<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 20, 1999
REGISTRATION NO. 333-82213
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
BLUESTONE SOFTWARE, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 7372 22-2964141
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------------------------
1000 BRIGGS ROAD
MOUNT LAUREL, NEW JERSEY 08054
(856) 727-4600
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------------------------
P. KEVIN KILROY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
BLUESTONE SOFTWARE, INC.
1000 BRIGGS ROAD
MOUNT LAUREL, NEW JERSEY 08054
(856) 727-4600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
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<S> <C>
WILLIAM A. SCARI, ESQUIRE WILLIAM J. GRANT, JR., ESQUIRE
PAUL T. PORRINI, ESQUIRE WILLKIE FARR & GALLAGHER
PEPPER HAMILTON LLP 787 SEVENTH AVENUE
1235 WESTLAKES DRIVE, SUITE 400 NEW YORK, NEW YORK 10019
BERWYN, PENNSYLVANIA 19312 (212) 728-8000
(610) 640-7800
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / / ______
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ______
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
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<CAPTION>
PROPOSED MAXIMUM AMOUNT OF
AGGREGATE OFFERING REGISTRATION FEE
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED PRICE (1) (2) (3)
<S> <C> <C>
Common Stock, $.001 par value........................................................... $55,200,000 $15,346
</TABLE>
(1) Estimated solely for purposes of determining the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
(2) Includes amount subject to the over-allotment option granted to the
Underwriters.
(3) The registration fee for all securities registered hereby of $15,346 has
been calculated pursuant to Rule 457(o) of the Securities Act of 1933 by
multiplying the proposed maximum aggregate offering price by .000278. A fee
of $12,788 was paid on July 2, 1999. Pursuant to Rule 457(o) under the
Securities Act, such previous fee has been credited against the registration
fee in connection herewith. Accordingly, the additional registration fee
required to be paid with this Registration Statement is $2,558.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS Subject to Completion
, 1999
[LOGO]
4,000,000 Shares
Common Stock
We are offering 4,000,000 shares of common stock in an initial public offering.
We have applied to list our common stock for quotation on the Nasdaq National
Market under the symbol "BLSW." We expect that the initial public offering price
will be between $11.00 and $13.00 per share. The market price of the shares of
common stock after this offering may be higher or lower than the initial public
offering price.
Investing in our common stock involves a high degree of risk. See "Risk Factors"
beginning on page 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<CAPTION>
Per Share Total
<S> <C> <C>
Public Offering Price $ $
Underwriting Discount $ $
Proceeds to Bluestone $ $
</TABLE>
We and certain selling stockholders have granted the underwriters a 30-day
option to purchase up to 600,000 additional shares of common stock at the
initial public offering price to cover any over-allotments.
We expect to issue these shares on , 1999.
Deutsche Banc Alex / / Brown
SoundView Technology Group
C.E. Unterberg, Towbin
Legg Mason Wood Walker
Incorporated
, 1999
<PAGE>
[INSIDE FRONT COVER OF PROSPECTUS]
GRAPHIC:
[Landscape format--1 page graphic]: A graphical figure of a single,
floor-standing server cabinet, is located in the center of the page with the
following text appearing immediately under the server: "APPLICATION SERVER -
Provides standard services to make information access available, secure and
reliable." Five two-directional arrows surround the text, and point, to various
graphical representations located in the corners and bottom center of the page.
Beginning in the bottom left corner of the page and moving in a clockwise
direction are the following graphical figures:
(1) A two-directional arrow cuts through a cloud which represents and is
labelled as the "Internet," and points to the following text: "INFORMATION
ACCESS--Access from applications or information devices." Below the text are
graphical figures of a personal computer, a lap-top computer, a cellular
phone and a handheld personal computing device.
(2) in the upper left hand corner of the page is a graphical figure of a
satellite dish on top of a metal tower. A two-directional arrow points
between the server cabinet and one satellite dish. The following text is
located to the right of the satellite dish: "APPLICATION MANAGEMENT--Control
and reporting of application usage."
(3) in the upper right hand corner of the page are graphical figures of
a personal computer, a lap-top computer, a cellular phone and a handheld
personal computing device. There is a two-directional arrow pointing between
the aforementioned figures and the server cabinet. To the left of the
figures is the following text: "INFORMATION ACCESS--Access from other
information sources or computer systems."
(4) in the right lower corner of the page is a graphical figure of an
electrical plug. A two-directional arrow points between the electrical plug
and the server cabinet. Above the electrical plug is the following text:
"APPLICATION INTEGRATION--Provides access to all information in the
Enterprise."
(5) in the bottom center of the page is a graphical figure of a computer
screen displaying a software application. A two-directional arrow points
between the server cabinet and the computer screen. Directly above the
computer screen is the following text: "APPLICATION DEVELOPMENT--The ability
to build applications that provide information access."
(6) The top center of the page contains a Bluestone logo with the words:
"Bluestone Software--Enterprise."
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES APPEARING ELSEWHERE IN THIS
PROSPECTUS.
GENERALLY, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT:
- THE OVER-ALLOTMENT OPTION GRANTED TO THE UNDERWRITERS BY BLUESTONE AND
CERTAIN SELLING STOCKHOLDERS IS NOT EXERCISED;
- THE CONVERSION OF ALL SHARES OF OUR OUTSTANDING SERIES A, SERIES B AND
SERIES C CONVERTIBLE PREFERRED STOCK AND ALL ACCRUED DIVIDENDS THEREON
INTO COMMON STOCK OCCURS IMMEDIATELY UPON COMPLETION OF THIS OFFERING; AND
- A 1 FOR 3.2 REVERSE SPLIT OF THE COMMON STOCK IS EFFECTED IMMEDIATELY
BEFORE THIS OFFERING.
BLUESTONE
We are a leading provider of software for enterprise interaction management,
which enables businesses to extend information over the World Wide Web in a
controlled manner and to support high volumes of users and interactions. Our
flagship product, Sapphire/Web, is a framework for JAVA Web application servers
and is currently in Release 6. A Web application server is a software product
that allows broad access to stored corporate information and applications to a
variety of users, including customers, suppliers and employees via the Web. We
believe that our JAVA Web application server is the leading solution of its kind
based on the breadth of its functionality. We believe that ours is the only
product to adequately address the four defining elements of enterprise
interaction management-- development, deployment, integration and
management--and therefore provides the most complete overall solution to our
customers. In January 1999, we released Bluestone XML-Server, which represents a
new generation of specialized Web application server focused on commerce via the
Internet.
OUR INDUSTRY
Businesses are rapidly adopting technology that allows their existing
computer systems to operate and be accessed over the Web. To date, most
businesses have simply provided marketing material on their Web sites and have
not been able to take full advantage of the interactive potential of the
Internet. The existing information technology infrastructure of most companies
cannot reliably and securely handle a high volume of interactions across the
Internet. Therefore, most companies are unable to utilize, integrate or deploy
their existing information technology assets for Internet commerce or use over
the Web.
Deploying Web application servers allows real time, interactive access to
complex information through the Web that is otherwise only available internally
in an organization through its own applications and existing corporate
databases. This enables a much broader and diverse audience to utilize and
interact with a business' core systems and information. Uses of this capability
include:
- broad dissemination and more effective use of management information for
decision support;
- employee self-service applications that improve internal efficiencies;
- customer relationship management activities that enhance service levels;
- supply chain functions that increase coordination among trading partners;
and
- Internet commerce initiatives that create entirely new revenue streams and
business models.
Demand for these capabilities has resulted in significant growth in the
market for Web application servers. In an August 1998 report, Forrester Research
estimated that the market for application server
1
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software would be approximately $700 million in 1999 and grow to approximately
$1.8 billion by 2001, representing a compound annual growth rate of
approximately 60%. Another independent technology research organization, Ovum,
estimated in a June 1999 report that the market for application server
technologies, which Ovum defines in a manner that more closely resembles our
addressable market, will grow to $17 billion by 2004. As this market develops,
businesses are recognizing that a broader set of facilities, beyond simple
deployment alone, are required to capture the substantial benefits that Internet
computing can provide.
OUR SOLUTION
We provide a comprehensive framework that enables businesses to deploy
information across the Internet to employees, customers, suppliers and partners.
Our solution furnishes businesses with the ability to Web-enable their existing
systems, develop new Web-based applications, integrate their applications and
enable Internet commerce. Our deployment solution is 100% Pure JAVA, a
programming language developed by Sun Microsystems that operates in virtually
all computing environments. We believe our solution is the only one available
that allows organizations to develop, deploy, integrate and manage
enterprise-scale, mission-critical applications. In particular, our solution
offers the following facilities:
- robust development environment and toolset that is open and highly
adaptable and has many features that increase the speed and reduce the
cost of systems development;
- open, high-performance deployment that enables implementation of systems
with high reliability, security and flexibility and supports very high
volumes of interactions;
- extensive integration capabilities that facilitate the integration of a
business' overall computing environment; and
- comprehensive management features that provide the necessary means to
monitor, administer and report on a business' entire Web infrastructure.
OUR GROWTH STRATEGY
Our goal is to maintain and extend our position as a leading provider of Web
application server technology, enterprise application integration and Internet
commerce solutions. Our key growth strategies are to:
- maintain and extend technological leadership;
- expand product offerings;
- continue to focus on enterprise-scale solutions;
- increase marketing and direct sales efforts; and
- further develop indirect channels, partners and alliances.
OUR CUSTOMERS
Our solutions are applicable to a wide variety of industries and are used by
many of the world's leading businesses, including:
- three of the top five FORTUNE 500 companies in the electronics industry;
- five of the top ten FORTUNE 500 companies in the computer equipment
industry;
- four of the top five FORTUNE 500 companies in the aerospace industry;
- seven out of the top ten FORTUNE 500 companies in the telecommunications
industry;
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<PAGE>
- three of the top four FORTUNE 500 companies in the entertainment industry;
and
- five of the top ten FORTUNE 500 companies in the pharmaceuticals industry.
We market our products and services through our direct sales force and a
network of value added resellers, independent software vendors, and systems
integrators. Since 1996, we have sold our Sapphire/Web software products to over
500 customers. Our customers include ARI, AT&T, Deutsche Bank, Dreyfus
Corporation, Eli Lilly, Hewlett-Packard, Houghton Mifflin Company, Just For
Feet, MCI WorldCom, OpenConnect and Reliance National.
We were originally incorporated in 1989. Our executive offices are located
at 1000 Briggs Road, Mount Laurel, New Jersey 08054. Our telephone number is
(856) 727-4600. Information contained on our Web site at www.bluestone.com does
not constitute a part of this prospectus.
THE OFFERING
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Common stock offered by Bluestone............ 4,000,000 shares
Common stock outstanding after this
offering................................... 17,302,473 shares
Use of proceeds.............................. product development, sales and marketing
and working capital
Proposed Nasdaq National Market symbol....... "BLSW"
</TABLE>
Common stock outstanding after this offering is based on the number of
shares outstanding as of June 30, 1999. It excludes:
- 2,961,411 shares of common stock issuable upon exercise of options and
warrants at a weighted average exercise price of $4.15 per share and
218,750 shares of common stock issuable upon the conversion of a
convertible note at a conversion price of $2.29 per share.
- 431,784 shares reserved for future grants under our stock option and
directors' compensation plans.
3
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SUMMARY FINANCIAL INFORMATION
The following table sets forth certain of our historical, pro forma and
adjusted financial data. The pro forma balance sheet data presented below
assumes the conversion of all outstanding preferred stock and accrued dividends
on preferred stock into common stock. The pro forma net loss per share amounts
presented below reflect the outstanding preferred stock during each period
presented on an as converted basis. The adjusted balance sheet data presented
below gives effect to the receipt of the net proceeds from the sale of shares of
common stock offered by us at an assumed offering price of $12.00 per share,
after deducting the estimated underwriting discounts and commissions and our
estimated offering expenses.
In April 1997, in connection with our sale of Series A preferred stock, we
spun off our consulting division to our then sole stockholder. The consulting
division spin-off has been reported as a discontinued operation. In April 1998,
we decided to focus on internally developed software products and curtail the
licensing and services related to third party products. No material license
revenues from third party products were recognized after March 31, 1998.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license fees.................................................. $ 1,475 $ 2,337 $ 3,391 $ 1,192 $ 4,727
Services............................................................... 43 2,179 3,620 1,707 1,865
Third party products and related services.............................. 6,555 5,225 1,107 932 --
--------- --------- --------- --------- ---------
Total revenues..................................................... 8,073 9,741 8,118 3,831 6,592
Cost of revenues:
Software license fees.................................................. 113 202 259 96 156
Services............................................................... 305 2,516 4,433 2,078 2,467
Third party products and related services.............................. 4,261 2,798 643 535 --
--------- --------- --------- --------- ---------
Total cost of revenues............................................. 4,679 5,516 5,335 2,708 2,623
--------- --------- --------- --------- ---------
Gross profit............................................................. 3,394 4,225 2,783 1,122 3,969
Operating expenses:
Sales and marketing.................................................... 3,005 5,131 9,551 3,748 6,185
Product development.................................................... 702 1,295 2,474 904 1,869
General and administrative............................................. 1,515 1,616 2,316 950 2,124
Amortization of stock-based compensation............................... -- 112
--------- --------- --------- --------- ---------
Total operating expenses........................................... 5,222 8,042 14,341 5,601 10,290
--------- --------- --------- --------- ---------
Loss from operations..................................................... (1,828) (3,817) (11,558) (4,479) (6,321)
Interest expense, net.................................................... (50) (80) (47) (34) (1,148)
--------- --------- --------- --------- ---------
Loss from continuing operations.......................................... (1,878) (3,896) (11,605) (4,512) (7,469)
Income (loss) from discontinued operations............................... (738) 99 -- -- --
--------- --------- --------- --------- ---------
Net loss................................................................. (2,616) (3,798) (11,605) (4,512) (7,469)
Accretion of preferred stock redemption value............................ -- (240) (846) (308) (779)
--------- --------- --------- --------- ---------
Net loss available to common stockholders................................ $ (2,616) $ (4,038) $ (12,451) $ (4,820) $ (8,247)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic and diluted net income (loss) per share:
Continuing operations.................................................. $ (0.67) $ (1.39) $ (4.12) $ (1.60) $ (2.65)
Discontinued operations................................................ (0.26) 0.04 -- -- --
Accretion of preferred stock redemption value.......................... -- (0.09) (0.30) (0.11) (0.28)
--------- --------- --------- --------- ---------
$ (0.93) $ (1.44) $ (4.42) $ (1.71) $ (2.93)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Shares used in computing basic and diluted net income (loss) per share... 2,813 2,813 2,814 2,814 2,815
Pro forma basic and diluted net loss per share from continuing
operations............................................................. $ (0.96) $ (1.35) $ (0.67) $ (0.70)
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in computing pro forma basic and diluted net loss per
share.................................................................. 4,046 8,572 6,789 10,688
</TABLE>
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<CAPTION>
JUNE 30, 1999
-----------------------------------
ACTUAL PRO FORMA ADJUSTED
--------- ----------- -----------
(IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................................... $ 20,600 $ 20,600 $ 64,440
Working capital................................................. 16,576 16,576 60,416
Total assets.................................................... 24,969 24,969 68,809
Long-term obligations, net of current portion................... 1,654 1,654 1,654
Mandatorily redeemable convertible preferred stock.............. 40,453 -- --
Total stockholders' equity (deficit)............................ (24,180) 16,273 60,113
</TABLE>
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RISK FACTORS
THIS SECTION HIGHLIGHTS SPECIFIC RISKS WITH RESPECT TO AN INVESTMENT IN OUR
BUSINESS. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. WE ALSO
CAUTION YOU THAT THIS PROSPECTUS INCLUDES FORWARD-LOOKING STATEMENTS THAT ARE
BASED ON MANAGEMENT'S BELIEFS AND ASSUMPTIONS AND ON INFORMATION CURRENTLY
AVAILABLE TO MANAGEMENT. YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW
AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE PURCHASING THE COMMON STOCK.
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WE HAVE HAD RECENT LOSSES AND We have incurred significant net losses since 1996,
MAY INCUR FUTURE LOSSES THAT including losses of approximately $3.8 million and $11.6
MAY DEPRESS OUR STOCK PRICE. million for the years ended December 31, 1997 and 1998,
respectively and $7.5 million for the six months ended
June 30, 1999. Our losses have resulted in an accumulated
deficit of approximately $26.4 million as of June 30,
1999. Any significant shortfall of revenues in relation to
our expectations or any material delay of customer orders
would have an immediate adverse effect on our business,
operating results and financial condition. We may not be
profitable in any future period. Our future operating
results will depend on many factors, including:
- the overall growth rate for the markets in which we
compete;
- the level of market acceptance of, and demand for, our
software products;
- the level of product and price competition;
- our ability to establish strategic marketing
relationships, develop and market new and enhanced
products, and control costs;
- our ability to expand our direct sales force and
indirect distribution channels;
- our ability to integrate acquired businesses and
product lines;
- our ability to develop and maintain awareness of our
brands; and
- our ability to attract, train and retain consulting,
technical and other key personnel.
LACK OF GROWTH OR DECLINE IN Our products enhance companies' ability to transact
INTERNET USAGE OR THE LACK OF business and conduct operations utilizing the Internet.
ACCEPTANCE OF COMMERCE Therefore, our future sales and any future profits are
CONDUCTED VIA THE INTERNET substantially dependent upon the widespread acceptance and
COULD BE DETRIMENTAL TO OUR use of the Internet as an effective medium of commerce by
FUTURE OPERATING RESULTS. consumers and businesses. Rapid growth in the use of the
Internet and other online services is a recent development
and we are unsure whether that acceptance and use will
continue to develop or that a sufficiently broad base of
consumers will adopt and continue to use the Internet and
other online services as a medium of commerce. To be
successful, we must rely on consumers and businesses, who
have historically used traditional means of commerce to
purchase products, accepting and utilizing new ways of
conducting business and exchanging information over the
Internet.
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<S> <C>
In addition, the Internet may not be accepted as a viable
commercial marketplace for a number of reasons, including
potentially inadequate development of the necessary
network infrastructure or delayed development of enabling
technologies and Web performance improvements. If the
Internet continues to experience significant growth in the
number of users, frequency of use or an increase in
bandwidth requirements, the Internet's infrastructure may
not be able to support the demands placed upon it. In
addition, the Internet could lose its viability due to
delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet
activity, or due to increased governmental regulation. If
Congress, or other governing bodies both within and
outside the United States, decides to alter materially the
current approach to, and level of, regulation of the
Internet, we may need to adapt our technology. Any
required adaptation could cause us to spend significant
amounts of time and money. If use of the Internet does not
continue to grow or grows more slowly than expected, if
the infrastructure for the Internet does not effectively
support growth that may occur, if government regulations
change, or if the Internet does not become a viable
commercial marketplace, our business could suffer.
WE DEPEND ON OUR SAPPHIRE/WEB Software license revenues from our Sapphire/Web software
PRODUCTS AND IF THE MARKET were $3.4 million or 42% of total revenues in 1998 and
FOR THESE PRODUCTS DOES NOT $4.7 million or 72% of total revenues in the first six
CONTINUE TO GROW, OUR months of 1999. We expect to continue to be dependent upon
BUSINESS COULD BE MATERIALLY the Sapphire/Web software products in the future, and any
ADVERSELY AFFECTED. factor adversely affecting the market for Web application
server software in general, or our software in particular,
would adversely affect our ability to generate revenues.
The market for Web application server software is
competitive, highly fragmented and characterized by rapid
technological change. Our future financial performance
will depend in large part on the successful development,
introduction and customer acceptance of our new products
and product enhancements in a timely and cost effective
manner. After the offering, we expect to commit
significant resources to market and further develop the
Sapphire/Web software products and enhance the brand
awareness of Sapphire/Web products. The market for our
software may not continue to grow or may grow at a slower
rate than we expect. Furthermore, the market may not
accept our products. If this market fails to grow or grows
more slowly than we anticipate, or if the market fails to
accept our products, our business could suffer.
</TABLE>
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<TABLE>
<S> <C>
IF THE MARKET'S ACCEPTANCE Our Sapphire/Web product is 100% Pure JAVA. JAVA is a
AND ADOPTION OF JAVA AND XML programming language developed by Sun Microsystems.
SERVER TECHNOLOGIES DOES NOT Therefore, the continued acceptance of our products in the
CONTINUE, OUR FUTURE RESULTS marketplace depends on JAVA's acceptance as a standard
MAY SUFFER. programming language. If Sun Microsystems were to make
significant changes to the JAVA language or fail to
correct defects and limitations in its products, our
ability to continue to improve and ship our products could
be impaired. In the future, our customers may also require
the ability to deploy our products on platforms for which
technically acceptable JAVA implementations either do not
exist or are not available on commercially reasonable
terms.
In January 1999, we introduced a product based on a
document format for the Web called XML, or extensible
mark-up language. We cannot be sure that XML technology
will be adopted as a standard, that XML-based products
will achieve broad market acceptance, that our XML
products will be accepted or that other superior
technologies will not be developed. The failure of XML
technology to become a standard or the failure of our XML
products to achieve broad acceptance could adversely
affect our ability to generate revenues. The XML server
technology is one of several competing technologies used
in information exchange and Internet commerce. We intend
to continue to invest substantial resources in our XML
products.
