> <<LAST NAME>>
("Optionee"), an option to purchase a maximum of <<NO. SHS>> shares (the "Option
Shares") of Class A Common Stock, $.01 par value (the "Common Stock"), at the
price of $____ per share, on the following terms and conditions:
1. GRANT UNDER 1997 STOCK PLAN. This Option is granted pursuant to and is
governed by Company's 1997 Stock Plan approved by Company's directors on March
10, 1997 (the "Plan"). Unless the context requires otherwise, terms used herein
shall have the same meaning as in the Plan.
2. GRANT AS NON-QUALIFIED OPTION, OTHER OPTIONS. This Option is intended to
be a Non-Qualified Option (rather than an incentive stock option), and the Board
intends to take appropriate action, if necessary, to achieve this result. This
Option is in addition to any other options heretofore or hereafter granted to
Optionee by Company, but a duplicate original of this instrument shall not
affect the grant of another option.
3. EXTENT OF OPTION IF BUSINESS RELATIONSHIP CONTINUES. If Optionee has
continued to serve Company or any Related Corporation in the capacity of an
employee, officer, director, agent, advisor, or consultant, including services
as a member of the Board of Advisors of Company or any Related Corporation (such
service is described herein as maintaining or being involved in a "Business
Relationship" with Company or any Related Corporation), on the following dates,
Optionee may exercise this Option for the number of Option Shares set opposite
the applicable date:
<TABLE>
<S> <C>
One year or more, but less than two years % of the total Option Shares
from [ISSUE DATE]
Two years or more, but less than three years an additional __% of the total Option Shares
from [ISSUE DATE]
Three years or more, but less than four years an additional __% of the total Option Shares
from [ISSUE DATE]
</TABLE>
<PAGE> 34
<TABLE>
<S> <C>
Four years or more, but less than five years an additional __% of the total Option Shares
from [ISSUE DATE]
Five years or more, but less than six years an additional __% of the total Option Shares
from [ISSUE DATE]
</TABLE>
The foregoing rights shall cumulate while Optionee continues to maintain a
Business Relationship with Company or any Related Corporation, and may be
exercised up to and including the date that falls ten (10) years from the date
this Option is granted. All of the foregoing rights fall subject to Sections 4
and 5, as appropriate, if Optionee ceases to maintain a Business Relationship
with Company or a Related Corporation, dies, becomes disabled or undergoes
dissolution while involved in a Business Relationship with Company or a Related
Corporation.
4. TERMINATION OF BUSINESS RELATIONSHIp. If Optionee ceases to maintain a
Business Relationship with Company or any Related Corporation, other than by
reason of death or disability as defined in Section 5, no further installments
of this Option shall vest or become exercisable from and after the date Optionee
no longer maintains a Business Relationship with the Company or any Related
Corporation and this option may only be exercised, to the extent of the number
of Option Shares with respect to which Optionee could have exercised it on the
date the Business Relationship ceased, at any time within [Insert Time Period]
after the date Optionee ceased to maintain a Business Relationship with the
Company or any Related Corporation, but in no event later than the scheduled
expiration date. At the expiration of such [Insert Time Period] or the scheduled
expiration date, whichever occurs earlier, this Option shall terminate and the
only rights hereunder shall be those as to which the Option was properly
exercised before such termination.
5. DEATH; DISABILITY. If Optionee is a natural person who dies while
involved in a Business Relationship with Company or any Related Corporation, no
further installments of this Option shall vest or become exercisable from and
after the date of death and this Option may only be exercised, to the extent of
the number of Option Shares with respect to which Optionee could have exercised
it on the date of his death, by his estate, personal representative or
beneficiary to whom this Option has been assigned pursuant to Section 10, at any
time within [Insert Time Period] after the date of death, but not later than the
scheduled expiration date. If Optionee is a natural person whose Business
Relationship with Company and all Related Corporations is terminated by reason
of his disability (as defined in the Plan), no further installments of this
Option shall vest or become exercisable from and after the date such Business
Relationship is terminated due to such disability and this Option may only be
exercised, to the extent of the number of option Shares with respect to which
Optionee could have exercised it on the date the Business Relationship of the
Optionee with the Company and all Related Corporations was terminated, at any
time within [Insert Time Period] after the date of such termination but not
later than the scheduled expiration date. At the expiration of such [Insert Time
Period] or the scheduled expiration date, whichever occurs earlier, this Option
shall terminate and the only rights hereunder shall be those as to which the
Option was properly exercised before such termination.
-2-
<PAGE> 35
6. PARTIAL EXERCISE. Exercise of this Option up to the extent above stated
may be made in part at any time and from time to time within the above limits,
except that this Option may not be exercised for a fraction of a share unless
such exercise is for the final installment of stock subject to this Option and a
fractional share (or cash in lieu thereof) must be issued to permit Optionee to
exercise such final installment completely. Any fractional share for which an
installment of this Option cannot be exercised because of the preceding sentence
shall remain subject to this Option and available for later purchase by Optionee
in accordance with the terms hereof.