INTENSE COMPETITION AND The market for our products is intensely competitive,
INCREASING CONSOLIDATION IN highly fragmented, characterized by rapid technological
OUR INDUSTRY COULD CREATE change and significantly affected by new product
STRONGER COMPETITORS AND HARM introductions. Recent acquisitions of several of our
OUR BUSINESS. competitors by large software companies and other market
activities of industry participants have increased the
competition in our market. Our competitors consist of a
number of private and public companies including, among
others: BEA Systems which acquired WebLogic; IBM;
Microsoft; Oracle; and Sun Microsystems, which acquired
NetDynamics and the rights to Netscape's Application
Server. In addition, we face competition from in-house
software developers who may develop some or all of the
functionality that our products provide. Many of our
competitors have longer operating histories, significantly
greater financial, technical, marketing and other
resources, greater name recognition, a broader range of
products to offer and a larger installed base of customers
than us, any of which could provide them with a
significant competitive advantage.
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<S> <C>
We expect to face increased competition in the future from
our current competitors. In addition, new competitors, or
alliances among existing and future competitors, may
emerge and rapidly gain significant market share. We also
may face increased competition from existing large
business application software vendors that may broaden
their product offerings to include Web application server
software. Their significant installed customer bases and
abilities to offer a broad solution and price these new
products as incremental add-ons to existing systems could
provide them with a significant competitive advantage.
OUR CUSTOMERS ARE Our top ten customers for the year ended December 31, 1998
CONCENTRATED AND THE LOSS OF and the six months ended June 30, 1999 in the aggregate
ONE OF OUR LARGEST CUSTOMERS accounted for approximately 39% and 66%, respectively, of
COULD CAUSE OUR REVENUES TO our revenues. Hewlett-Packard accounted for more than 10%
DROP QUICKLY AND of our revenues for the year ended December 31, 1998 and
UNEXPECTEDLY. OpenConnect accounted for more than 10% of our revenues
for the six months ended June 30, 1999. We expect that a
small number of customers will continue to account for a
substantial portion of revenues in any given quarter in
the foreseeable future, although it is unusual for the
same customer to account for a substantial amount of
revenues in each of several quarters. As a result, our
inability to secure major customers during a given period
or the loss of any one major customer could cause our
revenues to drop quickly and unexpectedly.
IF WE FAIL TO DEVELOP NEW Due to the recent emergence of the Internet and the Web as
PRODUCTS AND SERVICES IN THE a forum for conducting business, the market for Web
FACE OF OUR INDUSTRY'S application server systems in which we participate is
RAPIDLY EVOLVING TECHNOLOGY, subject to rapid technological change, changing customer
OUR FUTURE RESULTS MAY BE needs, frequent new product introductions and evolving
ADVERSELY AFFECTED. industry standards that may render existing products and
services obsolete. Our growth and future operating results
will depend in part upon our ability to enhance existing
applications and develop and introduce new applications or
components that:
- meet or exceed technological advances in the
marketplace;
- meet changing customer requirements;
- achieve market acceptance;
- integrate successfully with third party software; and
- respond to competitive products.
</TABLE>
8
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<S> <C>
Our product development and testing efforts have required,
and are expected to continue to require, substantial
investment. We may not possess sufficient resources to
continue to make the necessary investments in technology.
In addition, we may not successfully identify new software
opportunities and develop and bring new software to market
in a timely and efficient manner. If we are unable, for
technological or other reasons, to develop and introduce
new and enhanced software in a timely manner, we may lose
existing customers and fail to attract new customers,
resulting in a decline in revenues.
OUR STOCK HAS NOT TRADED Prior to this offering, there has been no public market
PUBLICLY, AND AFTER THIS for our common stock. The market price of our common stock
OFFERING ITS MARKET PRICE MAY could fluctuate substantially due to:
FLUCTUATE WIDELY. - quarterly fluctuations in operating results;
- announcements of new products or product enhancements
by us or our competitors;
- technological innovations by us or our competitors;
- general market conditions or market conditions specific
to our or our customers' industries; and
- changes in earnings estimates or recommendations by
analysts.
Stock prices of Internet-related companies have been
highly volatile. Our initial public offering price may not
be indicative of the price of our stock that will prevail
in the trading market. In the past, following periods of
volatility in the market price of a company's securities,
securities class action litigation has at times been
instituted against that company. If we become subject to
securities litigation, we could incur substantial costs
and experience a diversion of management's attention and
resources.
THE UNPREDICTABILITY OF OUR Quarterly fluctuations in operating results may be caused
QUARTERLY OPERATING RESULTS by:
MAY ADVERSELY AFFECT THE - changes in the growth rate of Internet usage;
TRADING PRICE OF OUR COMMON - fluctuations in the demand for our products and
STOCK. services;
- the level of product and price competition in our
markets;
- the timing and market acceptance of new product
introductions and upgrades by us or our competitors;
- our success in expanding our customer support and
marketing and sales organizations;
- the size and timing of individual transactions;
- delays in, or cancellations of, customer
implementations;
- customers' budget constraints;
- the level of product development expenditures;
- our ability to control costs; and
- general economic conditions.
</TABLE>
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<TABLE>
<S> <C>
Many of these factors are not in our control. In addition,
we also experience seasonality which causes us to
typically recognize a disproportionately greater amount of
our revenues for any fiscal year in our fourth quarter and
a disproportionately lesser amount in our first quarter,
due largely to sales force quota practices in the software
industry and to customer budgeting processes.
WE NEED TO MANAGE OUR GROWTH We are a growing company. Our ability to manage our growth
EFFECTIVELY OR WE MAY NOT will depend in large part on our ability to generally
SUCCEED. improve and expand our operational and sales and marketing
capabilities, to develop the management skills of our
managers and supervisors, many of whom have been employed
by us for a relatively short time, and to train, motivate
and manage both our existing employees and the additional
employees that may be required. Additionally, we may not
adequately anticipate all of the demands that growth may
impose on our systems, procedures and structure. Any
failure to adequately anticipate and respond to these
demands or manage our growth effectively would have a
material adverse effect on our future prospects.
THE DEVELOPMENT OF We expect to expand our international operations and
INTERNATIONAL OPERATIONS WILL international sales and marketing efforts, initially, by
CAUSE US TO FACE ADDITIONAL opening regional sales and support offices in Europe and
RISKS. Asia Pacific within the next twelve months. We have
limited experience in marketing, selling and distributing
our products and services internationally. International
operations, including operations in those regions that we
are targeting, are subject to the following risks:
- recessions in foreign economies;
- political and economic instability;
- fluctuations in currency exchange rates;
- difficulties and costs of staffing and managing foreign
operations;
- potentially adverse tax consequences;
- reduced protection for intellectual property rights in
some countries; and
- changes in regulatory requirements.
OUR FAILURE TO MAINTAIN We derive over 75% of our license revenues through a
ONGOING SALES THROUGH A limited number of independent software vendors, systems
LIMITED NUMBER OF INDIRECT integrators, distributors and resellers. Although we
CHANNELS MAY RESULT IN LOWER intend to increase our marketing and direct sales efforts,
REVENUES. we expect that a limited number of these indirect channels
will continue to account for a significant portion of our
revenues in any given quarter in the foreseeable future.
To be successful, we must continue to foster and maintain
our existing indirect channels, as well as develop new
relationships. The loss of, or reduction in orders
through, existing indirect channels or the failure to
develop new indirect channel relationships could cause our
revenues to decline and have a material adverse effect on
our business.
</TABLE>
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<S> <C>
IF WE LOSE OUR KEY PERSONNEL, A significant portion of our senior management team has
OR FAIL TO ATTRACT AND RETAIN been in place for a relatively short period of time. Our
ADDITIONAL PERSONNEL, THE success will depend to a significant extent on their
SUCCESS AND GROWTH OF OUR ability to gain the trust and confidence of our other
BUSINESS MAY SUFFER. employees and to work effectively as a team.
Our future success will also depend significantly on our
ability to attract, integrate, motivate and retain
additional highly skilled technical, managerial, sales,
marketing, and services personnel. Competition for skilled
personnel is intense, and we may not be successful in
attracting, motivating and retaining the personnel
required to grow and operate profitably. Failure to
attract, integrate, motivate and retain highly skilled
personnel could adversely affect our business, especially
our ability to develop new products and enhance existing
products.
THE LENGTHY AND VARIABLE Our Sapphire/Web software is generally used for
SALES CYCLES OF OUR mission-critical or enterprise-wide purposes and involves
SAPPHIRE/WEB PRODUCT COULD a significant commitment of resources by our customers. A
CAUSE SIGNIFICANT FLUCTUATION customer's decision to license our Sapphire/Web software
IN OUR QUARTERLY RESULTS. generally involves the evaluation of the available
alternatives by a significant number of personnel in
various functional and geographic areas, each often having
specific and conflicting requirements. Accordingly, we
typically must expend substantial resources educating
prospective customers about the value of our Sapphire/ Web
software solutions. For these reasons, the length of time
between the date of initial contact with the potential
customer and the execution of a software license agreement
typically ranges from three to six months, and is subject
to delays over which we have little or no control. As a
result, our ability to forecast the timing and amount of
specific sales is limited and the delay or failure to
complete one or more large license transactions could
cause our operating results to vary significantly from
quarter to quarter.
THE FAILURE TO IMPLEMENT Implementation of our Sapphire/Web software often involves
SUCCESSFULLY OUR SAPPHIRE/WEB a significant commitment of financial and other resources
SOFTWARE COULD RESULT IN by our customers. The customer's implementation cycle can
DISSATISFIED CUSTOMERS AND be lengthy due to the size and complexity of their systems
DECREASED SALES. and operations. In addition, our customers rely heavily on
third party systems integrators to assist them with the
installation of the Sapphire/ Web software. Our failure or
the failure of our alliance partners, our customers or our
third party integrators to implement successfully our
Sapphire/Web software could result in dissatisfied
customers which could adversely affect our reputation.
</TABLE>
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<TABLE>
<S> <C>
WE MAY REQUIRE FUTURE Over time, we may require additional financing for our
ADDITIONAL FUNDING TO STAY IN operations. Additionally, we periodically review other
BUSINESS. companies' product lines and technologies for potential
acquisition. Any material acquisitions or joint ventures
could require additional financing. This additional
financing may not be available to us on a timely basis if
at all, or, if available, on terms acceptable to us.
Moreover, additional financing may cause dilution to
existing stockholders.
CAPACITY RESTRICTIONS COULD Concurrency restrictions can limit Internet deployment and
REDUCE THE DEMAND AND UTILITY use capacity. The boundaries of our Sapphire/Web software
OF OUR PRODUCTS. and Bluestone XML server capacity, in terms of numbers of
concurrent users or interactions, are unknown because, to
date, no customer or testing environment has reached these
boundaries. The Sapphire/Web software's or the Bluestone
XML server's capacity boundaries may, at some future time,
be reached and, when reached, may be insufficient to
enable our customers to achieve their desired levels of
information deployment and exchange. We may lose customers
or fail to gain new customers if either of the
Sapphire/Web software's or the Bluestone XML server's
capacity boundary limits the ability of our customers to
achieve expected levels of information deployment and
exchange or Internet commerce transactions.
OUR LIMITED ABILITY TO Our success and ability to compete are substantially
PROTECT OUR INTELLECTUAL dependent on our internally developed technologies and
PROPERTY RIGHTS COULD IMPAIR trademarks, which we protect through a combination of
OUR ABILITY TO COMPETE copyright, trademark and trade secret laws,
EFFECTIVELY. confidentiality procedures and contractual provisions.
Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our
products or obtain and use information that we regard as
proprietary. Policing unauthorized use of our products is
difficult and, though we are unable to determine the
extent to which piracy of our software products exists, we
expect software piracy to be a problem. In addition, the
laws of some foreign countries do not protect our
proprietary rights to the same extent as the laws of the
United States. Furthermore, our competitors may
independently develop technology similar to ours.
</TABLE>
12
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<S> <C>
The number of intellectual property claims in our industry
may increase as the number of competing products grows and
the functionality of products in different industry
segments overlaps. Although we are not aware that any of
our products infringe upon the proprietary rights of third
parties, there can be no assurance that third parties will
not claim infringement by us with respect to current or
future products. Any of these claims, with or without
merit, could be time consuming to address, result in
costly litigation, cause product shipment delays or
require us to enter into royalty or license agreements.
These royalty or license agreements might not be available
on terms acceptable to us or at all, which could have a
material adverse effect on our business.
OUR FAILURE TO OBTAIN OR We have in the past and may in the future, resell, under
MAINTAIN THIRD PARTY LICENSES license, certain third party software that enables our
COULD HARM OUR BUSINESS. software to interact with other software systems or
databases. In addition, we license certain software
technology used to develop our software. The loss or
inability to maintain any of these software licenses could
result in delays or reductions in product shipments until
equivalent software could be identified and licensed or
compiled, which could adversely affect our business.
WE MAY BE SUBJECT TO FUTURE Many of our installations involve projects that are
PRODUCT LIABILITY CLAIMS AND critical to the operations of our customers' businesses
OUR PRODUCTS' REPUTATIONS MAY and provide benefits that may be difficult to quantify.
SUFFER. Any failure in a customer's system could result in a claim
for substantial damages against us, regardless of our
responsibility for the failure. Although our license
agreements with our customers typically contain provisions
designed to limit contractually our liability for damages
arising from negligent acts, errors, mistakes or
omissions, it is possible that these provisions will not
be enforceable in certain instances or would otherwise not
protect us from liability for damages. Although we
maintain general liability insurance coverage, this
coverage may not continue to be available on reasonable
terms or at all, or may be insufficient to cover one or
more large claims.
We have entered into and plan to continue to enter into
agreements with strategic alliance partners whereby we
license our software products for integration with the
alliance partners' software. If an alliance partner's
software fails to meet customer expectations or causes a
failure in its customer's systems, the reputation of our
software products could be materially and adversely
affected even if our software products performed in
accordance with their functional specifications.
</TABLE>
13
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<S> <C>
YEAR 2000 PROBLEMS MAY Many currently installed computer systems and software
DISRUPT OUR BUSINESS. products are coded to accept only two digit entries in the
date field. Beginning in the year 2000, these date fields
will need to accept four digit entries to distinguish
twenty-first century dates from twentieth century dates.
As a result, over the next several months, computer
systems and/or software used by many companies may need to
be upgraded to comply with these "Year 2000" requirements.
Significant uncertainty exists in the software industry
concerning the potential effects associated with
compliance. While our software products are not time/date
sensitive, many of the third party software applications
run by our customers are time/date sensitive. In addition,
we have in the past resold third party software that may
not be Year 2000 compliant.
We may experience unanticipated problems and costs caused
by undetected errors or defects in the software used in
our internal systems related to the Year 2000 transition.
If our internal computer systems are not Year 2000
compliant then we or our customers may suffer system
failures or miscalculations that could cause disruptions
of operations.
In addition, we believe that the purchasing patterns of
customers and potential customers may be affected by Year
2000 issues in a variety of ways. Many companies are
expending significant resources to correct or patch their
current software systems for Year 2000 compliance. These
expenditures may result in reduced funds available to
purchase software products such as those offered by us.
Our reasonable worst case scenarios include:
- exposure to potential business disruption and resulting
claims, whether with or without merit;
- temporary inability to process transactions internally,
to send invoices to vendors and customers or to engage in
similar normal business activities; and
- postponed or delayed sales because existing and
potential customers may choose to defer purchasing, or
reduce funds available to purchase, software products
such as those offered by us.
Our insurance coverage may not cover or be adequate to
offset these and other business risks related to the Year
2000.
</TABLE>
14
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<TABLE>
<S> <C>
OUR EXECUTIVE OFFICERS AND Following the completion of this offering, our executive
DIRECTORS AND THEIR officers, directors and their affiliates will beneficially
AFFILIATES WILL OWN A LARGE own approximately 64% of the outstanding shares of common
PERCENTAGE OF OUR VOTING stock, or 62% if the underwriters over allotment option is
STOCK AND WILL HAVE THE exercised in full. As a result, these stockholders will be
ABILITY TO MAKE DECISIONS able to control all matters requiring stockholder approval
THAT COULD ADVERSELY AFFECT and, thereby, our management and affairs. Matters that
OUR STOCK PRICE. require stockholder approval include:
- election of directors;
- approval of mergers or consolidations; and
- sale of all or substantially all of our assets.
This concentration of ownership may delay, deter or
prevent acts that would result in a change of control of
Bluestone, which in turn could reduce the market price of
our common stock.
INVESTORS IN THIS OFFERING The anticipated initial public offering price is
WILL INCUR IMMEDIATE DILUTION substantially higher than the book value of our common
PER SHARE OF THE COMMON STOCK stock. At the initial offering price of $12.00 per share,
BASED ON ITS BOOK VALUE AFTER the book value of the common stock after the offering will
THE OFFERING. be $3.47 per share. This represents an immediate and
substantial dilution per share of the common stock. The
dilution per share represents the difference between the
amount per share paid by the purchasers of shares of
common stock in this offering and the net tangible book
value per share of common stock immediately after the
completion of this offering. In addition, to the extent
outstanding options are exercised, there will be further
dilution to new investors.
OUR CHARTER AND BYLAWS AND At the time we complete this offering, our charter and our
DELAWARE LAW CONTAIN bylaws, in conjunction with Delaware law, will contain
PROVISIONS THAT COULD provisions that could make it more difficult for a third
DISCOURAGE A TAKEOVER EVEN IF party to obtain control of Bluestone even if doing so
BENEFICIAL TO STOCKHOLDERS. would be beneficial to stockholders. For example, we
anticipate that our charter will provide for a classified
board of directors and restrict the ability of
stockholders to call a special meeting. Our bylaws will
allow the board of directors to expand its size and fill
any vacancies without stockholder approval.
</TABLE>
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<S> <C>
FUTURE SALES OF OUR COMMON The market price of our common stock could decline as a
STOCK MAY DEPRESS OUR STOCK result of sales by our existing stockholders or the
PRICE. perception that those sales may occur. These sales could
also make it more difficult for us to raise funds through
equity offerings in the future at a time and at a price
that we think is appropriate.
After completion of this offering, the current holders of
most of our common stock and all of our preferred stock
outstanding prior to this offering, as well as the holders
of outstanding warrants, will be entitled to registration
rights with respect to their common stock or the common
stock underlying their convertible securities. If these
holders, by exercising their registration rights, cause a
large number of securities to be registered and sold in
the public market, these sales could have an adverse
effect on the market price for our common stock. If we
were to include, in a registration statement initiated by
us, shares held by these holders pursuant to the exercise
of their registration rights, these sales may have an
adverse effect on our ability to raise needed capital.
</TABLE>
FORWARD-LOOKING STATEMENTS
Some statements in this prospectus constitute forward-looking statements.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements or
industry results to be materially different from any future results, performance
or achievements expressed or implied by these forward-looking statements. Such
factors include those described in "Risk Factors." The forward-looking
statements included in this prospectus may prove to be inaccurate. In light of
the significant uncertainties inherent in these forward-looking statements, you
should not consider this information to be a guarantee by us or any other person
that our objectives and plans will be achieved.
USE OF PROCEEDS
The net proceeds to us from the sale of 4,000,000 shares of common stock, at
an assumed initial public offering price of $12.00 per share, will be
approximately $43.8 million, or $47.2 million if the underwriters'
over-allotment option is exercised in full, after deducting underwriting
discounts and commissions and estimated offering expenses payable by us. While
we have not determined the specific allocation of the net proceeds of this
offering, we currently intend to use the net proceeds for product development,
sales and marketing and working capital.
Pending their application as described above, we intend to invest the net
proceeds in short-term, investment-grade, interest-bearing securities.
DIVIDEND POLICY
We intend to retain any future earnings to support operations and to finance
the growth and development of our business, and we do not anticipate paying cash
dividends for the foreseeable future. Under our current credit facility, we are
prohibited from paying dividends except those accruing to outstanding preferred
stock. As of June 30, 1999, there were $1.7 million in accrued dividends on our
convertible preferred stock. Upon the conversion of the preferred stock into
common stock, we are required to pay to the holders of the preferred stock being
converted all accumulated and unpaid cash dividends, whether or not declared,
with respect to the preferred stock. However, if requested by any holder of the
shares of preferred stock being converted and approved by the holders of a
majority of the then outstanding shares of common stock, the holder may exchange
all or any portion of the accumulated and unpaid cash dividends into shares of
common stock at the then fair market value of the common stock.
16
<PAGE>
CAPITALIZATION
The following table sets forth our unaudited total capitalization as of June
30, 1999:
- on an actual basis;
- on a pro forma basis assuming the conversion of all outstanding shares of
preferred stock and accrued dividends on preferred stock into 10,482,518
shares of common stock; and
- on an adjusted basis to give effect to the receipt of the net proceeds
from our sale of 4,000,000 shares of common stock in this offering at an
assumed public offering price of $12.00 per share, after deducting
estimated underwriting discounts and commissions and estimated offering
expenses.
In the following table, stockholders' equity excludes:
- 218,750 shares of common stock issuable upon the conversion of a
convertible note payable to Mark Baiada, a former director, in the
principal amount of $500,000;
- 2,663,589 shares of common stock issuable upon the exercise of outstanding
stock options granted as of June 30, 1999 under our Amended and Restated
1996 Incentive and Non-Qualified Stock Option Plan and 275,534 shares
reserved for issuance under such plan;
- 156,250 shares reserved for issuance under our Director Compensation Plan;
- 9,766 shares of common stock issuable upon the exercise of a warrant to
purchase common stock issued to Silicon Valley Bank;
- 150,448 shares of common stock issuable upon the exercise of a warrant to
purchase common stock issued to Deutsche Bank Securities Inc.; and
- 137,608 shares of common stock issuable upon the exercise of warrants
issued to certain holders of the preferred stock.
You should read this information together with our financial statements and
the corresponding notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1999
---------------------------------
ACTUAL PRO FORMA ADJUSTED
--------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term borrowings, including current portion of long-term
debt........................................................ $ 1,108 $ 1,108 $ 1,108
Long-term debt, less current portion.......................... 1,654 1,654 1,654
--------- ----------- ---------
Total debt.................................................. 2,762 2,762 2,762
--------- ----------- ---------
Mandatorily redeemable convertible preferred stock............ 40,453 -- --
--------- ----------- ---------
Stockholders' equity (deficit):
Common Stock, par value $0.001; 53,800,000 shares
authorized, 2,819,955 shares issued and outstanding
actual; 13,302,473 shares issued and outstanding pro
forma; 17,302,473 shares issued and outstanding
adjusted.................................................. 3 13 17
Common stock warrants....................................... 1,900 1,900 1,900
Deferred compensation....................................... (1,303) (1,303) (1,303)
Additional paid-in capital.................................. 1,630 42,073 85,909
Accumulated deficit......................................... (26,410) (26,410) (26,410)
--------- ----------- ---------
Total stockholders' equity (deficit)........................ (24,180) 16,273 60,113
--------- ----------- ---------
Total capitalization........................................ $ 19,035 $ 19,035 $ 62,875
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
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DILUTION
Our pro forma net tangible book value as of June 30, 1999 was $16.3 million
or $1.22 per share of common stock. We determined our pro forma net tangible
book value per share by subtracting our total liabilities from our total
tangible assets and dividing that number by 13,302,473 pro forma shares of
common stock outstanding as of June 30, 1999. The pro forma information provided
immediately above and in the two tables below gives effect to:
- the conversion of all outstanding shares of preferred stock into common
stock; and
- the assumed conversion of accrued dividends on preferred stock into common
stock.
Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of shares of our common stock in
this offering and the net tangible book value per share of our common stock
immediately following this offering. Assuming an initial offering price of
$12.00 per share after giving effect to our sale of shares of common stock in
this offering and after deducting the estimated underwriting discount and
commissions and our estimated offering expenses, our pro forma net tangible book
value as of June 30, 1999 would have been $60.1 million or $3.47 per share of
common stock. This represents an immediate increase in net tangible book value
of $2.25 per share to existing stockholders and an immediate dilution of $8.53
per share to new investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $ 12.00
Pro forma net tangible book value per share as of June 30,
1999..................................................... $ 1.22
Increase per share attributable to new investors........... 2.25
---------
Adjusted pro forma net tangible book value per share as of
June 30, 1999.............................................. 3.47
---------
Dilution per share to new investors.......................... $ 8.53
---------
---------
</TABLE>
The following table summarizes on a pro forma basis as of June 30, 1999 the
difference between the existing stockholders and new investors with respect to
the number of shares of common stock purchased from us, the total consideration
paid to us, and the average price per share paid. The information presented is
based upon an assumed initial public offering price of $12.00 per share, before
deducting estimated underwriting discounts and commissions and estimated
offering expenses.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- -------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................................. 13,302,473 77% $ 43,297,000 47% $ 3.25
New investors.......................................... 4,000,000 23% 48,000,000 53% $ 12.00
------------ ----- ------------- -----
Total.................................................. 17,302,473 100% $ 91,297,000 100% $ 5.28
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
The tables above assume no exercise of outstanding stock options or warrants
and exclude:
- 218,750 shares of common stock issuable upon the conversion of a
convertible note payable to Mark Baiada, a former director, in the
principal amount of $500,000;
- 2,663,589 shares of common stock issuable upon the exercise of outstanding
stock options granted as of June 30, 1999 under our option plan with a
weighted average exercise price of $4.01 per share and 275,534 shares
reserved for issuance under the option plan;
- 156,250 shares reserved for issuance under our director compensation plan;
- 9,766 shares of common stock issuable upon the exercise of a warrant to
purchase common stock issued to Silicon Valley Bank with an exercise price
of $2.56 per share;
- 150,448 shares of common stock issuable upon the exercise of a warrant to
purchase common stock issued to Deutsche Bank Securities Inc. exercisable
at $8.70 per share; and
- 137,608 shares of common stock issuable upon the exercise of warrants
issued to certain holders of the preferred stock with a weighted average
exercise price of $2.06 per share.
To the extent that outstanding options or warrants are exercised or the
convertible note is converted, there will be further dilution to new investors.
18
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below as of December 31, 1997 and 1998
and for each of the three years in the period ended December 31, 1998 have been
derived from our audited financial statements included elsewhere in this
prospectus. The selected financial data set forth below as of December 31, 1995
and 1996 and for the year ended December 31, 1995 have been derived from our
audited financial statements not included in this prospectus. The selected
financial data as of and for the year ended December 31, 1994, and as of and for
the six months ended June 30, 1998 and 1999 have been derived from unaudited
financial statements which, in the opinion of management, include all
adjustments necessary for a fair presentation of our financial position and
results of operations. The pro forma balance sheet data assumes the conversion
of all outstanding preferred stock and accrued dividends on preferred stock into
common stock. The pro forma net loss per share amounts reflect the outstanding
preferred stock during each period presented and corresponding accrued dividends
through June 30, 1999, on an as converted basis. The selected financial data are
not necessarily indicative of results to be expected for any future period and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements,
including the notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license fees........................... $ -- $ -- $ 1,475 $ 2,337 $ 3,391 $ 1,192 $ 4,727
Services........................................ -- -- 43 2,179 3,620 1,707 1,865
Third party products and related services....... 6,074 6,950 6,555 5,225 1,107 932 --
--------- --------- --------- --------- --------- --------- ---------
Total revenues.............................. 6,074 6,950 8,073 9,741 8,118 3,831 6,592
Cost of revenues:
Software license fees........................... -- -- 113 202 259 96 156
Services........................................ -- -- 305 2,516 4,433 2,078 2,467
Third party products and related services....... 3,502 3,975 4,261 2,798 643 535 --
--------- --------- --------- --------- --------- --------- ---------
Total cost of revenues...................... 3,502 3,975 4,679 5,516 5,335 2,708 2,623
--------- --------- --------- --------- --------- --------- ---------
Gross profit...................................... 2,572 2,975 3,394 4,225 2,783 1,122 3,969
Operating expenses:
Sales and marketing............................. 1,226 1,836 3,005 5,131 9,551 3,748 6,185
Product development............................. 246 458 702 1,295 2,474 904 1,869
General and administrative...................... 724 841 1,515 1,616 2,316 950 2,124
Amortization of stock-based compensation........ -- -- -- -- -- -- 112
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses.................... 2,196 3,135 5,222 8,042 14,341 5,601 10,290
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations..................... 376 (160) (1,828) (3,817) (11,558) (4,479) (6,321)
Interest expense, net............................. (30) (41) (50) (80) (47) (34) (1,148)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations.......... 346 (201) (1,878) (3,896) (11,605) (4,512) (7,469)
Income (loss) from discontinued operations........ 300 497 (738) 99 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)................................. 646 296 (2,616) (3,798) (11,605) (4,512) (7,469)
Accretion of preferred stock redemption value..... -- -- -- (240) (846) (308) (779)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) available to common
stockholders.................................... $ 646 $ 296 $ (2,616) $ (4,038) $ (12,451) $ (4,820) $ (8,247)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Basic and diluted net income (loss) per share:
Continuing operations........................... $ 0.12 $ (0.07) $ (0.67) $ (1.39) $ (4.12) $ (1.60) $ (2.65)
Discontinued operations......................... 0.11 0.18 (0.26) 0.04 -- -- --
Accretion of preferred stock redemption value... -- -- -- (0.09) (0.30) (0.11) (0.28)
--------- --------- --------- --------- --------- --------- ---------
$ 0.23 $ 0.11 $ (0.93) $ (1.44) $ (4.42) $ (1.71) $ (2.93)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Shares used in computing net income (loss) per
share........................................... 2,813 2,813 2,813 2,813 2,814 2,814 2,815
Pro forma basic and diluted net loss per share
from continuing operations...................... $ (0.96) $ (1.35) $ (0.67) $ (0.70)
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in computing pro forma basic and
diluted net loss per share...................... 4,046 8,572 6,789 10,688
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30, 1999
----------------------------------------------------- ----------------------
1994 1995 1996 1997 1998 ACTUAL PRO FORMA
--------- --------- --------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 120 $ 146 $ 1,086 $ 2,330 $ 2,535 $ 20,600 $ 20,600
Working capital (deficit)..................... 1,119 1,205 (640) (48) (340) 16,576 16,576
Total assets.................................. 3,303 4,888 6,734 5,815 7,536 24,969 24,969
Long-term obligations, net of current
portion..................................... 519 184 191 1,270 1,876 1,654 1,654
Mandatorily redeemable convertible preferred
stock....................................... -- -- -- 5,331 17,415 40,453 --
Total stockholders' equity (deficit).......... 1,098 1,375 (1,269) (5,703) (18,147) (24,180) 16,273
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
We were incorporated in New Jersey in 1989 as Bluestone Consulting, Inc. Our
primary business initially consisted of general information technology
consulting on the UNIX platform and information technology staffing. In January
1991, we entered the software business and became a value added reseller of
third party software products. We also began to develop software internally for
sale to customers as part of our software business. In October 1995, our
proprietary product, Sapphire/Web 1.0, was released.
In March 1997, we reincorporated in Delaware and changed our name to
"Bluestone Software, Inc." In April 1997, we spun off our consulting business to
Bluestone Consulting, Inc. a newly formed Delaware corporation ("BCI").
Immediately after the spin-off, our business consisted of two product lines:
- Sapphire/Web, our proprietary software product; and
- third party graphical user interface software products, which we resold to
our customers.
For the year ended December 31, 1997, the Sapphire/Web products and related
services generated approximately $4.5 million in revenues, while third party
products and related services contributed approximately $5.2 million.
In 1998, we decided to focus on internally developed software products and
curtail the licensing and services related to third party products. Beginning in
March 1998, we increased our sales and marketing efforts and hired new
management. We hired a significant number of sales personnel throughout the
country in order to develop a nationwide presence and generate increased
revenue. The positioning and feature set of the Sapphire/Web product was shifted
from a low-cost development tool to an enterprise-wide software solution for
Internet applications. For the year ended December 31, 1998, the Sapphire/Web
products and related services generated approximately $7.0 million in revenues,
while third party products and related services contributed approximately $1.1
million. In January 1999, we released Bluestone XML-Server, which represents a
new generation of specialized Web application server focused on Internet
commerce. In May 1999, Release 6 of Sapphire/Web was made generally available.
OVERVIEW
Our fiscal year end is December 31. References to 1996, 1997 or 1998 mean
the fiscal year ended December 31 unless otherwise indicated.
We generate revenue from two principal sources:
- license fees for our software products; and
- professional services and support revenue derived from consulting,
training and maintenance services related to our software products.
In 1998, one customer accounted for 11% of our total product and services
revenues and in the six months ended June 30, 1999, one customer accounted for
29% of our total product and services revenues. Our top 10 customers represented
34%, 39% and 66% of total revenues in 1997, 1998 and in the six months ended
June 30, 1999, respectively.
SOFTWARE LICENSE FEES. Typically, our customers pay an up-front, one-time
fee for a perpetual license of our software. The amount of the fee is based on
the number of developer seats and server interactions. A pricing model based on
the number of processors within a server is also available. We also sell annual
and multi-year licenses, primarily to independent software vendors. We generally
require a written license contract that typically provides for an initial
payment within 30-60 days of contract signing. Certain multi-year license
contracts contain payment terms that extend beyond one
20
<PAGE>
year. Pursuant to the American Institute of Certified Public Accountants'
Statement of Position 97-2, any amounts due under contract beyond one year are
not deemed to be fixed and determinable and therefore are deferred and
recognized as revenue when the payments become due.
Prior to 1998, software licenses were principally the result of direct sales
to end-users. Beginning in 1998, we began to focus on channel marketing. This
has resulted in significant sales of products sold through independent software
vendors, resellers and systems integrators. We believe that these alliances have
helped to maximize our exposure in the marketplace. Furthermore, we have
experienced, and expect to continue to experience, significant variation in the
size of individual licensing transactions, ranging from small sales of perpetual
developer licenses to large, multi-year licensing arrangements with independent
software vendors.
We generally recognize license fee revenue when a formal agreement exists,
delivery of the product has occurred, no production, modification, customization
or implementation obligations remain, the license fee is deemed fixed and
determinable and collectibility is probable. Revenue from arrangements with
distributors and resellers is not recognized until our product is delivered to
the end-user.
SERVICES REVENUE. Services revenue consists principally of revenue derived
from consulting services provided to customers during implementation and
integration of our software products, training of customers' employees and fees
for ongoing maintenance, which consists of customer technical support services
and unspecified product upgrades/enhancements on a when-and-if-available basis.
Consulting and training services are typically delivered on a time and material
basis and are typically completed within one month following license contract
signing. Consulting services generally consist of simple installations and
configurations. We recognize services revenue as the services are performed.
Maintenance revenue is generally invoiced in advance and is recognized ratably
over the term of the maintenance agreement, which is generally 12 months.
COST OF SOFTWARE LICENSE FEES. Cost of software license fees consists
primarily of the costs associated with the purchase of product CDs and related
documentation and duplication costs.
COST OF SERVICES. Cost of services consist primarily of salary and benefit
costs of our consulting, support and training organizations, and are expensed
when incurred. Additionally, from time to time we engage outside consultants to
meet peaks in customer demand.
SALES AND MARKETING. We license our products primarily through our indirect
channels and direct sales force. Sales and marketing expenses consist primarily
of personnel costs, commissions to employees, office facilities, travel and
promotional events such as trade shows, advertising and public relations
programs.
PRODUCT DEVELOPMENT. We maintain an in-house development staff to enhance
our existing products and to develop new ones. Product development expenditures
are generally charged to operations as incurred. Statement of Financial
Accounting Standards No. 86 requires the capitalization of certain software
development costs subsequent to the establishment of technological feasibility.
We establish technological feasibility upon the completion of a working model.
To date, we have expensed all software development costs due to the minimal
level of development costs incurred subsequent to the establishment of
technological feasibility.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include our
personnel and other costs of our finance, human resources and information
services activities.
STOCK BASED COMPENSATION. The amount by which the fair market value of our
common stock exceeded the exercise price of stock options on the date of grant
is recorded as deferred compensation and is amortized to stock based
compensation expense as the options vest.
21
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth statement of operations data for the periods
indicated as a percentage of total revenues:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C>
Revenues:
Software license fees........................... 18% 24% 42% 31% 72%
Services........................................ 1 22 44 45 28
Third party products and related services....... 81 54 14 24 --
------- ------- ------- ------- -------
Total revenues.............................. 100 100 100 100 100
Cost of revenues:
Software license fees........................... 1 2 3 3 2
Services........................................ 4 26 55 54 37
Third party products and related services....... 53 29 8 14 --
------- ------- ------- ------- -------
Total cost of revenues...................... 58 57 66 71 40
------- ------- ------- ------- -------
Gross profit...................................... 42 43 34 29 60
Operating expenses:
Sales and marketing............................. 37 53 118 98 94
Product development............................. 9 13 30 24 28
General and administrative...................... 19 17 29 25 32
Amortization of stock-based compensation........ -- 2
------- ------- ------- ------- -------
Total operating expenses.................... 65 83 177 146 156
------- ------- ------- ------- -------
Loss from operations.............................. (23) (39) (142) (117) (96)
Interest expense, net............................. (1) (1) (1) (1) (17)
------- ------- ------- ------- -------
Loss from continuing operations................... (23)% (40)% (143)% (118)% (113)%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
SOFTWARE LICENSE FEES
Sapphire/Web license fees were $4.7 million and $1.2 million for the six
months ended June 30, 1999 and 1998, respectively. This increase of 296.6% was
primarily due to a shift in our product position from a low-priced development
tool to a high-end, high-priced enterprise software solution. This change in
product position has resulted in increased revenues per customer. Additionally,
we were able to concentrate solely on our Sapphire/Web products and services
once we curtailed our graphical user interface product line in April 1998. In
addition, we received payment under an extended license fee arrangement with one
customer in February 1999, which accounted for approximately $1.9 million of our
license fee revenue during the six months ended June 30, 1999.
SERVICES REVENUE
Sapphire/Web services revenue was $1.9 million and $1.7 million for the six
months ended June 30, 1999 and 1998, respectively, an increase of 9.3%. Services
revenue remained relatively constant between the two periods due to a strategic
change in the use of our professional staff. By the beginning of 1999, the main
focus of the services organization had shifted to concentrate on short-term,
installation-type engagements, usually 2-3 days in duration, rather than
long-term implementation activities. These implementation activities are now
performed primarily by systems integrators with which we have strategic
alliances.
22
<PAGE>
THIRD PARTY PRODUCTS AND RELATED SERVICES REVENUE
Third party products and related services revenue was zero and $932,000 for
the six months ended June 30, 1999 and 1998, respectively. This decrease was due
to our decision in 1998 to curtail the licensing and services related to third
party products so that we could focus on our proprietary products.
GROSS MARGIN--LICENSE FEES
Our license fee gross margin increased to 96.7% for the six months ended
June 30, 1999 from 91.9% for the same period in 1998. This increase was
primarily due to the increase in revenue per customer. Our focus on positioning
the product as an enterprise-wide solution has increased the revenue associated
with each sale, while the cost of sales for the product has remained relatively
constant.
GROSS MARGIN--SERVICES REVENUE
Our services gross margin decreased to (32.3)% for the six months ended June
30, 1999 from (21.8)% for the same period in 1998. This was primarily due to the
hiring and training of additional services personnel in advance of anticipated
services revenue growth.
SALES AND MARKETING
Sales and marketing expenses were $6.2 million and $3.7 million for the six
months ended June 30, 1999 and 1998, respectively, an increase of 65.0%. Of this
increase, $1.1 million was due to increases in payroll and related costs,
recruiting costs and travel costs as a result of the growth in the number of
sales personnel, $600,000 was due to increased advertising and trade show
expenses, and $256,000 was due to increased commissions expense as a result of
higher sales volume. We have increased our spending on sales and marketing
because we believe that our sales and marketing efforts are essential for us to
increase our market position and our product acceptance. The average number of
sales and marketing employees for the six months ended June 30, 1999 was 54
compared to 42 for the six months ended June 30, 1998. We also incurred
increases in variable marketing expenses due to increased trade show
participation, direct mail campaigns and advertising in order to increase market
awareness and gain market acceptance of our products. These costs as a
percentage of revenue were 93.8% and 97.8% for the six months ended June 30,
1999 and 1998, respectively.
PRODUCT DEVELOPMENT
Product development expenses were $1.9 million and $904,000 for the six
months ended June 30, 1999 and 1998, respectively, an increase of 106.3%. These
costs as a percentage of revenue were 28.3% and 23.6% for the six months ended
June 30, 1999 and 1998, respectively. These increases were associated with the
development of our new products, Sapphire/Web Release 6 and the Bluestone XML
Suite. We believe that our product development investment is essential for us to
maintain our market and technological competitiveness. Average development
headcount for the six months ended June 30, 1999 and 1998 was 30 and 22,
respectively.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2.1 million and $950,000 for the
six months ended June 30, 1999 and 1998, respectively. Included in expenses for
the six months ended June 30, 1999 were $604,000 for severance and consulting
costs. The severance costs were related to the termination of certain
executives, and the consulting costs were based upon the fair value of options
issued to outside consultants. Excluding these costs, our general and
administrative expenses were $1.5 million, an increase of 62.8% over the six
months ended June 30, 1998. This increase was primarily due to payroll and
related costs resulting from the addition of personnel to support the growth of
our business. General and administrative expenses as a percentage of revenue
were 32.6% and 24.8% for the six
23
<PAGE>
months ended June 30, 1999 and 1998, respectively. Excluding these severance and
consulting costs, the expenses as a percentage of revenue decreased to 23.5%.
AMORTIZATION OF STOCK-BASED COMPENSATION
Amortization of stock-based compensation was $112,000 and zero for the six
months ended June 30, 1999 and 1998, respectively. Deferred compensation of $1.4
million arose due to the issuance of stock options at exercise prices below the
fair market value of our common stock for accounting purposes relative to the
hiring of key employees and directors during the three months ended June 30,
1999. Deferred compensation is included as a component of stockholders' equity
and is being amortized by charges to operations over the vesting periods of the
options. As of June 30, 1999, we had an aggregate of $1.3 million of deferred
compensation to be amortized through June 30, 2003.
INTEREST EXPENSE
Net interest expense was $1.1 million and $34,000 for the six months ended
June 30, 1999 and 1998, respectively. This increase was due to the issuance of
warrants to purchase 137,608 shares of common stock at the weighted exercise
price of $2.06 per share in connection with the issuance of convertible
subordinated bridge notes. Original issue discount interest cost of $1.1 million
was recorded during the three months ended June 30, 1999 based upon the fair
value of the warrants at the dates of issuance. The warrants are recorded as a
component of stockholders' equity.
1998 COMPARED TO 1997
SOFTWARE LICENSE FEES
Sapphire/Web license fees were $3.4 million and $2.3 million for 1998 and
1997, respectively. The increase of 45.1% was due to increased market acceptance
of the Sapphire/Web software suite.
SERVICES REVENUE
Sapphire/Web services revenue was $3.6 million and $2.2 million for 1998 and
1997, respectively. This increase of 66.1% was due to the increase in the number
of consulting and training engagements associated with our growing customer
base.
THIRD PARTY PRODUCTS AND RELATED SERVICES REVENUE
Third party products and related services revenue was $1.1 million and $5.2
million for 1998 and 1997, respectively. This decrease was due to our decision
in 1998 to curtail the sale of third party products and services.
GROSS MARGIN--LICENSE FEES
Our license fee gross margin was 92.4% in 1998 and 91.4% in 1997, remaining
relatively constant.