7. PAYMENT OF PRICE. The option price shall be payable in United States
dollars and may be paid:
(a) in cash or by check, or any combination of the foregoing, equal in
amount to the option price; or
(b) in the discretion of the Board, in cash, by check, by delivery of
shares of Company's Common Stock having a fair market value (as determined
by the Board) equal as of the date of exercise to the option price, or by
any combination of the foregoing, equal in amount to the option price.
8. AGREEMENT TO PURCHASE FOR INVESTMENT. By acceptance of this Option
Optionee agrees that a purchase of Option Shares under this Option will not be
made with a view to their distribution as that term is used in the 1933 Act
unless in the opinion of counsel to Company such distribution complies with or
stands exempt from the registration and prospectus requirements of the 1933 Act
and applicable state securities laws, and Optionee agrees to sign a certificate
to such effect at the time of exercising this Option and agrees that the
certificate for the Option Shares so purchased may be inscribed with a legend to
ensure compliance with the 1933 Act and applicable state securities laws.
In the event that for any reason the Option Shares to be issued upon exercise of
the Option shall not be effectively registered under the 1933 Act, upon any date
on which the Option is exercised in whole or in part, the person exercising the
Option shall give a written representation to the Company in the form reasonably
required by the Company and the Company shall place an "investment legend,"
so-called, upon any certificate for the Shares issued by reason of such
exercise.
9. METHOD OF EXERCISING OPTION. Subject to the terms and conditions of this
Agreement, this Option may be exercised by written notice to Company, at the
principal executive office of Company, or to such transfer agent as Company
shall designate. Such notice shall state the election to exercise this Option
and the number of Option Shares in respect of which it is being exercised and
shall be signed by the person or persons so exercising this Option. Such notice
shall be accompanied by payment of the full purchase price of such Option
Shares, and Company shall deliver a certificate or certificates representing
such Option Shares as soon as practicable after the
-3-
<PAGE> 36
notice shall be received. The certificate or certificates for the Option Shares
as to which this Op tion shall have been so exercised shall be registered in the
name of the person or persons so exercising this Option (or, if this Option
shall be exercised by Optionee and if Optionee shall so request in the notice
exercising this Option, shall be registered in the name of Optionee and another
person jointly, with right of survivorship) and shall be delivered as provided
above to or upon the written order of the person or persons exercising this
Option. In the event this Option shall be exercised, pursuant to Section 5
hereof, by any person or persons other than Optionee, such notice shall be
accompanied by appropriate proof of the right of such person or persons to
exercise this Option. All Option Shares that shall be purchased upon the
exercise of this Option as provided herein shall be fully paid and
nonassessable.
10. OPTION NOT TRANSFERABLE. This Option shall not be transferred or
assigned except by will or by the laws of descent and distribution. During
Optionee's lifetime only Optionee can exercise this Option.
11. NO OBLIGATION TO EXERCISE OPTION. The grant and acceptance of this
Option imposes no obligation on Optionee to exercise it.
12. NO OBLIGATION TO CONTINUE BUSINESS RELATIONSHIP. Neither the Plan nor
this Option shall obligate Company or any Related Corporation in any manner to
continue to maintain a Business Relationship with Optionee.
13. NO RIGHTS AS STOCKHOLDER UNTIL EXERCISE. Optionee shall enjoy no rights
as a stockholder with respect to Option Shares subject to this Agreement until a
stock certificate therefor has been issued to Optionee and it is fully paid for
by Optionee. Except as expressly provided in the Plan for changes in the
capitalization of Company, no adjustment shall be made for dividends or similar
rights for which the record date precedes the date upon which such stock
certificate is issued.
14. CAPITAL CHANGES AND BUSINESS SUCCESSIONS. This Option is intended to
encourage Optionee to work for the best interests of Company and its
stockholders. To protect Optionee's interest in this Option, the provisions of
the Plan that preserve options at full value in a number of contingencies are
hereby made applicable hereunder and are incorporated herein by reference. Thus,
this Option and the Option price shall be equitably adjusted in the event of any
stock dividend, stock split, recapitalization or other change in the capital
structure of Company. In the event of any stock dividend, stock split,
recapitalization or other change in the capital structure of Company, this
Option and the Option price shall be equitably adjusted and, in lieu of issuing
fractional shares upon exercise thereof, this Option (and the corresponding
Option Shares) shall be rounded upward or downward to the nearest whole share
(rounding upward for all amounts equal to or in excess of .51). In particular,
without affecting the generality of the foregoing, Optionee understands that for
the purposes of Sections 3 through 5 hereof, inclusive, maintaining or being
involved in a Business Relationship with Company includes maintaining or being
involved in a Business Relationship with a Related Corporation.