GROSS MARGIN--SERVICES REVENUE
Our services gross margin decreased to (22.5)% in 1998 from (15.5)% in 1997.
This decrease in the gross margin was primarily due to the hiring and training
of additional personnel to support our growing installed base of customers and
anticipated increase in future revenues.
SALES AND MARKETING
Sales and marketing expenses were $9.6 million and $5.1 million in 1998 and
1997, respectively, an increase of 86.1%. These costs as a percentage of revenue
increased to 117.7% in 1998 from 52.7% in 1997. These increases were primarily
due to an increase in the number of sales and marketing personnel between March
and September 1998, including the addition of a new Senior Vice President, Sales
and a Senior Vice President, Marketing, as well as three Sales Vice Presidents.
In 1998, we
24
<PAGE>
opened seven new remote sales offices in Georgia, California, Texas, Colorado
and Illinois. Beginning in March 1998, we focused our marketing efforts on
achieving market awareness of Bluestone and acceptance of our products, and
subsequently incurred significant costs for trade show participation,
advertising and direct mail campaigns.
PRODUCT DEVELOPMENT
Product development expenses were $2.5 million and $1.3 million for 1998 and
1997, respectively, an increase of 91.0%. These costs as a percentage of revenue
increased to 30.5% in 1998 from 13.3% in 1997. These increases were primarily
due to an increase of $948,000 in payroll and related costs related to the
hiring of additional developers, and $115,000 for additional rent and
depreciation expense related to capital expenditures for software, hardware and
equipment.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2.3 million and $1.6 million for
1998 and 1997, respectively. This increase of 43.3% was primarily due to
increases in staff to support our growth. These costs as a percentage of revenue
increased to 28.5% in 1998 from 16.6% in 1997.
1997 COMPARED TO 1996
SOFTWARE LICENSE FEES
Sapphire/Web license revenue was $2.3 million and $1.5 million for 1997 and
1996, respectively. The increase of 58.4% was due to increased market acceptance
of the Sapphire/Web software suite.
SERVICES REVENUE
Sapphire/Web services revenue was $2.2 million and $43,000 for 1997 and
1996, respectively. This increase of $2.1 million was primarily due to an
increase in the number of consulting and training engagements associated with
our growing customer base.
THIRD PARTY PRODUCTS AND RELATED SERVICES REVENUE
Third party products and related services revenue was $5.2 million and $6.6
million for 1997 and 1996, respectively. This decrease was due to a shift in our
attention from third party products and services towards proprietary products
and services.
GROSS MARGIN--LICENSE FEES
Our license fee gross margin was 91.4% in 1997 and 92.3% in 1996, remaining
relatively constant.
GROSS MARGIN--SERVICES REVENUE
Our services gross margin increased to (15.5%) in 1997 from (609.3%) in
1996. This increase was primarily due to a significant increase in the sales of
our product and the related consulting, training and maintenance services. We
began to offer our maintenance services in 1996.
SALES AND MARKETING
Sales and marketing expenses were $5.1 million and $3.0 million for 1997 and
1996, respectively. This increase of 70.7% was primarily due to increases in the
number of sales and marketing personnel. These costs as a percentage of revenue
increased to 52.7% in 1997 from 37.2% in 1996.
PRODUCT DEVELOPMENT
Product development expenses were $1.3 million and $702,000 for 1997 and
1996, respectively, an increase of 84.5%. These costs as a percentage of revenue
increased to 13.3% in 1997 from 8.7% in 1996. These increases were primarily due
to the costs of hiring of additional developers.
25
<PAGE>
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $1.6 million and $1.5 million for
1997 and 1996, respectively. This increase of 6.7% was primarily due to
increases in staff to support our growth. These costs as a percentage of revenue
decreased to 16.6% in 1997 from 18.8% in 1996.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly statement of operations
data for periods indicated. We derived this data from our unaudited financial
statements, and, in our opinion, they include all adjustments necessary to
present fairly the financial results for the periods. Results of operations for
any previous fiscal quarter do not necessarily indicate what results may be for
any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------
6/30/97 9/30/97 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98 3/31/99 6/30/99
------- ------- -------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software license fees................. $ 530 $ 523 $ 854 $ 432 $ 760 $ 1,354 $ 845 $ 2,257 $ 2,470
Services.............................. 563 624 708 937 769 1,029 885 1,020 845
Third party software and related
services............................ 1,176 1,181 1,272 785 147 114 61 -- --
------- ------- -------- ------- ------- ------- -------- ------- -------
Total revenues.................... 2,269 2,328 2,834 2,154 1,676 2,497 1,791 3,277 3,315
Cost of revenues:
Software license fees................. 23 67 78 39 57 113 50 57 99
Services.............................. 624 682 865 985 1,093 1,192 1,163 1,338 1,129
Third party software and related
services............................ 647 621 683 436 98 73 35 -- --
------- ------- -------- ------- ------- ------- -------- ------- -------
Total cost of revenues............ 1,294 1,370 1,626 1,460 1,248 1,378 1,248 1,395 1,228
------- ------- -------- ------- ------- ------- -------- ------- -------
Gross profit............................ 975 958 1,208 694 428 1,119 543 1,882 2,087
Operating expenses:
Sales and marketing................... 1,099 1,398 1,598 1,545 2,203 2,930 2,874 2,826 3,360
Product development................... 299 338 376 360 544 704 866 904 964
General and administrative............ 381 434 439 447 502 666 701 635 1,489
Amortization of stock-based
compensation........................ -- -- -- -- -- -- -- -- 112
------- ------- -------- ------- ------- ------- -------- ------- -------
Total operating expenses.......... 1,779 2,170 2,413 2,352 3,249 4,300 4,441 4,365 5,925
------- ------- -------- ------- ------- ------- -------- ------- -------
Loss from operations.................... (804) (1,212) (1,205) (1,658) (2,821) (3,181) (3,898) (2,483) (3,838)
Interest income (expense), net.......... (22) 12 (29) (41) 8 42 (56) (48) (1,100)
------- ------- -------- ------- ------- ------- -------- ------- -------
Loss from continuing operations......... $ (826) $(1,200) $(1,234) $(1,699) $(2,813) $(3,139) $(3,954) $(2,531) $(4,938)
------- ------- -------- ------- ------- ------- -------- ------- -------
------- ------- -------- ------- ------- ------- -------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
6/30/97 9/30/97 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98 3/31/99 6/30/99
------- ------- -------- ------- ------- ------- -------- ------- -------
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software license fees.............. 23% 22% 30% 20% 45% 54% 47% 69% 75%
Services........................... 25 27 25 44 46 41 49 31 25
Third party software and related
services......................... 52 51 45 36 9 5 3 -- --
------- ------- --- ------- ------- ------- --- ------- -------
Total revenues................. 100 100 100 100 100 100 100 100 100
Cost of revenues:
Software license fees.............. 1 3 3 2 3 5 3 2 3
Services........................... 28 29 31 46 65 48 65 41 34
Third party software and related
services......................... 29 27 24 20 6 3 2 -- --
------- ------- --- ------- ------- ------- --- ------- -------
Total cost of revenues......... 57 59 57 68 74 55 70 43 37
------- ------- --- ------- ------- ------- --- ------- -------
Gross profit......................... 43 41 43 32 26 45 30 57 63
Operating expenses:
Sales and marketing................ 48 60 56 72 131 117 160 86 101
Product development................ 13 15 13 17 32 28 48 28 29
General and administrative......... 17 19 15 21 30 27 39 19 45
Amortization of stock-based
compensation..................... -- -- -- -- -- -- -- -- 3
------- ------- --- ------- ------- ------- --- ------- -------
Total operating expenses....... 78 93 85 109 194 172 248 133 179
------- ------- --- ------- ------- ------- --- ------- -------
Loss from operations................. (35) (52) (43) (77) (168) (127) (218) (76) (116)
Interest income (expense), net....... (1) 1 (1) (2) -- 2 (3) (1) (33)
------- ------- --- ------- ------- ------- --- ------- -------
Loss from continuing operations...... (36)% (52)% (44)% (79)% (168)% (126)% (221)% (77)% (149)%
------- ------- --- ------- ------- ------- --- ------- -------
------- ------- --- ------- ------- ------- --- ------- -------
</TABLE>
26
<PAGE>
Our comparisons of operating results from 1996 to 1997 and from 1997 to
1998, and for the six months ended June 30, 1998 to the six months ended June
30, 1999, generally apply to the comparison of the results of operations for the
nine quarters in the period ended June 30, 1999. Our third party products and
related services revenue decreased during the four quarters of 1998 due to our
decision to curtail the licensing of third party products so that we could focus
our resources on our proprietary products. Our gross profit margin increased
over the three quarters ended June 30, 1999 due to the increase in our
proprietary software license revenue. The increase in general and administrative
expenses for the three months ended June 30, 1999 resulted primarily from
$577,000 of severance and consulting costs. Net interest expense increased
during the three months ended June 30, 1999 due to the issuance of warrants with
an original issue discount interest cost of $1.1 million in connection with the
issuance of convertible bridge notes. See "Certain Transaction--Bridge
Financing."
Our quarterly operating results have varied in the past and may vary
significantly in the future depending on many factors including, among others:
- the size, timing and recognition of revenue from significant orders;
- increases in operating expenses required for product development and
marketing;
- the timing and market acceptance of new products and product enhancements;
- customer budget constraints;
- our success in expanding our sales and marketing programs; and
- general economic conditions.
We believe that the purchase of our products is relatively discretionary and
generally involves a significant commitment of capital. As a result, purchases
of our products may be deferred or canceled in the event of a downturn in any
potential customer's business or the economy in general. Accordingly, we believe
that, while the quarterly period-to-period comparisons furnish important
information about our revenues and expenses, they are not necessarily meaningful
and should not be relied upon as indicators of future performance.
LIQUIDITY AND CAPITAL RESOURCES
From our incorporation in 1989 through 1996, we primarily financed our
operations and met our capital expenditure requirements through funds generated
from operations and funds borrowed from lending institutions. From April 1997
through May 1999, we raised approximately $41.6 million of venture capital
funding in order to expand the sales and marketing and product development
efforts of the business. As of June 30, 1999 our primary sources of liquidity
consisted of cash in excess of $20.6 million and $1.0 million of available
borrowings under our $1.75 million revolving line of credit, which is secured by
substantially all of our assets. As of June 30, 1999, the balance outstanding on
our line of credit was $671,000. Borrowings under the line of credit are subject
to a borrowing base of 80% of eligible accounts receivable. Interest on our line
of credit is payable monthly at rates of prime plus .75%. We believe that our
existing capital resources are sufficient to meet our capital requirements for
the next 12 months.
Net cash used for operating activities was $3.0 million in 1997, $10.3
million in 1998 and $4.7 million for the six months ended June 30, 1999. The
cash used for operating activities was attributable primarily to net losses of
$3.8 million, $11.6 million and $7.5 million in 1997, 1998 and the six months
ended June 30, 1999, respectively.
Net cash used in investing activities was $872,000 in 1997, $1.2 million in
1998 and $164,000 for the six months ended June 30, 1999. The cash used in
investing activities related primarily to purchases of computers and software
for internal use.
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Net cash provided by financing activities amounted to $5.1 million in 1997,
$11.7 million in 1998 and $23.0 million for the six months ended June 30, 1999.
In 1997, $4.8 million was provided from the sale of Series A preferred stock to
certain venture capital investors, $920,000 was provided from borrowings under
the available credit lines and $250,000 was provided from borrowings from a
related party. In April 1998, approximately $11.2 million was provided from the
sale of Series B preferred stock to certain venture capital investors. In May
1999, we sold 9,191,176 shares of Series C preferred stock for gross proceeds of
$25.0 million, $1.35 million of which was comprised of the conversion of
indebtedness under bridge financing incurred earlier in 1999. For more
information on the bridge financing, see "Certain Transactions--Bridge
Financing."
YEAR 2000 ISSUES
GENERAL. Year 2000 issues relate to computer programs or hardware that have
date-sensitive software or embedded chips that may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculation causing disruption of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in other normal business activities.
The term "computer programs and hardware" includes accounting, data
processing and telephone/ PBX systems, in addition to other miscellaneous
systems. These systems may contain imbedded technology, which complicates our
identification, assessment, remediation and testing efforts.
STATE OF READINESS. We have designed the current versions of our software
products to be Year 2000 compliant, and do not anticipate any Year 2000 issues
related to these products. However, some older versions of our software products
that we no longer sell may not be Year 2000 compliant. Any customer using an
older version of one of our products that is not Year 2000 compliant may need to
upgrade to a newer, compatible version or discontinue using the software prior
to January 1, 2000.
We have performed an assessment of the Year 2000 readiness of our
information technology systems, including the hardware and software we use to
provide and deliver our products. Our testing to date has included our major
infrastructure items, hardware platforms, telephone, voice mail and operating
systems. All of the tested systems are compliant. Desktop computing, servers,
switching and routing platforms have been inventoried and tested with only minor
upgrades necessary to one router family. All personal computer systems have been
tested and, where necessary, upgraded. By July 1999, we had largely completed
the implementation of Year 2000 compliant internal computer applications for our
main financial and order processing systems.
We completed a Year 2000 simulation on our internal systems and software
during the first quarter of 1999. Any discrepancies noted were corrected.
Another testing cycle will be completed during the third quarter of 1999 to
ensure that systems then not compliant or systems that are newly discovered to
be non-compliant are remedied. No information technology projects have been
delayed or deferred by our Year 2000 compliance program.
As of January 1999, all third party vendors who provide us with systems or
software were contacted and provided us with written assurances of their
product's compliance. We have incorporated any recommended changes and upgrades
wherever necessary. We have not used any independent verification or validation
processes to verify the Year 2000 compliance of our third party vendors. In the
event that one or more of our significant vendors or service providers are not
Year 2000 compliant, due to undetected or embedded system components or
technology, we believe that our results of operations will not be materially
adversely affected and that our relationships with customers, vendors and others
will not be materially adversely affected.
We have also sought assurances of Year 2000 compliance from our material
providers of items other than information technology. To date we have received
approximately 95% of the necessary
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responses and will complete this portion of our investigations by the end of the
third quarter 1999. We have not received notification from any vendor indicating
that they are not Year 2000 compliant.
COST AND RISK. We have funded our Year 2000 compliance efforts from our
cash flow from operations and we have not incurred any significant costs to date
related to Year 2000 issues and do not expect the cost of future Year 2000
issues to be material. Furthermore, we believe that Year 2000 issues will not
pose significant operational problems for us.
However, if all Year 2000 issues are not properly identified or if Year 2000
issues that are identified are not assessed, remediated and tested in a timely
fashion, the Year 2000 issue may adversely impact our results of operations or
adversely affect our relationships with customers, vendors or others. Also, we
may experience operational difficulties caused by undetected errors or defects
in embedded technologies that we use in our internal systems. Additionally, we
cannot predict whether the Year 2000 issues of third parties will have a
material adverse impact on our systems or results of operations.
The costs and completion dates of our Year 2000 identification, assessment,
remediation and testing efforts are based upon management's best estimates,
which were derived using numerous assumptions regarding future events. We have
not used any independent verification or validation process to assure the
reliability of our risks and costs estimates. These estimates may prove to be
inaccurate and actual results could differ materially from those currently
anticipated. Specific factors that could cause these material differences
include, but are not limited to, the ability to identify, assess, remediate and
test all relevant products and services purchased from or by third parties and
other similar uncertainties. In addition, variability of definitions of
"compliance with Year 2000," and the myriad of different products and services
and combinations thereof, used by our customers in connection with our products
may lead to claims against us which we cannot currently estimate. The aggregate
cost of defending and resolving such claims, if any, may adversely impact our
results of operations.
Year 2000 issues may affect the purchasing patterns of current and potential
customers in a variety of ways. Many companies are expending significant
resources to replace or remedy their current hardware and software systems for
Year 2000 compliance. These expenditures may result in reduced funds available
to purchase software products such as those offered by us. Furthermore, our
customers could be forced to postpone installations of our products due to
dedication of resources to their own Year 2000 issues. We do not believe that
there is any practical way to ascertain the extent of, and have no plan to
address problems associated with, any reduction in purchasing resources of our
customers. Any resulting reduction could have a material adverse effect on our
business.
To date, there has been no material negative impact on our financial
condition or operations as a result of our Year 2000 compliance program.
CONTINGENCIES. We have not yet completed an analysis of the operational
problems and costs, including loss of revenues, that would be reasonably likely
to result from our failure and the failure of certain third parties to complete
efforts necessary to achieve Year 2000 compliance on a timely basis. We plan to
identify the most likely worst case scenario and, if a contingency plan is
required, finalize our plan by September 1999.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop our products in the U.S. and have sold them primarily in North
America. As a result, our financial results have not been affected by factors
such as changes in foreign currency exchange rates or weak economic conditions
in foreign markets. In the future, we expect to increase our international
operations which could increase our exposure to these factors.
Our future interest income will be sensitive to changes in the general level
of U.S. interest rates. However, we plan to invest our excess cash in
short-term, investment-grade, interest-bearing securities and we have concluded
that there is no material market risk exposure relating to these investments.
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BUSINESS
OUR COMPANY
We are a leading provider of software for enterprise interaction management,
which enables businesses to extend information over the Web in a controlled
manner and to support high volumes of users and interactions. Our flagship
product, Sapphire/Web, is a framework for JAVA Web application servers and is
currently in Release 6. A Web application server is a software product that
allows broad access to stored corporate information and applications to a
variety of users, including customers, suppliers and employees, via the Web. We
believe that our JAVA Web application server is the leading solution of its kind
based on the breadth of its functionality. We believe that ours is the only
product to adequately address the four defining elements of enterprise
interaction management--development, deployment, integration and management--and
therefore provides the most complete overall solution to our customers. In
December 1998 at the Giga Information Group's Emerging Technology Conference, we
demonstrated that our solution can meet the needs of virtually any enterprise by
conducting a live simulation of an Internet commerce site running at a rate of
over 100 million interactions per day. In January 1999, we released Bluestone
XML-Server, which represents a new generation of specialized Web application
server focused on commerce via the Internet.
We participate in the following three separate markets:
- THE MARKET FOR JAVA WEB APPLICATION SERVERS. In this market sector,
enterprises employ our solutions to deploy their existing information
technology assets for use in a Web environment, and to create new
enterprise applications that are used via the Web.
- THE MARKET FOR eXTENDING THE SUPPLY CHAIN. In this market sector, our
products enable the "virtual corporation," which means they allow an
enterprise to integrate its information assets with those of its partners,
vendors and customers to improve collaboration utilizing Web technology in
a highly secure and scalable environment.
- THE MARKET FOR ENTERPRISE APPLICATION INTEGRATION. In this market sector,
our products facilitate the integration of disparate computer systems
within an enterprise. We believe we are particularly well positioned in
this market, since the necessary capabilities, including standardizing
corporate data formats and providing access to existing information
systems, are two of the core strengths of our JAVA Web application server
software.
Our solutions are used by some of the world's leading companies, including
ARI, AT&T, Deutsche Bank, Dreyfus Corporation, Eli Lilly, Hewlett-Packard,
Houghton Mifflin Company, Just For Feet, MCI WorldCom, OpenConnect and Reliance
National.
OUR INDUSTRY
GROWTH IN INTERNET RELATED SOFTWARE
The Internet has experienced dramatic growth, both in terms of the number of
users and as a means of conducting commercial transactions, and is expected to
continue to grow rapidly. According to a report prepared by the Computer
Industry Almanac Inc., the number of Internet users was over 150 million in
1998, and is expected to grow to over 720 million by the end of 2005.
The increase of users and business activities on the Web has created a large
and growing market for Web application software as existing businesses and new
Web-based enterprises foster new revenue streams, significantly broaden
information deployment, enable inter-enterprise collaboration and strive to
reduce the cost of maintaining an ever-changing technology infrastructure. An
International Data Corporation report estimates that Internet-centric software,
which accounted for $4.0 billion in revenue in 1997, will approach $16.0 billion
by 2000 due to aggressive corporate adoption.
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THE RISE OF THE ENTERPRISE APPLICATION SERVER
To date, most companies' use of Internet technology has consisted of
employing Internet software products called Web servers to provide marketing
material through their Web sites. This technology allows the presentation of
relatively simple information to users, such as pictures and text, through
static documents. This static information must be preformatted with the
information to be displayed, then manually changed when information is to be
updated. This technology is still heavily in use today, but cannot sufficiently
meet the quickly growing needs of companies to provide complex and dynamic
information to their users. The existing information technology infrastructure
of most companies leaves them unable to utilize, integrate or deploy existing
information technology assets for Internet commerce or use over the Web. These
companies are recognizing that a broader set of facilities is required to
capture the substantial benefits offered by Internet computing. These facilities
include development capabilities that are specifically geared to a Web-based
environment, interaction environments that are scalable and reliable,
integration faculties that allow seamless linkages between the Internet and an
enterprise's existing information infrastructure, and the ability to effectively
monitor and manage Web-based applications and infrastructure. Web application
servers such as our software have emerged to provide these facilities.
Web application servers, by design, allow scalable, secure real time,
interactive access to complex information through the Web that is otherwise only
available internally in an organization through its own applications and
existing databases. They do this by providing the following capabilities:
- load balancing--spreading the workload across multiple processors;
- transaction management--tracking and assuring the completion of
transactions;
- integration to multiple back-end sources--making all enterprise
information available for use;
- an integrated development environment--a graphical tool to assist software
developers;
- application management--monitoring and reporting on all application server
activity; and
- multiple user support--the ability to individually serve a community of
disparate users.
Demand for these capabilities has resulted in significant growth in the
market for Web application servers. In an August 1998 report, Forrester Research
estimated that the market for Application Server software would be approximately
$700 million in 1999 and would grow to approximately $1.8 billion by 2001,
representing a compound annual growth rate of approximately 60%. Another
independent technology research organization, Ovum, estimated in June 1999 that
the market for application server technologies, which they define in a manner
that more closely resembles our addressable market, will grow to $17 billion by
2004.
OUR SOLUTION
We provide a comprehensive framework that enables businesses to deploy
information across the Internet, or their proprietary company networks called
intranets and extranets, to employees, customers, suppliers and partners. Our
solution furnishes businesses with the ability to Web-enable existing
information systems, develop new Web-based applications, and enable Internet
commerce. Our deployment solution is certified by Sun Microsystems as 100% Pure
JAVA and therefore operates in all enterprise computing environments. We have
recently introduced the capability to support Hot Swapping, which enables the
movement of applications from one computer to another, and Hot Versioning, which
enables software programs to be updated between user clicks. These features
allow businesses to upgrade or fix their hardware and software without
interrupting user interactions permitting true 24x7 operations. This is
particularly critical for companies engaged in Internet commerce where down time
can be very costly. We believe our solution is the only one available that
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provides the features and capabilities necessary for use in enterprise-scale,
mission-critical applications. In particular, our solution offers the following
facilities:
ROBUST DEVELOPMENT ENVIRONMENT AND TOOLSET. Our solution includes an
integrated development environment, which can be thought of as a programmer's
toolkit, that uses industry-standard programming components to easily assemble
applications and provides improved support for users with varying skill levels.
This toolkit includes automated routines to generate user interfaces and the
ability to import existing user interfaces from other sources, which increases a
programming staff's development speed. The environment is open and highly
adaptable, which allows programmers to increase their productivity by selecting
the most appropriate tools for a given task.
SCALABLE, OPEN, HIGH-PERFORMANCE DEPLOYMENT. The Web application server
framework within our solution enables businesses to make their information
available with a high degree of reliability, security and flexibility. Our Web
application server supports very high volumes of interactions and high numbers
of concurrent users with caching, load balancing and fault-tolerance features,
which optimize response times and ensure the integrity of applications. In
addition, our standards-based, 100% Pure JAVA architecture allows for a high
level of flexibility in operating systems, programming languages, and database
access and communication protocols, with no dependence on proprietary
technology.
EXTENSIVE INTEGRATION CAPABILITIES. Our solution goes beyond application
programming interfaces, or APIs, to facilitate communications between a
business' computing systems with pre-built modules for Web-enabling today's
dominant business applications, such as those from SAP and PeopleSoft. Our
solution also includes tools that allow programmers to rapidly build new
integration modules for other applications, and generally enable complex
information answers to be generated from any data source within the enterprise,
no matter how remote or proprietary. These capabilities allow businesses to
marry existing systems to new information delivery platforms, thereby preserving
legacy investments.
COMPREHENSIVE MANAGEMENT. Our solution provides the necessary means to
monitor, administer and report on a business' entire Web infrastructure. These
advanced features provide the means to perform administrative and management
tasks easily and quickly, allow for real time reconfiguration of the information
infrastructure, assure minimum and/or differentiated levels of service, and
integrate with leading systems management utilities such as those from Computer
Associates, IBM Tivoli, BMC and Hewlett-Packard. Our solution automatically
generates alarms, alerts and reports, which allows for optimal performance of,
and powerful insight into, a business' Web infrastructure.
OUR GROWTH STRATEGY
Our goal is to maintain and extend our position as a leading provider of Web
application server technology, enterprise application integration and Internet
commerce solutions. Our key growth strategies are to:
MAINTAIN AND EXTEND TECHNOLOGICAL LEADERSHIP. We believe that our
technology, solution and features represent a significant competitive advantage
and provide customer benefits that are not available from other solutions.
Highly advanced technological elements incorporated in our solutions
collectively contribute to the speed, scalability, reliability, manageability,
flexibility and extensibility of our product set. For more information on these
technological elements, see "--Technology." We believe that our consistent
record of technological industry firsts, as demonstrated recently by the release
of our Bluestone XML-Server, will continue into the future.
EXPAND PRODUCT OFFERINGS. We intend to continue to develop new products and
enhancements to existing products to fuel continued growth. Recently, we
introduced our XML suite of products, which expands the markets and applications
for our technology, with a focus on Internet commerce and inter-enterprise
information exchange. Upcoming enhancements to the Sapphire/Web suite consist of
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enhanced Internet commerce services including the ability to provide
differentiated service levels based on user profiles, improved content and
presentation management capabilities, and significantly increased bandwidth,
transaction processing and security. Additional upcoming enhancements will
include improved high-end management features like reporting and control
systems, new business application capabilities and increased ease of use. We
expect to continue to make considerable investments in product development to
maintain this pace of innovation.
CONTINUE TO FOCUS ON ENTERPRISE-SCALE SOLUTIONS. An April 5, 1999 article
in PCWEEK ONLINE reported on an independent evaluation of our Web application
server framework against two competitive products. The evaluation employed a
simulated E-commerce site developed by Doculabs, an independent information
advisory company. In this evaluation, our solution posted throughput and
response time results that were 50% higher than our nearest competitor. In
addition, our solution was the only product able to meet the fault-tolerance
requirements of mission-critical and E-commerce applications. At the December
1998 Emerging Technology Conference sponsored by Giga Information Group, we
performed a live demonstration based on a PCWEEK Labs-designed benchmark and
successfully processed a variety of complex transactions at a rate of over 100
million interactions per day. Consequently, we believe that we are uniquely
positioned as a performance leader in our industry and will benefit as an
increasing number of large mission-critical systems move to the Web and as
Internet commerce grows.
INCREASE MARKETING AND DIRECT SALES EFFORTS. We intend to leverage our
previous customer successes by devoting significant marketing and direct sales
resources to specific industry verticals, including telecommunications,
insurance, brokerage, pharmaceuticals and E-commerce. We intend to increase the
number of field sales offices and field sales representatives over the next 12
months. Our direct sales organization is organized around named accounts,
geographic regions and, increasingly, industry verticals. As of June 30, 1999,
we had 52 employees in sales and marketing, 18 of which were quota-carrying
field sales representatives.
FURTHER DEVELOP INDIRECT CHANNELS, PARTNERS AND ALLIANCES. Our sales
efforts are leveraged by indirect channels and partners, and we intend to
continue to foster these relationships to fuel additional growth. These
channels, partners and alliances significantly extend our market reach and
overall opportunity set, and include the following:
- independent software vendors, including Hewlett-Packard, Sanchez Computer
Associates and Platinum technology;
- systems integrators, including American Management Systems, Grant
Thornton, KPMG, PricewaterhouseCoopers and approximately 65 others; and
- value added distributors (VADs) and value added resellers (VARs),
including Intraware and Merisel.
OUR PRODUCTS
SAPPHIRE/WEB SUITE
SAPPHIRE/DEVELOPER. Sapphire/Developer is a software product that delivers
the capability to build applications that are used through the Web to find,
access and deliver enterprise-class information to users. It connects any
back-end data source to any front-end data user. It supports a wide variety of
industry standard data formats and programming languages, such as HTML and
ActiveX, and enables the delivery of information to any database, flat file or
other enterprise application. Sapphire/ Developer's ability to incorporate new
technology, tools and development approaches allows increased productivity and
faster deployment of Web applications.
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SAPPHIRE/DEVELOPER ENTERPRISE EDITION. Sapphire/Developer Enterprise
Edition is a bundle of software products which includes the Sapphire/Developer
Enterprise Deployment Kit (EDK) and Sapphire/Developer. EDK is a software tool
kit that extends Sapphire/Developer to enable the use of any combination of
operating systems, programming languages and data definitions such as those from
Microsoft, Sun and IBM.
SAPPHIRE/UNIVERSAL BUSINESS SERVER (UBS). UBS is the Web application server
that creates a real time, Web-enabled environment that scales applications to
meet fluctuating needs, balances loads to prevent system downtime, crashes or
poor performance and manages transactions across the Web infrastructure. UBS
delivers scalability and consistent availability to mission-critical,
enterprise-class Web applications.
SAPPHIRE/APPLICATION MANAGER (SAM). SAM is a management engine that
proactively collects and provides real-time performance and status information
on a company's entire Web infrastructure, including all components of the
Sapphire/Web application server framework. SAM monitors all user interactions
and bolsters the quality, performance and integrity of work being performed over
the Web using the Sapphire/Web application server.
SAPPHIRE/INTEGRATION MODULES (SIMS). SIMs provide a solution for
integrating a company's existing information assets without the need for
extensive and costly re-engineering of applications and infrastructure. SIMs
create reusable programs that are used to access all of a company's information
resources and make them easily available to programmers and users. We provide
SIMs to popular applications and protocols, such as SAP, PeopleSoft, CICS and MQ
Series.
THE BLUESTONE XML SUITE
BLUESTONE XML-SERVER. Our Bluestone XML-Server, released in January 1999,
is a specialized application server that automatically converts data from
existing sources into XML documents and then uses the XML documents to
communicate with other applications. XML is a highly flexible document format
for structuring data on the Web. Our XML server enables businesses to conduct
Internet commerce, integrate their supply chains and generally share information
across software applications and with other businesses in an automated fashion.
BLUESTONE VISUAL-XML. Our Bluestone Visual-XML product, announced in
February 1999 and released in May 1999, is a tool kit designed to allow business
users to develop applications based on XML with a graphical drag-and-drop
environment.
XWINGML. Our XwingML product is an open source application that was
released in February 1999 and is used to create JAVA graphical user interfaces
based on XML documents.
BLUESTONE XML-CONTACT. Our Bluestone XML-Contact is open source software
that lets devices using 3Com's Palm operating system exchange contact
information with any corporate database, turning personal productivity tools
into corporate information resources with the power of XML.
SERVICES AND SUPPORT
We offer short-term mentoring, consulting and customer training services
through our Advanced Technology Group. We use our Advanced Technology Group
resources to assist our partners and clients in the early implementation
efforts, which tend to be less than one month in duration, and rely on our
systems integration partners to deliver longer-term professional integration
services. This strategy allows us to offer a higher degree of pre- and
post-sales support to our prospects, partners and licensees in support of
furthering the sales of our software products.
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We have a Customer Support Group that provides ongoing maintenance and
support to customers through maintenance contracts. We furnish support through
the telephone and e-mail, as well as through a portion of our Web site called
Explore Web, which provides users with access to a comprehensive knowledge base
of the Sapphire/Web and XML suite solutions.
We offer extensive training and certification for Sapphire/Web products as
well as course training in related topics, such as JAVA, XML and the Web in
general. Additionally, we also offer formal instruction through interactive
distance learning, which furnishes instruction through an innovative mix of
video, computer-based training and e-mail. We provide ongoing technical support
on a contractual basis to our licensees with annual maintenance agreements.
SALES AND MARKETING
As of June 30, 1999, our sales and marketing organization consisted of 52
individuals, all of whom were based in North America. We had 18 field sales
representatives and 11 inside sales representatives, all of whom carry quotas.
The sales force is comprised of three primary organizations: Named Accounts,
Direct Sales and Indirect Sales. We have diversified our sales activities to
support a target distribution of 70% indirect and 30% direct.
We have sales offices in Sacramento, Los Angeles, Atlanta, Dallas, Chicago,
Boulder, San Francisco, Toronto and Mount Laurel, New Jersey. Sales outside
North America are generated by third party resellers in London, Seoul and
Sydney. We expect to open regional sales support offices in Europe and Asia
Pacific within the next twelve months.
We support our sales efforts through corporate and field marketing
initiatives in North America. Our marketing organization focuses on creating
market awareness, generating leads, promoting our technology leadership and
educating independent research analysts. These efforts include public relations,
advertising, trade shows, alliance programs, seminars, direct mail,
telemarketing and marketing collateral that includes a Web site, brochures,
white papers and demonstrations.
STRATEGIC ALLIANCES
We are building and maintaining significant working relationships with
complementary vendors that we believe will contribute to our ongoing success.
These relationships fall into four categories: strategic technology alliances,
independent software vendors, systems integrators and value added distributors
and resellers. Within our strategic technology alliances, we engage in
collaborative technology exchanges with BEA Systems, Computer Associates,
Informix, IBM, Level III Communications/PKS SI, Microsoft, Netscape,
OpenConnect, Oracle, Platinum technology, Sanchez Computer Associates and Sun
Microsystems, among others.
We have relationships with independent software vendors, including
Hewlett-Packard, Platinum technology, OpenConnect, Sanchez Computer Associates
and Foundation Technologies. These partners deliver their application software
products with some element of our technology embedded therein. We maintain a
close working relationship with these partners and will continue to develop
relationships of this nature.
We also maintain relationships with third party systems integrators who
deliver services to our end-user clients. These companies have been recruited to
deliver long term project support and are required to maintain a level of
proficiency in our products. These relationships include American Management
Systems, KPMG, Grant Thornton, PricewaterhouseCoopers and Level III
Communications/PKS SI.
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We have entered into formal two-tier distribution agreements with Intraware
and Merisel to deliver our suite of software products. These agreements provide
Intraware and Merisel with the right to distribute our products in North
America.
We are a member in good standing of the Enterprise JAVA Bean Council, the
World Wide Web Consortium (W3C), the Object Management Group (OMG) and the
Enterprise Integration Council.
CUSTOMERS
From 1996 through 1998, we licensed copies of our Sapphire/Web software to
more than 500 customers. Most of these customers began using our Sapphire/Web
products to Web-enable separate departmental systems and many of them are now
expanding their usage of Sapphire/Web to a company-wide basis. Accordingly, we
have observed a recent shift by our customers from creating Web applications to
creating enterprise applications that are Web-enabled.
Our solutions are applicable to a wide variety of industries and are used by
many of the world's leading businesses. For example, Sapphire/Web users include:
- three of the top five FORTUNE 500 companies in the electronics industry;
- five of the top ten FORTUNE 500 companies in the computer equipment
industry;
- four of the top five FORTUNE 500 companies in the aerospace industry;
- seven out of the top ten FORTUNE 500 companies in the telecommunications
industry;
- three of the top four FORTUNE 500 companies in the entertainment industry;
and
- five of the top ten FORTUNE 500 companies in the pharmaceuticals industry.
Our customers include ARI, AT&T, Deutsche Bank, Dreyfus Corporation, Eli
Lilly, Hewlett-Packard, Houghton Mifflin Company, Just For Feet, MCI WorldCom,
OpenConnect and Reliance National. Each of these customers accounted for at
least $100,000 in revenue.
Examples of successful Sapphire/Web implementations with representative
customers of ours include the following:
- We helped ARI, a large international leasing company, establish its first
Web application in 1998. That application enabled ARI's customers to
inquire directly into ARI's leasing system to manage delivery and
maintenance information for ARI's fleet.
- Reliance National, a major insurance company, has been using Sapphire/Web
software since 1997. Reliance National began with small departmental
solutions. In 1998, Reliance National expanded its usage to include a
system that decentralized its operations by communicating its risk
management system to all of its associated brokers, thereby significantly
expanding the speed in which the broker can prepare premium quotes and the
manner in which Reliance National serves its customers.
- AT&T and MCI WorldCom have each chosen our products to be used in customer
loyalty and retention programs. These companies have engaged in projects
to Web-enable their billing and reporting systems, thereby allowing their
customers to review and approve bills through their Web site.
- Several major publishers have used our products to further their Internet
commerce initiatives. For example, Time, Inc. has utilized the
Sapphire/Web solution to Web-enable the acquisition of pictures from its
large database so that its customers can search for and purchase the
images from its Web site. In another example, Houghton Mifflin Company, a
text book publisher, has
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utilized the Sapphire/Web solution to provide an index of products
available on its Web site, thereby considerably enhancing its customer
service capabilities.
- Several independent software vendors have entered into licensing
arrangements with us in which our Sapphire/Web software becomes a core
component for the next generation of their respective software products.
For example, Platinum technology uses Sapphire/Web software as its next
generation technology to move beyond the Web extension of legacy
applications. In another example, Sanchez Computer Associates, a banking
software provider, uses the Sapphire/ Web software as a foundation for its
voice response and ATM systems. Additionally, Hewlett-Packard, a workflow
and process management software vendor, uses Sapphire/Web software as its
application integration engine, thereby giving it access to back-end
legacy applications.
COMPETITION
The market for our products is intensely competitive, highly fragmented and
characterized by rapid technological change and new product introductions.
Recently, several of our competitors have been acquired by large software
companies. Our competitors consist of a number of private and public companies
including, among others:
- BEA Systems, which acquired WebLogic;
- IBM;
- Microsoft;
- Oracle; and
- Sun Microsystems, which acquired NetDynamics and the rights to Netscape's
Application Server.
In addition, we face competition from in-house software developers. Many of
our competitors have longer operating histories, significantly greater
financial, technical, marketing and other resources, greater name recognition, a
broader product range and a larger base of installed customers than us.
We expect to face increased competition in the future from our current
competitors. In addition, new competitors, or alliances among existing and
future competitors, may emerge and rapidly gain significant market share. We may
also face increased competition in the future from existing large business
application and Internet software vendors that may broaden their product
offerings to include Web application server software. To the extent these
vendors are able to offer systems that are functionally comparable or superior
to our products, their significant installed customer bases, ability to offer a
broad solution and ability to price their products as incremental add-ons to
existing systems could provide them with a significant competitive advantage
over us.
TECHNOLOGY
Our technology is based upon two concepts:
- binding front-end objects to back-end objects which connects sources of
data to users of data; and
- protecting users from changes in technology.
Specific technology features of the Bluestone solution include:
100% PURE JAVA APPLICATION SERVER. The JAVA platform offers enormous
benefits to us and our customers. Our products run on any platform where JAVA is
available and has been verified on operating systems such as Windows95,
Windows98, WindowsNT, Linux, all UNIX platforms including Sun, IBM and HP, as
well as the operating systems for IBM's mainframes and AS400 computers. JAVA
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<PAGE>
has also brought large productivity gains to our development team by decreasing
development time, eliminating porting costs and speeding time to market.
LOAD BALANCING. This is the fundamental technology that provides the high
performance and scalability for large applications and contributes to the fault
tolerant, or continuous operation, of the applications. A Load Balance Broker
runs in any number of Web servers in a Web server farm and manages the load
across any number of copies of Sapphire/UBS in that server farm. In addition,
the Load Balance Broker can be deployed as a portable mini-application, such as
a JAVA Bean or an Enterprise JAVA Bean, to allow utilization of the application
server from non-Web based applications. The Load Balance Broker has a unique
competitive advantage with a zero-feedback loop, a sophisticated technique to
direct work to non-busy resources that provides maximum speed and no practical
limits in terms of numbers of Load Balance Brokers and Web application servers
deployed.
PERSISTENT STATE SERVER. The persistent state server is also a key
component of fault tolerance. State servers are where "shopping cart"
information is held on Internet commerce sites while a user is shopping. It is
important that even if one of the application servers fails, the state
information is still available. A recent PCWEEK test substantiated
Sapphire/Web's significant lead in this high performance implementation of fault
tolerance.
FAULT TOLERANT DESIGN. Sapphire/Web has been designed to provide fault
tolerance, or nonstop operation, in a Web environment. There are two key pieces
to this technology. First, in the event of an application server failure, the
Load Balance Broker will redirect any requests from Web browsers to other
application servers. Second, the Persistent State Server will make a user's
state information continuously available, even if the application servers fail.
LIVE OBJECT CACHE. The Live Object Cache provides very high performance for
Internet commerce applications. The Live Object Cache holds data and programs
within the memory of the application server, reducing the time required for
accessing frequently used data. It is also contributes to fault tolerance by
working in conjunction with the persistent state server.
CONTENT GENERATION OBJECTS. Sapphire/Web has a powerful template processing
facility to generate Web pages dynamically. Content Generation Objects are
reusable JAVA classes, or computer programs, that can create content in a
consistent manner. This increases programmer productivity and provides Web
developers a simple mechanism to maintain a consistent look and feel to their
Web pages.
SAPPHIRE/DEVELOPER DESIGN ENVIRONMENT. This provides developers a highly
productive design environment for binding front-end objects to back-end objects.
Sapphire/Developer also maintains an open environment for integrating other
industry leading programming tools.
BLUESTONE XML-SERVER COMMUNICATIONS SERVICES. This program recognizes the
protocol of incoming communications and translates it to a request for service
to the XML-Server. XML documents can be passed to and from the XML server from
any combination of industry standard protocols. This separates the
communications from the processing of XML documents, so additional
communications services can be added without changing any code.
BLUESTONE XML-SERVER DOCUMENT HANDLER SERVICES. Bluestone's Document
Handlers are the JAVA programs that process XML documents. The Bluestone
XML-Server is unique in its ability to handle any XML document type via this
mechanism and its ability to dynamically load new document handler classes.
BLUESTONE VISUAL-XML DESIGN ENVIRONMENT. This open tool provides easy to
use creation of Bluestone XML-Server applications and creates XML documents in a
stand-alone mode. This tool is available on all platforms including Linux, UNIX
and Windows. We believe this tool expands the XML market to non-programmers.
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HOT VERSIONING AND HOT SWAPPING. These new capabilities of Sapphire/Web
Release 6 are unique in providing companies the ability to run a full 24x7 Web
site. Hot Versioning allows Web applications to be upgraded between user clicks
with no session interruption. It includes testing in a production environment
and roll-forward and roll-back capabilities for versions of an application.
Sapphire/Web Release 6 also supports Hot Swapping so that applications can be
moved from server to server without interrupting service to the user.