-4-
<PAGE> 37
15. WITHHOLDING TAXES. Optionee hereby agrees that Company may withhold
from Optionee's wages or other remuneration the appropriate amount of federal,
state and local taxes attributable to Optionee's exercise of any installment of
this Option. At Company's discretion, the amount required to be withheld may be
withheld in cash from such wages or other remuneration, or in Common Stock from
the Common Stock otherwise deliverable to Optionee on exercise of this Option;
provided however, no such withholding may be made by an optionee who is an
"officer" or "director" within the meaning of the Exchange Act, except pursuant
to a standing election to so withhold Common Stock purchased upon exercise of an
Option, such election to be made in the form set forth in Exhibit 1 hereto and
to be made not less than six months prior to the date of such exercise. Such
election may be revoked by the optionee only upon six months prior written
notice to the Company. Optionee further agrees that, if Company does not
withhold an amount from Optionee's wages or other remuneration sufficient to
satisfy Company's withholding obligation, Optionee will reimburse Company on
demand, in cash, for the amount underwithheld.
16. NO EXERCISE OF OPTION IF EMPLOYMENT TERMINATED FOR MISCONDUCT. If the
employment or engagement of Optionee is terminated for "Misconduct", this Option
shall terminate on the date of such termination and this Option shall thereupon
not be exercisable to any extent whatsoever. "Misconduct" is conduct, as
determined by the Board, involving one or more of the following: (i) disloyalty,
gross negligence, dishonesty or breach of fiduciary duty to Company or any
Related Corporation; or (ii) the commission of an act of embezzlement, fraud or
deliberate disregard of the rules or policies of Company which results in loss,
damage or injury to Company or any Related Corporation; or (iii) the
unauthorized disclosure of any trade secret or confidential information of
Company or any Related Corporation; or (iv) the commission of an act which
constitutes unfair competition with Company or any Related Corporation or which
induces any customer of Company or any Related Corporation to break a contract
with Company or any Related Corporation; or (v) the substantial and continuing
failure of Optionee to render services to Company or any Related Corporation in
accordance with his assigned duties.
17. GOVERNING LAW. This Agreement shall be governed by and interpreted in
accordance with the internal laws of the State of Delaware.
-5-
<PAGE> 38
IN WITNESS WHEREOF Company and Optionee have caused this instrument to be
executed, and Optionee whose signature appears below acknowledges receipt of a
copy of the Plan and acceptance of an original copy of this Agreement.
Signature of Optionee: BITSTREAM INC.
___________________________________ By: ________________________
<<first name>> <<last name>> Name:
Title: President
EXHIBIT 1
TO STOCK OPTION AGREEMENT
Gentlemen:
The undersigned Optionee hereby elects and agrees that, whenever the
undersigned exercises a stock option (including any options which now or may
hereafter be granted), the Company shall withhold from the shares issuable upon
such exercise, such number of shares as is equal in value to the federal and
state withholding taxes due upon such exercise. The undersigned further
acknowledges and agrees that this election may not be revoked without six months
prior written notice to the Company.
Optionee
____________________________________
Signature
Name:_______________________________
(Printed)
____________________________________
Social Security
-6-
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
Bitstream World Trade, Inc., a Delaware corporation
Bitstream, B.V., a Dutch corporation
Bitstream S.A.R.L., a French corporation
Bitstream B.V. France, a French corporation
Archetype Acquisition Corporation, a Delaware corporation
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE TWELVE
MONTHS ENDED 12-31-96 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
FINANCIAL STATEMENTS AND NOTES THERETO CONTAINED IN THE COMPANY'S ANNUAL REPORT
ON FORM 10-K.
</LEGEND>
<CIK> 0000818813
<NAME> BITSTREAM INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 11,718,000
<SECURITIES> 0
<RECEIVABLES> 3,496,000
<ALLOWANCES> 277,000
<INVENTORY> 0
<CURRENT-ASSETS> 16,239,000
<PP&E> 3,456,000
<DEPRECIATION> 2,532,000
<TOTAL-ASSETS> 17,477,000
<CURRENT-LIABILITIES> 2,019,000
<BONDS> 0
0
0
<COMMON> 59,000
<OTHER-SE> 15,300,000
<TOTAL-LIABILITY-AND-EQUITY> 17,477,000
<SALES> 10,551,000
<TOTAL-REVENUES> 10,551,000
<CGS> 1,858,000
<TOTAL-COSTS> 1,858,000
<OTHER-EXPENSES> 7,431,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,000
<INCOME-PRETAX> 1,243,000
<INCOME-TAX> (94,000)
<INCOME-CONTINUING> 1,337,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,337,000
<EPS-PRIMARY> .27
<EPS-DILUTED> .0
</TABLE>