INTERNET QUALITY OF SERVICE. This innovative capability provides for
differentiation of service based on each particular user. This allows for
priority customers to always get performance preference over other visitors to a
Web site.
PRODUCT DEVELOPMENT
Historically, we have invested heavily in product development. Our future
success depends in large part on our ability to enhance existing products and
create new products that maintain and expand our technology lead. Accordingly,
we intend to continue to invest heavily in product development.
As of June 30, 1999, we had 31 people in the product development group,
which includes a core group of senior developers and product development
leaders, junior developers, quality assurance and documentation personnel. Our
development team is located at our headquarters in Mount Laurel, New Jersey.
Almost all of our software is being developed in JAVA, thereby improving
productivity and reducing porting and testing costs.
In an attempt to move our products at Internet-speed, we employ a small-team
approach with an interactive design/development/testing methodology that has
evolved over the past five years. To date, our product development group has
benefitted from a very low turnover rate.
We are currently developing new releases to our Sapphire/Web and XML product
families. We anticipate that these new releases will bring even stronger
Internet commerce, high-end management, and ease of use capabilities, together
with integrated Internet commerce solutions for SAP and PeopleSoft in joint
development with our systems integration partners. We expect these new releases
to continue to position our products as the most "feature-rich" in the market.
EMPLOYEES
As of June 30, 1999, we had 152 employees, of which 52 were employed in
sales and marketing, 38 were employed in services, 31 were employed in product
development and 31 were employed in general and administrative positions. None
of our employees are represented by unions. We believe that our relations with
our employees are good.
PROPERTIES
Our principal executive and administrative offices are located in
approximately 41,000 square feet of office space in Mount Laurel, New Jersey. We
also maintain sales offices in Sacramento, Los Angeles, Atlanta, Dallas,
Chicago, Boulder, San Francisco, Toronto and Mount Laurel, New Jersey. Annual
lease payments on the Mount Laurel facility are approximately $480,000. This
lease expires in November 2003. We do not own any real property.
LEGAL PROCEEDINGS
We are from time to time a party to litigation arising in the ordinary
course of our business. We are not currently a party to any material litigation.
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TRADEMARKS AND COPYRIGHTS
Bluestone-Registered Trademark- and Sapphire/Web-Registered Trademark- are
registered trademarks of Bluestone Software, Inc. Sapphire/ Universal Business
Server-TM- (UBS), Sapphire/Enterprise Deployment Kit-TM- (EDK), Sapphire/
Application Manager-TM- (SAM), Sapphire/Integration Modules-TM- (SIMS),
Enterprise Interaction Management-TM-, Bluestone iCommerce Suite-TM-,
Sapphire/Developer-TM-, Sapphire/Developer Enterprise Edition-TM-, Bluestone XML
Suite-TM-, Bluestone XML-Contact-TM-, Bluestone XML-Server-TM-, XwingML-TM-,
Bluestone Visual-XML-TM-, Hot Versioning-TM-, and IQS-TM- (Internet Quality of
Service) are trademarks of Bluestone Software, Inc.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- ------------------------------------------------------------------
<S> <C> <C>
P. Kevin Kilroy........................ 45 President, Chief Executive Officer and Director
S. Craig Huke.......................... 38 Senior Vice President and Chief Financial Officer
Robert W. Bickel....................... 42 Senior Vice President, Products
John H. Capobianco..................... 47 Senior Vice President, Marketing
Joseph K. Krivickas.................... 37 Senior Vice President, Worldwide Sales
Mel Baiada............................. 41 Chairman of the Board of Directors and Founder
Gregory M. Case........................ 36 Director
William C. Hulley...................... 40 Director
Anton Simunovic........................ 33 Director
Andrew J. Filipowski................... 48 Director
Paul E. Blondin........................ 48 Director
</TABLE>
P. KEVIN KILROY has served as our President since January 5, 1999 and our
Chief Executive Officer since June 10, 1999. From March 1998 to January 4, 1999,
Mr. Kilroy served as our Senior Vice President, Worldwide Sales. Before joining
Bluestone, Mr. Kilroy served as the Senior Vice President of Worldwide
Distribution for Seer Technologies, Inc., an application development software
company, from March 1996 to March 1998. From April 1993 to October 1995, Mr.
Kilroy served as President of Mantech Systems Corporation and Mantech Solutions
Corporation and Vice President of Mantech International Corporation.
S. CRAIG HUKE has served as our Senior Vice President and Chief Financial
Officer since April 15, 1999. Before joining Bluestone, Mr. Huke was Vice
President, Finance of MetroNet Communications Corp., a broadband
telecommunications services provider, from April 1998 to April 1999. Prior to
joining MetroNet he was Vice President and Corporate Controller of Seer
Technologies, Inc. from November 1994 to April 1998. From September 1991 through
October 1994, Mr. Huke held several positions with Legent Corporation, a
publicly held software development company, including Director of Financial
Planning and Analysis and Assistant Controller.
ROBERT W. BICKEL has served as our Senior Vice President, Products since
January 1998. From April 1997 to January 1998, Mr. Bickel served as our Chief
Operating Officer, and from May 1992 to April 1997, as the Director of Products
at Bluestone Consulting, Inc., a New Jersey corporation and our predecessor.
JOHN H. CAPOBIANCO has served as our Senior Vice President, Marketing since
February 1998. Before joining Bluestone, Mr. Capobianco served as a Senior Vice
President of Marketing at SAP America from March 1997 to February 1998. From
1996 to March 1997, Mr. Capobianco served as the Vice President, Corporate
Marketing of Sybase, Inc., from 1995 to 1996 as Vice President, Marketing of
PRIMAVERA Systems, Inc. and from 1985 to 1995 as Vice President, Marketing of
Computer Associates International, Inc.
JOSEPH K. KRIVICKAS has served as our Senior Vice President, Worldwide Sales
since May 1999. From August 1998 to May 1999, Mr. Krivickas was Vice President,
Sales and Service for E-commerce products at Sanga International. From January
1996 to July 1998, Mr. Krivickas was co-founder and
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served as Chief Technology Officer for Kazz Digital Studios. From 1988 to 1995,
Mr. Krivickas held various sales and marketing management positions within
SunSoft, Sun Technology Enterprises and Sun Microsystems Computer Corporation.
MEL BAIADA has served as our Chairman of the Board of Directors since our
incorporation. From April 1997 to January 1999, Mr. Baiada served as our
President and Chief Executive Officer. From April 1989 to April 1997, Mr. Baiada
served as the President and Chief Executive Officer of Bluestone Consulting
Inc., a New Jersey corporation and our predecessor. Mr. Baiada also serves as
the President and a director of Bluestone Consulting, Inc., a Delaware
corporation spun off from us in April 1997.
GREGORY M. CASE has served as a director of Bluestone since April 1997. Mr.
Case has been a Managing Director of Patricof & Co. Ventures, Inc. since May
1995 and a Vice President of Patricof & Co. Managers, Inc. since May 1996. From
January 1994 through May 1995, Mr. Case served as a Vice President of Patricof &
Co. Ventures, Inc.
WILLIAM C. HULLEY has served as a director of Bluestone since April 1997.
Mr. Hulley co-founded Adams Capital Management, Inc. in 1994 and is a Vice
President and General Partner. Adams Capital Management, Inc. is a Managing
Partner of several venture capital partnerships, including Adams Capital
Management, L.P. and the P/A Fund. From 1989 through December 1994, Mr. Hulley
was employed by Fostin Capital Corp and has been a General Partner of Fostin
Capital Partners II, L.P. since 1993. Mr. Hulley is a director of On Technology
Corporation, a publicly traded company.
ANTON SIMUNOVIC has served as director of Bluestone since April 1998. Mr.
Simunovic is a Senior Vice President of the Equity Capital Group at General
Electric Capital Corporation and has served as such since September 1996. From
June 1993 through August 1996, Mr. Simunovic served as Manager at Barents Group
LLC.
ANDREW J. FILIPOWSKI has served as director of Bluestone since June 1999.
Mr. Filipowski is currently the Chief Executive Officer of Divine Interventures,
Inc. Mr. Filipowski was the co-founder, Chairman of the Board, President and
Chief Executive Officer of Platinum technology, inc. since its formation in
April 1987 until its sale to Computer Associates in May 1999. Mr. Filipowski is
a director of System Software Associates, Inc., Blue Rhino and Platinum
Entertainment, Inc., all publicly traded companies.
PAUL E. BLONDIN has served as a director of Bluestone since June 1999. Mr.
Blondin has been the President and Chief Executive Officer of IP Highway since
February 1999. From January 1998 until February 1999, Mr. Blondin was President
and Chief Executive Officer of Netect, Ltd., an Israeli Company. Prior thereto,
he served as Chairman of the Board of Open Development Corporation until October
1997. From March 1993 until May 1997, Mr. Blondin served as the Vice President,
Finance and Administration, Chief Financial Officer and Treasurer of Cascade
Communications.
KEY EMPLOYEE
MARK S. NIGRO, age 41, has served as our Senior Vice President and Chief
Technology Officer since October 1997. From September 1996 to October 1997, Mr.
Nigro served as Chief Technology Officer for us and our predecessor, Bluestone
Consulting Inc., a New Jersey corporation. From June 1993 to September 1996 he
served as our predecessor's Lead Product Developer.
CLASSIFICATION OF DIRECTORS
Following the closing of this offering, our certificate of incorporation
will classify the board of directors into three classes. The directors' terms
will be staggered by class.
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<PAGE>
BOARD COMMITTEES
The Audit Committee consists of Mel Baiada, Paul E. Blondin and Gregory M.
Case. The Audit Committee makes recommendations to the board of directors
regarding the selection of independent public accountants, reviews the results
and scope of the audit and other services provided by our independent public
accountants and reviews and evaluates our control functions.
The Compensation Committee consists of Andrew J. Filipowski, William C.
Hulley and P. Kevin Kilroy. The Compensation Committee administers the issuance
of stock options under our stock option plan, makes recommendations regarding
nonqualified stock options and various incentive compensation and benefit plans
and determines salaries for the executive officers and incentive compensation
for our employees and consultants.
DIRECTOR ELECTION RIGHTS
Pursuant to our certificate of incorporation, the board of directors is
required to consist of seven members. General Electric Capital Corporation, a
holder of preferred stock, is entitled to designate one member to the board of
directors. The holders of Series A preferred stock, as a class, are entitled to
designate two members to the board of directors. The holders of common stock, as
a class, are entitled to designate one member to the board of directors. The
holders of common stock and preferred stock, as a class, are entitled to
designate three members to the board of directors. These director election
rights are in effect until immediately prior to the closing of this offering,
after which time the board of directors will be elected by the holders of common
stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mel Baiada, our chairman and former chief executive officer, was a member of
our compensation committee in 1998. Mr. Baiada is a director, executive officer
and a member of the compensation committee of Bluestone Consulting, Inc. For
additional information regarding Bluestone Consulting, Inc., its spin-off from,
and relationship with, us and Mr. Baiada's transactions with us and Bluestone
Consulting, Inc., see "Certain Transactions."
DIRECTOR COMPENSATION
On June 10, 1999, the board of directors adopted the Directors' Compensation
Plan and reserved 156,250 shares of common stock to be used in connection with
the plan. The plan provides that non-employee directors will receive options at
the intervals and for the number of shares of common stock as follows:
- 6,250 shares upon the initial election to the board of directors;
- 3,125 shares upon the anniversary date each year after their election,
provided there is continuous service;
- 781 shares upon appointment to serve on the Compensation, Audit or other
duly constituted committee of the board of directors, plus an additional
781 shares on each anniversary date of their appointment, provided there
is continuous service on the committee; and
- 3,125 shares upon appointment to serve as the chairperson of the board of
directors.
The options will be fully vested upon issuance. In addition to these option
grants, non-employee directors shall be entitled to compensation as follows:
- $4,000 for in-person board meetings, of which four are anticipated each
year;
- $1,000 for telephone board meetings, of which six are anticipated each
year; and
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<PAGE>
- $500 for Audit and Compensation Committee meetings, if held independently
of an in-person board meeting.
In addition, reasonable travel and related expenses shall be paid to
non-employee directors for attending board of director meetings or while on
Bluestone approved business.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes the compensation paid to or earned by
Bluestone's Chief Executive Officer and all other executive officers whose
salary and bonus for services rendered in all capacities to Bluestone for the
fiscal year ended December 31, 1998 exceeded $100,000. We will use the term
"named executive officers" to refer collectively to these individuals later in
this prospectus.
Other annual compensation represents commissions paid in 1998. All other
compensation includes amounts paid by us in 1998 with respect to life insurance
premiums for the benefit of the named executive officers and our contributions
to the 401(k) accounts of these officers as follows:
- Mr. Kilroy, $260 for life insurance premiums;
- Mr. Baiada, $2,715 for life insurance premiums;
- Mr. Capobianco, $218 for life insurance premiums;
- Mr. Bickel, $600 in 401(k) contributions and $196 for life insurance
premiums; and
- Mr. Ballezzi, $600 in 401(k) contributions.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -------------
--------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- --------------------------------------- ---------- --------- ---------------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
P. Kevin Kilroy, President and Chief
Executive Officer (1)................ $ 148,077 $ 9,140 $ 83,509 146,257 $ 260
Mel Baiada, Chairman of the Board
(2).................................. 158,654 22,215 -- -- 2,715
John H. Capobianco, Senior Vice
President, Marketing................. 170,077 74,294 -- 142,716 218
Robert W. Bickel, Senior Vice
President, Products.................. 151,730 19,554 -- 56,778 796
Enrico J. Ballezzi (3)................. 123,557 19,992 -- 40,108 600
</TABLE>
- ------------------------
(1) During 1998, Mr. Kilroy served as our Senior Vice President, Worldwide
Sales. He became President on January 5, 1999 and Chief Executive Officer on
June 10, 1999.
(2) During 1998, Mr. Baiada served as our Chairman, President and Chief
Executive Officer.
(3) During 1998, Mr. Ballezzi served as our Chief Financial Officer.
OPTION GRANTS IN LAST FISCAL YEAR
The following table summarizes the options granted to each of our named
executive officers during the fiscal year ended December 31, 1998.
The potential realizable value set forth below is calculated based on the
term of the option at the time of the grant (10 years). Assumed stock price
appreciation of 5% and 10% is based on the assumed initial public offering
price. The assumed stock price appreciation rates used to determine the
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potential realizable value are prescribed by the Securities and Exchange
Commission rules for illustrative purposes only and are not intended to forecast
or predict future stock prices.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED ANNUAL
---------------------------------------------------------------------------- RATES OF STOCK PRICE
PERCENT OF TOTAL APPRECIATION FOR
NUMBER OF OUR SHARES OPTIONS GRANTED TO OPTION TERM
UNDERLYING OPTIONS OUR EMPLOYEES IN EXERCISE PRICE EXPIRATION --------------------------
NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10%
- ------------------------ --------------------- ----------------------- --------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
P. Kevin Kilroy......... 62,500 8% $ 2.24 2/28/08 $ 1,081,671 $ 1,805,307
49,294 6 3.07 5/18/08 812,106 1,382,840
17,813 2 3.07 10/13/08 293,464 499,706
16,650 2 3.07 12/31/08 274,304 467,081
Mel Baiada.............. -- -- -- -- -- --
John H. Capobianco...... 93,750 12 2.24 2/21/08 1,622,506 2,707,960
48,966 6 3.07 5/18/08 806,702 1,373,639
Robert W. Bickel........ 48,966 6 3.07 5/18/08 806,702 1,373,639
7,813 1 3.07 10/13/08 128,717 219,177
Enrico J. Ballezzi...... 40,108 5 3.07 5/18/08 660,769 1,125,146
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table presents information with respect to stock options owned
by the named executive officers at December 31, 1998 and with respect to stock
options exercised by the named executive officers during the fiscal year ended
December 31, 1998.
There was no public trading market for the common stock as of December 31,
1998. Accordingly, the values of unexercised options set forth below have been
calculated on the basis of the assumed initial public offering price of $12.00
per share, less the applicable exercise price per share, multiplied by the
number of shares underlying these options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1998 AT DECEMBER 31, 1998
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
P. Kevin Kilroy........................................... -- 146,257 $ -- $ 1,357,950
Mel Baiada................................................ -- -- -- --
John H. Capobianco........................................ -- 142,716 -- 1,352,266
Robert W. Bickel.......................................... 75,264 75,264 710,958 710,958
Enrico J. Ballezzi........................................ 35,679 35,679 331,543 331,543
</TABLE>
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<PAGE>
EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Mel Baiada in April 1997 which
was modified in January 1999 and which expired without being renewed on June 30,
1999. Under this agreement, in 1998 we paid Mr. Baiada a salary of $158,654 and
a $22,215 bonus. This agreement imposes a one year period after termination in
which Mr. Baiada may not compete against us. This agreement also provides that
Mr. Baiada will retain a position on the board of directors until the later of:
- the date his ownership interest in our outstanding common stock, assuming
conversion of all outstanding convertible securities, drops below 10%; and
- June 30, 2000.
For the twelve months commencing on July 1, 1999, Mr. Baiada will receive
$150,000 plus customary benefits as severance under his agreement. As of June
30, 1999, we recorded $154,200 in general and administrative expense associated
with this severance agreement. On July 1, 1999, Mr. Baiada's shares of common
stock deemed to be contingent under his stock repurchase agreement dated April
18, 1997 became vested. For more information about Mr. Baiada's stock repurchase
agreement see "Certain Transactions--Stock Repurchase Agreement."
We also entered into an employment agreement with Robert Bickel in April
1997 which may be terminated by us or Mr. Bickel at any time, with or without
cause. Under this agreement, in 1998 we paid Mr. Bickel a base salary of
$155,330 and a bonus of $19,554. Future increases to these amounts are at the
discretion of the board of directors. This employment agreement calls for the
payment of customary fringe benefits. Under this employment agreement, Mr.
Bickel has agreed not to compete against us for a period of one year after the
termination of his employment. In addition, as part of this employment
agreement, we granted to Mr. Bickel an option to purchase 93,750 shares of
common stock at an exercise price of $2.24 per share, the fair market value of
the common stock on the date of grant. The option vests in 16 equal installments
on a quarterly basis over a four-year period beginning as of the date of grant.
SEVERANCE AGREEMENTS
Messrs. Kilroy, Bickel, Capobianco and Ballezzi are parties to separate
severance agreements with us which call for the following payments and benefits
to be received upon the termination of their employment other than for cause:
- 12 months of salary and benefits plus an additional month of salary and
benefits for each year of service;
- accrued vacation;
- 6 months of outplacement services up to $12,000; and
- 50% vesting on all outstanding unvested options and the extension of the
exercise period on all vested options to five years.
Mr. Ballezzi's employment with us will terminate effective September 30,
1999. As of June 30, 1999, we recorded $208,700 in general and administrative
expense associated with his severance agreement.
EMPLOYEE CONFIDENTIALITY AGREEMENTS
We enter into agreements with all of our employees containing provisions
regarding confidentiality and assignment of inventions.
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EXECUTIVE BONUS POOL
Our board of directors has established an executive bonus pool of 384,794
shares of common stock issuable to our chairman, executive and certain other
officers under our stock option plan. Grants of awards under the bonus pool are
contingent upon our meeting predetermined revenue and profit goals on a
quarterly and annual basis in 1999. Our chairman and officers will receive
grants of immediately vested options from the pool on a quarterly and annual
basis if we determine that we have met our profit and revenue goals.
The following table sets forth the total amount of shares that each of our
chairman and executive officers may receive under the bonus pool:
<TABLE>
<S> <C>
P. Kevin Kilroy.................................................... 131,250
S. Craig Huke...................................................... 16,071
Robert W. Bickel................................................... 44,237
John H. Capobianco................................................. 47,125
Joseph K. Krivickas................................................ 36,735
Mel Baiada......................................................... 39,063
</TABLE>
We met our quarterly revenue and profit goals in each of our first two
quarters of 1999 and options covering 52,650 shares of common stock were granted
in May 1999 and options to purchase 60,259 shares will be granted in August
1999.
STOCK OPTION PLAN
On July 1, 1998, the board of directors adopted the Amended and Restated
Bluestone Software, Inc. 1996 Incentive and Non-Qualified Stock Option Plan,
which replaced all of our previous plans. Our option plan is administered by our
board of directors or a committee of at least two persons appointed by the board
of directors. The option plan permits the payment of the exercise price to be in
the form of cash, check, cashless exercise and such other consideration and
method of payment as the administrator of the plan may, from time to time
determine. Optionees are required to execute a stock purchase and restriction
agreement at the time he or she exercises any options.
As of June 30, 1999, a total of 2,946,578 shares of common stock were
authorized for issuance to directors, officers, employees and consultants
selected by the administrator of the option plan. Of these shares, 2,663,589
shares of common stock were issuable upon the exercise of stock options granted
under the option plan. The following table summarizes the option holdings of our
chairman and executive officers as of June 30, 1999:
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF COMMON STOCK
EXECUTIVE OFFICER UNDER VESTED OPTIONS UNDER UNVESTED OPTIONS
- -------------------------------------------- ----------------------- -----------------------
<S> <C> <C>
P. Kevin Kilroy............................. 237,534 649,438
S. Craig Huke............................... -- 76,500
Robert W. Bickel............................ 164,808 52,663
John H. Capobianco.......................... 63,661 168,304
Joseph K. Krivickas......................... -- 156,250
Mel Baiada.................................. 6,266 --
</TABLE>
Until the option plan terminates, any unpurchased shares of common stock
underlying all options that expire, are terminated or become unexercisable for
any reason, are returned to the option plan and become available for future
grants. The number of shares of common stock underlying an option, the total
number of shares of common stock authorized under the option plan but for which
no options have been granted, and the exercise price per share of the common
stock underlying all outstanding options are proportionately adjusted for any
increase or decrease in the number of outstanding shares
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<PAGE>
of common stock resulting from stock splits, reverse stock splits, stock
dividends, reclassifications and recapitalizations.
The option plan provides for the grant of either incentive stock options
("ISOs") or non-qualified stock options ("NQSOs"), except that consultants of
Bluestone who are not also employees are not entitled to receive ISOs under the
option plan. Exercise prices for ISOs may not be less than the fair market value
per share of common stock on the date of grant, or 110% of the fair market value
in the case of ISOs granted to any person who owns our stock possessing 10% or
more of the total voting power of all of our capital stock. Exercise prices for
NQSOs may be less than the fair market value per share, but must be at least
$0.01 per share. Until there is an established market for the common stock, the
board of directors, at its discretion, determines the fair market value of a
share of common stock. Unless otherwise specified by the terms of an option
agreement, options granted under the option plan vest at a rate of 25% of the
shares underlying the option per year during the consecutive 4 year period
beginning on the date of grant and expire 10 years after the date of grant, or 5
years after the date of grant with respect to ISOs granted to any person who
owns our stock possessing 10% or more of the total voting power of all of our
capital stock. In July 1998, our board of directors authorized us to grant
options to employees with a vesting period that commences on the later of:
- their date of hire; or
- March 1, 1996 (the inception date of the option plan).
Generally, all employee stock option grants made after July 1998 contain this
modified vesting arrangement.
The number of shares of common stock covered by ISOs granted to any optionee
is limited so that the total fair market value of stock, determined as of the
date of grant, with respect to which ISOs are exercisable for the first time by
such optionee in any calendar year does not exceed $100,000. Any options in
excess of such limits would be treated as NQSOs.
In the event of a sale of Bluestone, as defined in the option plan, 50% of
all options that have not vested as of the date of the sale become immediately
vested and exercisable. All remaining options vest in accordance with the
vesting schedule set forth in the applicable option agreement. In the event of a
change in control of Bluestone, as defined in the option plan, the board of
directors has the right, in its sole discretion, to accelerate the vesting of
all options that have not vested as of the date of the change in control or
establish an earlier date for the expiration of the exercise of an option or
both. In addition, in the event of a change in control of Bluestone, the board
of directors may, in its sole discretion, subject to and conditioned upon a sale
of Bluestone, arrange for the successor entity to assume all of the rights and
obligations under the option plan. Alternatively, the board of directors may, in
its sole discretion, terminate the option plan and:
- with respect to those options that are vested as of the date of the sale
of Bluestone, pay an amount equal to the amount over which the fair market
value of a share of common stock, exceeds the underlying exercise price
for those options;
- arrange for the exchange of all options for options to purchase common
stock in the successor entity; or
- distribute to each optionee other property in an amount equal to and in
the same form as the optionee would have received from the successor
entity if the optionee had owned the shares of common stock underlying
options that were vested as of the date of the sale of Bluestone rather
than the option at the time of the sale of Bluestone. In this instance,
the fair market value will be determined as of the termination date of the
option plan. The form of payment or distribution to the optionee is to be
determined by the board of directors, in its sole discretion.
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401(k) PLAN
We maintain a 401(k) Plan/Profit Sharing Plan. Under our 401(k) plan, a
participant may contribute, subject to some limitations contained in the
Internal Revenue Code, up to 15% of his or her compensation to the 401(k) plan.
Employees who are at least 21 years old are eligible to participate after six
consecutive months of employment with Bluestone.
We may make discretionary matching contributions into participants' accounts
of an annually determined percentage. This percentage is subject to a maximum of
6% of a participant's total eligible compensation. In addition, we may make
additional annual discretionary profit sharing contributions to participants'
accounts each year at the discretion of the board of the directors. Any profit
sharing allocations made are allocated in the ratio that a participant's total
eligible compensation bears to the total eligible compensation of all eligible
participants for the applicable 401(k) plan year. To be eligible for a
discretionary profit sharing contribution, a participant must be employed with
Bluestone on the last day of the applicable 401(k) plan year and must have
completed at least 500 hours of service for Bluestone during that year.
The portion of a participant's account attributable to his or her own
contributions is 100% vested. The portion of the account attributable to our
contributions vests as to 20% of these contributions each year over 5 years
beginning after completion of 2 years of service with us and ending after 6
years of service with us. Distributions from the 401(k) plan may be made in the
form of installment distributions or lump-sum cash payments.
LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS
As permitted by the Delaware General Corporation Law, as amended, our
certificate of incorporation provides that our directors shall not be liable to
us or our stockholders for monetary damages for breach of fiduciary duty as
directors to the fullest extent permitted by the Delaware General Corporation
Law as it now exists or as it may be amended. The Delaware General Corporation
Law permits limitations of liability for a director's breach of fiduciary duty
other than liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; or
- for any transaction from which the director derived an improper personal
benefit.
In addition, our bylaws provide that we shall indemnify all of our
directors, officers, employees and agents for acts performed on our behalf.
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CERTAIN TRANSACTIONS
SPIN-OFF OF CONSULTING BUSINESS
In April 1997, we had two operating businesses, the software products
business and the professional consulting services business. At that time and
after our reincorporation from a New Jersey corporation into a Delaware
corporation, all of our issued and outstanding common stock was owned by Mel
Baiada. In order to enable investors to provide capital in connection with the
software products business, we separated the consulting business and the
products business by spinning off the consulting business to Mel Baiada.
To accomplish the spin-off, we created BCI and entered into a contribution
and distribution agreement dated April 17, 1997 with BCI. Under the contribution
and distribution agreement, we contributed to BCI those assets and liabilities
that constituted the services business in exchange for all of the stock of BCI.
We then distributed all of the stock of BCI to Mel Baiada. At the time of the
distribution, both Bluestone and BCI were "S" corporations for federal income
tax purposes.
TRANSACTIONS IN CONNECTION WITH THE SPIN-OFF
MARK BAIADA CONVERTIBLE SUBORDINATED NOTE
To achieve an equal distribution of debt between us and BCI in connection
with the spin-off, we agreed to assume one-half of the $1.0 million principal
amount of a convertible note payable by Bluestone Consulting, the former New
Jersey corporation, to Mark Baiada, formerly a director of ours and the brother
of Mel Baiada. BCI assumed the liability for the other one-half of the note. At
the time we borrowed the $1.0 million, the proceeds were used for general
working capital purposes. We effected this assumption by issuing an amended and
restated convertible subordinated note dated April 17, 1997 to Mark Baiada in
the principal amount of $500,000. The note payable to Mark Baiada bears interest
at a rate of 10% per annum, compounded annually. We are required to make
interest payments in arrears on each anniversary date of this note until paid in
full. The principal amount of the note is payable in full on December 31, 2002.
We are permitted to prepay the note in whole or in part without penalty or
premium.
The amount outstanding under the note is convertible into 218,750 shares of
our common stock at any time prior to the time it matures or the date paid in
full at a rate equal to $2.29 per share, subject to proportionate adjustment in
the event we pay out stock dividends in shares of common stock or subdivide or
combine our outstanding common stock.
MEL BAIADA PROMISSORY NOTE AND PURCHASE OF SERIES A PREFERRED STOCK
As part of the spin-off, Mel Baiada agreed to cancel a promissory note in
the principal amount of $403,066 originally issued by Bluestone Consulting, the
former New Jersey corporation, in exchange for (1) our issuance to him of a
promissory note in the principal amount of $250,000 and (2) BCI's issuance to
him of a promissory note in the principal amount of $107,495. The promissory
notes were allocated between BCI and us as part of the negotiated distribution
of net assets in the spin-off. Bluestone Consulting, the former New Jersey
corporation, used the $403,066 for general working capital purposes.
Concurrently with our issuance of the Series A preferred stock on April 18,
1997, Mel Baiada contributed our note payable to him to our capital in exchange
for 263,158 shares of Series A preferred stock.
PROMISSORY NOTE TO BCI
To achieve an equal distribution of debt between BCI and us as part of the
spin-off, we issued a subordinated promissory note dated April 17, 1997 to BCI
in the principal amount of $500,000 that bears interest at a rate of 10% per
annum. We are required to make interest payments in arrears on
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each anniversary date of the note until paid in full. The principal amount of
the note is payable in full on December 31, 2005. We are permitted to prepay the
note in whole or in part without penalty or premium.
SERVICE MARK LICENSE AGREEMENT
As part of the spin-off, we entered into a service mark license agreement
dated April 17, 1997 with BCI. Under this license agreement, we granted BCI a
non-exclusive, perpetual, worldwide royalty-free license to use some of our
registered and unregistered trade marks in connection with any services
performed by BCI. We have the right to terminate the license agreement upon:
- certain events of default by BCI; or
- a change in control of BCI, subject to BCI's right to continue the license
agreement for a period of not more than 1 year from the date of the change
in control.
ISSUANCE OF SERIES A PREFERRED STOCK AND STOCK REPURCHASE AGREEMENT
On the day immediately after the date of the spin-off, and pursuant to a
stock purchase agreement dated April 18, 1997, we issued 5,526,316 shares of
Series A preferred stock for a total cash purchase price of $5.25 million or
$0.95 per share, including 263,158 shares of Series A preferred stock to Mel
Baiada and 5,263,158 shares of Series A preferred stock to the entities
affiliated with Patricof & Co. Ventures, Inc. and Fostin Capital Partners II,
L.P. Holders of Series A preferred stock are entitled to receive annual
dividends of $0.57 per share. Proceeds of the issuance of the Series A preferred
stock were used for general working capital purposes. Each share of our Series A
preferred stock was initially convertible into one share of our common stock,
subject to some anti-dilution protections. As a result of the stock split, each
share of our Series A preferred stock will convert into 0.3125 shares of our
common stock.
We entered into a stock repurchase agreement dated April 18, 1997 with Mel
Baiada as an incentive for Mr. Baiada to remain with us and devote his full-time
and efforts to us. To this end, we also entered into an employment agreement
with Mr. Baiada which is more fully described in this prospectus under the
heading "Management--Employment Agreements." Under the repurchase agreement,
421,875 shares of the 2,812,500 shares of common stock then held by Mr. Baiada
were designated as "contingent shares" which were subject to repurchase at our
option if Mr. Baiada ceased to be employed by us at a purchase price equal to
the fair market value as determined by our board of directors. At the beginning
of each calendar quarter, beginning with the third calendar quarter of 1997 and
until the second calendar quarter of 2001, 26,367 of the contingent shares were
to be reclassified as "vested shares," reducing the total number of "contingent
shares" by 26,367 at the beginning of each calendar quarter. Because Mr.
Baiada's employment agreement was not renewed on July 1, 1999, all outstanding
contingent shares automatically became vested shares.
TAX ALLOCATION AND INDEMNITY AGREEMENT
As a result of the spin-off, we, BCI and Mel Baiada needed to decide how our
taxes, and the taxes of BCI would be determined for the year of the spin-off,
and how we would deal with any adjustment to taxes to us and Mel Baiada that
resulted after the spin-off because of a tax audit. These matters are addressed
in the tax allocation and indemnity agreement dated April 18, 1997. The
agreement provides that:
- with respect to federal income taxes, we closed our books as of the day
before the issuance of the preferred stock, so that the income and
expenses earned in the year of the spin-off, before the issuance of the
preferred stock, were not included in our corporate income tax return for
the year of the spin-off. They were included in our final federal income
tax return for the period
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that we had elected to be an S corporation for federal income tax
purposes, and flowed through to the tax return of Mel Baiada;
- with respect to state income taxes and taxes that were not imposed on
income, such as property taxes, we allocated them between us and BCI based
on the reasonable determination of the boards of directors BCI and us;
- if we undergo a tax audit that results in us increasing our tax liability
for the period after the spin-off, Mr. Baiada will reimburse us for the
additional tax cost, if there is a corresponding reduction in income in an
open tax return in a year when we were an S corporation, and he realizes a
tax benefit because of the decrease in income in the S corporation year;
- if we undergo a tax audit that results in an increase in our income while
we were an S corporation, and also results in a decrease in our income for
a period after the spin-off, we will reimburse Mr. Baiada any additional
tax cost he incurs because of the increase in the income in the S
corporation return; and
- if our election to be treated as an S corporation is deemed invalid or
terminated for a reason other than the issuance of the preferred stock,
Mr. Baiada will reimburse us for any tax costs that we incur, to the
extent he receives a tax benefit from the change in our status, and if Mr.
Baiada has additional tax liability imposed on him because of the
termination, we will indemnify him for the costs.
There have been no claims made under the agreement, by either party, for
reimbursement.
RESELLER AGREEMENT WITH BCI
We are a party to a reseller agreement with BCI, dated January 1, 1998.
Under the reseller agreement, BCI is a non-exclusive reseller of our products in
the United States and Canada. BCI may purchase products from us at our then
current list prices less our standard quantity discounts. The material terms and
conditions contained in the reseller agreement are similar to those contained in
our standard reseller agreement.
SUBLEASE AGREEMENT WITH BCI
As part of the spin-off, we entered into a sublease agreement with BCI,
effective as of April 30, 1997. BCI subleases approximately 7,780 square feet of
our Mount Laurel facility. BCI pays us an annual base rent of $94,000, which is
paid in equal monthly installments in advance on the first day of every calendar
month during the term of the BCI sublease. The rental charges to BCI were
determined on a pro-rata square footage basis at the same rate and under the
same terms that we have with our landlord. BCI also pays us 19% of all taxes,
common area costs, utility costs and other services paid for by us under our
lease. The BCI sublease expires when our lease expires or is terminated for any
reason, including our default under our lease.
SALE OF MEL BAIADA SERIES A PREFERRED STOCK
On April 22, 1998, Mel Baiada sold all 263,158 of his shares of Series A
preferred stock to certain of the then existing holders of Series A preferred
stock for a total purchase of $341,053 or $1.296 per share.
ISSUANCE OF SERIES B PREFERRED STOCK
Pursuant to a stock purchase agreement dated April 22, 1998, we issued
8,782,695 shares of Series B preferred stock for a total purchase price of $11.4
million or $1.296 per share, including 3,858,025 shares of Series B preferred
stock to General Electric Capital Corporation and 4,924,670
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shares of Series B preferred stock to the entities affiliated with Patricof &
Co. Ventures, Inc. and Fostin Capital Partners II, L.P. Holders of Series B
preferred stock are entitled to annual dividends of $0.078 per share. The
proceeds of the issuance of the Series B preferred stock were used for general
working capital purposes. Each share of our Series B preferred stock was
initially convertible into one share of our common stock. Under the terms of our
Series B issuance, the conversion ratio changed as of December 31, 1998 so that
each share of our Series B preferred stock became convertible into 2.09 shares
of our common stock. As a result of the stock split, each share of our Series B
preferred stock will convert into 0.6541 shares of our common stock.
BRIDGE FINANCING
On January 21, 1999, we entered into the Note and Warrant Purchase Agreement
with substantially all of the holders of the Series B preferred stock. Under the
Note and Warrant Purchase Agreement, the Series B preferred stockholders agreed
to provide subordinated secured debt financing of up to $5.0 million for general
working capital purposes. To the extent this financing was utilized, we would
have been obligated to issue 10% convertible subordinated secured notes and
warrants to purchase up to 504,032 shares of common stock at an exercise price
equal to $1.98 per share to the Series B preferred stockholders. We were
permitted to draw on the Committed Principal Amount at any time until May 30,
1999.
As of May 25, 1999, we had drawn down approximately $1.35 million of the
$5.0 million available to fulfill general working capital needs and issued
137,609 warrants to the Series B preferred stockholders. This outstanding $1.35
million debt was converted into Series C preferred stock as part of our issuance
of 9,191,176 shares of Series C preferred stock at $2.72 per share on May 25,
1999.
The issuance of the warrants to the Series B preferred stockholders
triggered anti-dilution protection afforded to Silicon Valley Bank pursuant to
an antidilution agreement between us and Silicon Valley Bank dated November 24,
1997, whereby the number of shares of common stock underlying a warrant issued
to Silicon Valley Bank were readjusted from 8,224 to 9,766 shares of our common
stock and the exercise price under the Silicon Valley Bank warrant was
readjusted from $3.04 to $2.56 per share.
ISSUANCE OF SERIES C PREFERRED STOCK
Pursuant to a stock purchase agreement dated May 25, 1999, we issued
9,191,176 shares of Series C preferred stock for a total purchase price of $25.0
million or $2.72 per share, including 676,524 shares of Series C preferred stock
to General Electric Capital Corporation and 1,161,709 shares of Series C
preferred stock to the entities affiliated with Patricof & Co. Ventures, Inc.
and Fostin Capital Partners II, L.P. Holders of Series C preferred Stock are
entitled to annual dividends of $0.1632 per share. The proceeds of the issuance
of the Series C preferred stock were used for general working capital purposes.
Each share of our Series C preferred stock was initially convertible into one
share of our common stock. As a result of the stock split, each share of our
Series C preferred stock will convert into 0.3125 shares of our common stock.
REGISTRATION RIGHTS
Under the second restated investors' rights agreement dated May 25, 1999 by
and among us and our preferred stockholders, the holders of preferred stock are
entitled to certain rights with respect to the registration under the Securities
Act for resale to the public of our common stock issuable upon the conversion of
preferred stock. The second restated investors' rights agreement permits the
preferred stockholders to twice require us, whether or not we propose to
register our common stock for sale, to register all or part of those preferred
stockholders' common stock, issued upon conversion of the preferred stock, so
long as the securities that would be covered by the registration statement
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have an aggregate gross offering price of at least $20.0 million. If any
registration involves an underwritten offering, preferred stockholders that wish
to participate in that offering must enter into customary agreements with us and
the underwriter. The underwritten offering will be subject to certain
limitations and restrictions that may be imposed by the underwriters thereof,
including, the right of the underwriters to exclude a portion of the securities
owned by the preferred stockholders from the offering.
The second restated investors' rights agreement also provides demand
registration rights to the preferred stockholders requiring us to register all
or part of the registrable securities on Form S-3, provided, that, among other
things:
- Form S-3 is available to us and the preferred stockholders for this
offering;
- the offering price of the securities to be registered by the preferred
stockholders, together with securities held by other persons entitled to
participate in the registration, is at least $1.0 million in the
aggregate, net of any underwriters' discounts or commissions; and
- the board of directors determines that the registration would not be
seriously detrimental to us and our stockholders at that time. In this
event, the registration of these securities may be delayed for up to 60
days.
Under the second restated investors' rights agreement, the preferred
stockholders have the right, subject to several exceptions, to have their
registrable securities included in any registration statement filed by us. Each
preferred stockholder that wishes to participate in the offering must enter into
a customary agreement with us and the underwriter, which may limit in whole or
in part the inclusion of that preferred stockholder's registrable securities in
the registration statement, as determined by the underwriters in their sole
discretion.
We are required to pay all expenses relating to any of these registrations
other than underwriting discounts and commissions relating to shares sold by the
preferred stockholders. The registration rights provided in the second restated
investors' rights agreement extend for a period of five years following this
offering.
FILIPOWSKI CONSULTING AGREEMENT
We entered into a consulting agreement with Andrew Filipowski in May 1999
under which Mr. Filipowski will provide strategic and general business
consulting services to us from that date until May 2001. In consideration of
these consulting services, we granted to Mr. Filipowski a fully vested option to
purchase 21,875 shares of our common stock at an exercise price of $4.13 per
share. We recorded general and administrative expenses of $165,784 in the three
months ended June 30, 1999 in connection with this option.
FUTURE AFFILIATE TRANSACTIONS
We believe that all of the transactions described above were made on terms
no less favorable to us than would have been obtained from unaffiliated third
parties. All future transactions, including loans, between us and our officers,
directors, principal stockholders and their affiliates, will be approved by a
majority of the board of directors, including a majority of the independent and
disinterested outside directors on the board of directors, and will be on terms
no less favorable to us than could be obtained from unaffiliated third parties.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of July 31, 1999
regarding the beneficial ownership of our common stock by: (1) each person,
entity or group known by us to own beneficially more than 5% of our outstanding
common stock; (2) each director; (3) each of the named executive officers; and
(4) all directors and executive officers as a group. The ownership amounts are
calculated as if the outstanding preferred stock and accrued dividends on
preferred stock were fully converted into common stock as of June 30, 1999.
Unless otherwise indicated, the address of each person identified is c/o
Bluestone Software, Inc., 1000 Briggs Road, Mount Laurel, New Jersey 08054.
The percentages shown are based on 13,302,473 shares of common stock
outstanding prior to the offering and 17,302,473 shares of common stock
outstanding after the offering. Pursuant to Rule 13d-3 under the Exchange Act,
shares of common stock which a person has the right to acquire pursuant to the
exercise of stock options and warrants held by that holder that are exercisable
within 60 days are deemed outstanding for the purpose of computing the
percentage ownership of that person, but are not deemed outstanding for
computing the percentage ownership of any other person.
<TABLE>
<CAPTION>
PERCENT
SHARES BENEFICIALLY BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING -------------------
------------------- BEFORE AFTER
NAME AND ADDRESS NUMBER OFFERING OFFERING
- -------------------------------------------------------------------------------- ------------------- -------- --------
<S> <C> <C> <C>
Mel Baiada (1).................................................................. 2,807,277 21.2% 16.3%
General Electric Capital Corporation(2)......................................... 2,820,134 21.1% 16.2%
Entities affiliated with Patricof & Co. Ventures, Inc. (3)...................... 5,493,691 40.7% 31.4%
Fostin Capital Partners II, L.P. (4)............................................ 1,671,505 12.5% 9.6%
P. Kevin Kilroy (5)(6).......................................................... 237,534 1.8% 1.4%
Enrico J. Ballezzi (5).......................................................... 51,492 * *
Robert W. Bickel (5)............................................................ 164,808 1.2% 1.0%
John H. Capobianco (5).......................................................... 63,661 * *
Gregory M. Case (7)............................................................. 5,493,691 40.7% 31.4%
William C. Hulley (8)........................................................... 1,671,505 12.5% 9.6%
Anton Simunovic (9)............................................................. 2,820,134 21.1% 16.2%
Andrew J. Filipowski (5)(10).................................................... 28,125 * *
Paul E. Blondin (5)(11)......................................................... 6,250 * *
All directors and executive officers as a group (11 persons) (12)............... 11,672,972 82.7% 64.4%
</TABLE>
- ------------------------
* Represents less than 1% of the outstanding shares of Common Stock.
(1) Includes 562,500 shares of common stock owned directly by Mr. Baiada and
159,966 shares of common stock owned by four trusts for which Mr. Baiada or
his wife act as trustees. Mr. Baiada intends to grant the underwriters the
right to purchase shares pursuant to the underwriters' over-allotment
option.
(2) The address for General Electric Capital Corporation is 260 Long Ridge Road,
Stamford, CT 06927. Includes 3,953,662 shares of Series B preferred stock
which is convertible into 2,553,348 shares of common stock, 691,654 shares
of Series C preferred stock convertible into 216,142 of common stock, and
50,644 shares of common stock underlying warrants. General Electric Capital
Corporation is a subsidiary of the General Electric Company. General
Electric Capital Corporation intends to grant the underwriters the right to
purchase shares pursuant to the underwriters' over-allotment option. The
Directors of General Electric Company are James I. Cash, Jr., Silas S.
Cathcart, Dennis D. Dammerman, Paolo Fresco, Claudio X. Gonzalez, Andrea
Jung, Kenneth G. Langone, Gertrude G. Michelson, Eugene F. Murphy, Sam Nunn,
John D. Opie, Roger S. Penske, Frank H. T. Rhodes, Andrew C. Sigler, Douglas
A. Warner III, and John F. Welch, Jr.
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(3) The address for Patricof & Co. Ventures, Inc. is 445 Park Avenue, New York,
NY 10022. The directors and managing directors of Patricof & Co. Ventures,
Inc. are Alan Patricof-Director, Co-Chairman, Patricia Cloherty-Director,
Co-Chairman, Ronald Cohen-Director, Maurice Tchenio-Director, Robert
Chefitz-Managing Director, Salem Shuchman-Managing Director, David
Landau-Managing Director, Thomas Hirschfeld-Managing Director, George
Jenkins-Managing Director, Greg Case-Managing Director, Paul Vais-Managing
Director, George Phipps-Managing Director, and Janet Effland-Managing
Director. The share amount is comprised of:
(A) shares held by the P/A Fund, L.P., consisting of 2,451,454 shares of
Series A preferred stock convertible into 766,079 shares of common stock,
1,278,511 shares of Series B preferred stock convertible into 825,686 shares
of common stock, 206,727 shares of Series C preferred stock convertible into
64,602 shares of common stock, and 15,137 shares of common stock underlying
warrants. Fostin Capital Partners II, L.P. and APA Pennsylvania Partners II,
L.P. (a Patricof affiliate) are the general partners of The P/A Fund, L.P.
The address of the P/A Fund, L.P. is 455 South Gulph Road, Suite 410, King
of Prussia, PA 19406. The P/A Fund intends to grant the underwriters the
right to purchase shares pursuant to the underwriters' over-
allotment option.
(B) shares held by APA Excelsior IV, L.P., consisting of 2,717,475
shares of Series A preferred stock convertible into 849,211 shares of common
stock, 3,145,140 shares of Series B preferred stock convertible into
2,031,190 shares of common stock, 820,477 shares of Series C preferred stock
convertible into 256,399 shares of common stock and 60,076 shares of common
stock underlying warrants. Patricof & Co. Managers, Inc. is the general
partner of APA Excelsior IV Partners, which is the general partner of APA
Excelsior IV, L.P. The address of APA Excelsior IV, L.P. is 445 Park Avenue,
New York, NY 10022. APA Excelsior IV, L.P. intends to grant the underwriters
the right to purchase shares pursuant to the underwriters' over-
allotment option.
(C) shares held by APA Excelsior IV/Offshore, L.P., consisting of
479,555 shares of Series A preferred stock convertible into 149,861 shares
of common stock, 555,025 shares of Series B preferred stock convertible into
358,445 shares of common stock, 144,790 shares of Series C preferred stock
convertible into 45,247 shares of common stock and 10,602 shares of common
stock underlying warrants. Patricof & Co. Managers, Inc. is the general
partner of APA Excelsior IV Partners, which is the general partner of APA
Excelsior IV/Offshore, L.P. The address of APA Excelsior IV/Offshore, L.P.
is c/o Patricof & Co. Ventures, Inc. 445 Park Avenue, New York, NY 10022.
APA Excelsior IV/Offshore, L.P. intends to grant the underwriters the right
to purchase shares pursuant to the underwriters' over-allotment
option.
(D) shares held by Patricof Private Investment Club, L.P. including
51,984 shares of Series A preferred stock convertible into 16,245 shares of
common stock, 60,165 shares of Series B preferred stock convertible into
38,856 shares of common stock, 15,695 shares of Series C preferred stock
convertible into 4,905 shares of common stock and 1,149 shares of common
stock underlying warrants. Patricof & Co. Managers, Inc. is the general
partner of APA Excelsior IV Partners, which is the general partner of
Patricof Private Investment Club, L.P. The address of Patricof Private
Investment Club, L.P. is 445 Park Avenue, New York, NY 10022. Patricof
Private Investment Club, L.P. intends to grant the underwriters the right to
purchase shares pursuant to the underwriters' over-allotment
option.
(4) Fostin Capital Partners II, L.P. is a general partner of The P/A Fund, L.P.
The address for Fostin Capital Partners II, L.P. is 518 Broad Street,
Sewickley, PA 15143. William C. Hulley and Joel P. Adams are general
partners of Fostin Capital Partners II, L.P.
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<PAGE>
(5) Represents the total number of shares of our common stock issuable upon
exercise of stock options which are currently exercisable and which are
exercisable within 60 days after June 30, 1999.
(6) Mr. Kilroy intends to grant the underwriters the right to purchase
shares pursuant to the underwriters' over-allotment option.
(7) The address for Mr. Case is c/o Patricof & Co. Ventures, Inc., 455 South
Gulph Road, Suite 410, King of Prussia, PA 19406. Mr. Case is a Vice
President of Patricof & Co. Managers, Inc., the general partner of each of
APA Excelsior IV, L.P., APA Excelsior IV/Offshore, L.P. and Patricof Private
Investment Club, L.P. Mr. Case is a Managing Director of Patricof & Co.
Ventures, Inc., the investment advisor of APA Excelsior IV/Offshore, L.P.
Mr. Case is a general partner of APA Pennsylvania Partners II, L.P., a
general partner of The P/A Fund, L.P. Mr. Case shares voting and investment
powers with respect to the shares owned by these funds. Mr. Case does not
own any of our outstanding securities as an individual.
(8) The address for Mr. Hulley is c/o The P/A Fund, L.P., 578 Broad Street,
Sewickley, PA 15143. Mr. Hulley is a general partner of Fostin Capital
Partners II, L.P., which is a general partner of The P/A Fund L.P. Mr.
Hulley shares voting and investment powers with respect to the shares owned
by The P/A Fund L.P. Mr. Hulley does not own any of our outstanding
securities as an individual.
(9) The address for Mr. Simunovic is c/o General Electric Capital Corporation,
260 Long Ridge Road, Stamford, CT 06927. Mr. Simunovic is a Senior Vice
President of the Equity Capital Group at General Electric Capital
Corporation, a subsidiary of General Electric Company. Mr. Simunovic shares
voting and investment powers with respect to the shares owned by General
Electric Capital Corporation. Mr. Simunovic does not own any of our
outstanding securities as an individual.
(10) Mr. Filipowski was appointed as a director on June 10, 1999. The address
for Mr. Filipowski is c/o Platinum technology, inc., 1815 South Meyers Road,
Oakbrook Terrace, IL 60181.
(11) Mr. Blondin was appointed as a director on June 16, 1999. The address for
Mr. Blondin is 50 Battery Street, Boston, MA 02109.
(12) Includes 551,870 shares of our common stock issuable upon the exercise of
stock options which are currently exercisable and which are exercisable
within 60 days after June 30, 1999.
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<PAGE>
DESCRIPTION OF SECURITIES
Our authorized capital stock as of June 30, 1999 consisted of 53,800,000
shares of common stock, par value $0.001 per share, and 23,500,187 shares of
preferred stock, par value $0.001 per share, of which 5,526,316 shares were
designated as "Series A preferred stock," 8,782,695 shares were designated as
"Series B preferred stock," and 9,191,176 shares were designated as "Series C
preferred stock." Immediately prior to the closing of this offering, we will
authorize additional shares of common and preferred stock and all of the
outstanding preferred stock will automatically convert to common stock.
The following is a summary of certain provisions of our common stock, our
preferred stock and our third amended and restated certificate of incorporation.
COMMON STOCK
As of June 30, 1999, there were 2,819,955 shares of common stock held of
record by 11 stockholders. Holders of common stock, together with the holders of
the preferred stock, who are entitled to vote on an "as converted" basis as
described below, are entitled to one vote for each share held on all matters
submitted to a vote of stockholders and do not have cumulative voting rights.
Subject to the applicable provisions of the Delaware General Corporation Law,
stockholders holding a majority of the issued and outstanding shares entitled to
vote constitute a quorum for the purposes of convening a stockholders' meeting.
Accordingly, a majority of a quorum may elect directors standing for election,
subject to the director election rights of the stockholders described below.
Holders of common stock are entitled to receive ratably any dividends as may be
declared on the common stock by the board of directors. Upon liquidation,
dissolution or winding up of Bluestone, holders of common stock are entitled to
receive ratably the net assets of Bluestone available for distribution after the
payment of all debts and other liabilities subject to the prior and superior
liquidation preference rights of holders of preferred stock, if any are
outstanding. Holders of common stock have no preemptive or subscription rights
with respect to other issuances of securities. Our common stock has no
conversion rights and is not redeemable.
PREFERRED STOCK
All of our presently authorized preferred stock is outstanding. Immediately
prior to this offering's closing, all outstanding preferred stock will
automatically convert into common stock as follows:
- Series A: one share of Series A preferred stock for 0.3125 shares of
common stock;
- Series B: one share of Series B preferred stock for 0.6541 shares of
common stock; and
- Series C: one share of Series C preferred stock for 0.3125 shares of
common stock.
Holders of our outstanding preferred stock are entitled to receive annual
dividends as follows:
- Series A: $0.057 per share;
- Series B: $0.078 per share; and
- Series C: $0.1632 per share.
The Series A preferred stock dividends have accrued since April 17, 1997,
the Series B preferred stock dividends have accrued since April 22, 1998 and the
Series C preferred stock dividends have accrued since May 25, 1999. Aggregate
accrued dividends on the preferred stock as of June 30, 1999 amounted to
approximately $1.7 million.
We are required to pay any federal or state income taxes to which the
holders of preferred stock may be subject with respect to the accrued and unpaid
cash dividends, whether or not earned or declared. Accumulated but unpaid
dividends will be reduced by these tax payments. Upon the
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<PAGE>
conversion of our preferred stock into common stock, we are required to pay to
the holders of the preferred stock being converted all accumulated and unpaid
cash dividends, whether or not declared, with respect to the preferred stock.
However, if requested by any holder of the shares of preferred stock being
converted and approved by the holders of a majority of the then outstanding
shares of common stock, the holder may exchange all or any portion of the
accumulated and unpaid cash dividends into shares of common stock at the then
fair market value of the common stock.
ANTI-TAKEOVER EFFECTS OF BLUESTONE'S CERTIFICATE OF INCORPORATION AND BYLAWS AND
PROVISIONS OF DELAWARE LAW
Following the closing of this offering, our certificate of incorporation and
bylaws and provisions of Delaware corporate law may hinder or delay a third
party's attempt to acquire us. They may also make it difficult for the
stockholders to remove incumbent management.
CLASSIFIED BOARD OF DIRECTORS; VACANCIES. Following the closing of this
offering, the certificate of incorporation will divide the board of directors
into three classes. The directors' terms will be staggered by class. Our
classified board of directors is intended to provide continuity and stability in
board membership and policies. However, the classified board of directors makes
it more difficult for stockholders to change the board composition quickly. In
addition, a majority of the directors then in office can increase the size of
the board of directors and fill board of directors vacancies and newly created
directorships resulting from any increase in the size of the board of directors.
This is true even if those directors do not constitute a quorum or if only one
director is left in office. These provisions could prevent stockholders,
including parties who want to take over or acquire us, from removing incumbent
directors without cause and filling the resulting vacancies with their own
nominees.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER PROPOSALS AND STOCKHOLDER
NOMINATIONS OF DIRECTORS. The bylaws will establish an advance notice procedure
regarding nominations of directors by stockholders and other stockholder
proposals. The advance notice procedure will not apply to nominations of
directors by the board of directors. For matters a stockholder wishes to bring
before an annual meeting of stockholders, the stockholder must deliver to us a
notice not less than 90 days nor more than 120 days before the first anniversary
of the preceding year's annual meeting of nominations and other business to be
brought before our annual meeting. The stockholder must put information in the
notice regarding:
- the stockholder and its holdings;
- the background of any nominee for director;
- the written consent to being named as a nominee and to serving as a
director if elected;
- any business desired to be brought before the meeting;
- the reasons for conducting the business at the meeting; and
- any material interest of the stockholder in the business proposed.
At a special meeting of stockholders called to elect directors, stockholders
can make a nomination only if they deliver to us a notice that complies with the
above requirements no later than the tenth day following the day on which public
announcement of the special meeting is made. The bylaws could preclude a
nomination for the election of directors or the conduct of certain business at a
particular meeting if the proper procedures are not followed. This may
discourage or deter a third party from conducting a solicitation of proxies to
elect its own slate of directors or otherwise attempting to obtain control of
us.
SPECIAL STOCKHOLDERS' MEETINGS. Our certificate of incorporation and bylaws
will permit special meetings of the stockholders to be called only by the board
of directors, the chief executive officer or
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<PAGE>
the president or holders of at least 75% of our securities that are outstanding
and entitled to vote in an election of directors.
AUTHORIZED BUT UNISSUED SHARES. We will be able to issue shares of common
stock without stockholder approval, up to the number of shares authorized for
issuance in its certificate of incorporation, except as limited by Nasdaq rules.
We could use these additional shares for a variety of corporate purposes. These
purposes include future public offerings to raise additional capital, corporate
acquisitions and employee benefit plans. Our ability to issue these additional
shares could make it more difficult or discourage an attempt to obtain control
of us by means of a proxy contest, tender offer, merger or otherwise.
SECTION 203 OF DELAWARE LAW. After this offering is completed, Section 203
of the Delaware General Corporation Law will apply to us. This section will
prohibit us from engaging in a "business combination" with an "interested
stockholder." This restriction will apply for three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes (1) mergers, (2) asset sales and (3) other transactions
resulting in a financial benefit to an interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of our voting
stock. Section 203 could delay, defer or prevent a change in control of us. It
might also reduce the price that investors might be willing to pay in the future
for shares of common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is StockTrans, Inc.
LISTING
We have applied for listing our common stock on the Nasdaq National Market
under the trading symbol "BLSW."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Upon completion of this offering, we will have outstanding an aggregate
of 17,302,473 shares of our common stock, assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options. Of
these shares, all of the shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, unless
such shares are purchased by "affiliates" as that term is defined in Rule 144
under the Securities Act. The remaining 13,302,473 shares of common stock to be
held by existing preferred stockholders will be "restricted securities" as that
term is defined in Rule 144 under the Securities Act. Restricted securities may
be sold in the public market only if registered or if they qualify for an
exemption from registration under Rule 144 or Rule 701 promulgated under the
Securities Act, which rules are summarized below.
As a result of the lock up agreements described below and the provisions of
Rule 144, additional shares will be available for sale in the public market as
follows:
- 2,070 shares of common stock currently outstanding will be available for
sale into the public market following the effectiveness of this
registration statement;
- 2,663,589 shares of common stock issuable upon exercise of currently
outstanding options will be eligible for sale as the options vest and
following the effectiveness of a registration statement on Form S-8
covering the stock options, which we expect to file shortly after the
completion of this offering; and
- the remainder of the restricted securities will be eligible for sale from
time to time after the expiration of the lock up period and upon
expiration of their respective one-year holding periods.
LOCK-UP AGREEMENTS
All of our officers and directors and some of our stockholders are expected
to enter into lock-up agreements under which they agreed not to transfer or
otherwise dispose of, directly or indirectly, without the consent of Deutsche
Bank Securities Inc., any shares of our common stock or any securities
convertible into or exchangeable or exercisable for shares of our common stock
for a period of 180 days following the effective date of the registration
statement of which this prospectus is a part.
Transfers or dispositions can be made during the lock-up periods in the case
of gifts for estate planning purposes where the donee signs a lock-up agreement.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this registration statement, a person who has beneficially owned
shares of our common stock for at least one year would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 173,025 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 of the sale with the SEC.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
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RULE 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell their shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect, any
of our employees, consultants or advisors who purchases shares from us in
connection with a compensatory stock or option plan or other written agreement
are eligible to resell their shares 90 days after the effective date of this
offering in reliance on Rule 144, but without compliance with some restrictions,
including the holding period, contained in Rule 144.
REGISTRATION RIGHTS
After this offering, the holders of 10,482,518 shares of our common stock
and warrants exercisable for 288,056 shares of our common stock will be entitled
to demand registration of their shares under the Securities Act. All of these
holders have agreed not to demand registration of their common stock for one
year after the date of this offering. After this one year period, the holders of
a majority of the shares eligible for demand rights may require us, on not more
than two occasions, to use our best efforts to file a registration statement
under the Securities Act with respect to their shares eligible for demand rights
if the gross offering amount would be expected to exceed $20.0 million. In
addition, if at any time after this offering we propose to register any of our
securities under the Securities Act in a public offering in excess of $1.0
million, for ourselves or for other holders, we will send notice of this
registration to holders of the shares eligible for demand rights, as well as to
Mel Baiada with respect to his shares of our common stock and Silicon Valley
Bank with respect to its warrants exercisable for 9,766 shares of our common
stock. Subject to limitations and conditions set forth in the agreements
governing their registration rights, they may elect to register their eligible
shares. Further, if we propose to file a registration statement on Form S-3, a
short form registration statement, when we become eligible therefor, for an
offering in excess of $1.0 million, the holders of shares eligible for demand
rights and "piggyback" rights may register their common stock along with that
registration. We will be responsible for the expenses incurred in connection
with these registrations, other than underwriters' discounts or commissions,
except that we will pay expenses of only one registration on Form S-3 at a
holder's request per year. All registration rights expire five years from the
date of this offering.
STOCK OPTIONS
Shortly after completion of this offering, we plan to file a registration
statement on Form S-8 under the Securities Act covering shares of common stock
reserved for issuance under our stock option and director compensation plans. As
of June 30, 1999, options to purchase 2,663,589 shares of common stock were
issued and outstanding, 1,028,050 of which are vested. This registration
statement is expected to be filed and become effective as soon as practicable
after the date of this prospectus. Accordingly, shares registered under the S-8
registration statement will, subject to lock-up agreements, vesting provisions
and Rule 144 volume limitations applicable to our affiliates, be available for
sale in the open market immediately after the registration statement becomes
effective.
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PLAN OF DISTRIBUTION
Subject to the terms and conditions of the underwriting agreement, the
underwriters, named below through their representatives Deutsche Bank Securities
Inc., SoundView Technology Group, Inc., C.E. Unterberg, Towbin and Legg Mason
Wood Walker, Incorporated have severally agreed to purchase from us the
following respective numbers of shares of common stock at the initial public
offering price less the underwriting discounts and commissions set forth on the
cover page of this prospectus.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Deutsche Bank Securities Inc...............................................
SoundView Technology Group, Inc............................................
C.E. Unterberg, Towbin.....................................................
Legg Mason Wood Walker, Incorporated.......................................
-----------------
Total....................................................................
-----------------
-----------------
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to conditions precedent and that the underwriters will purchase all
of the shares of common stock offered hereby if any of such shares are
purchased.
We have been advised by the representatives of the underwriters that the
underwriters propose to offer the shares of our common stock to the public at
the initial public offering price set forth on the cover page of this prospectus
and to certain dealers at that price less a concession not in excess of
$ per share. The underwriters may allow to some other dealers, and those
dealers may reallow, a concession not in excess of $ per share. After the
initial public offering, the offering price and other selling terms may be
changed by the representatives of the underwriters.
We have requested that, of the 4,000,000 shares of common stock to be sold
in this offering, up to 200,000 shares be offered at the price to the public set
forth on the cover page of this prospectus to our directors, officers, employees
and business associates. Additionally, under certain circumstances, our
certificate of incorporation provides for a right of first offer to be made to
certain eligible preferred stockholders of an amount of this offering that would
enable these preferred stockholders to maintain their proportionate interest in
our capital stock after giving effect to the exercise of all outstanding
warrants and options. These preferred stockholders have the right, but not the
obligation, to acquire shares of common stock in this offering on the same terms
as the other investors. If a preferred stockholder does not accept the offer to
acquire its portion of the shares offered, its portion will be offered ratably
to the other eligible preferred stockholders. As a result, the number of shares
of common stock available for sale to the general public will be reduced to the
extent these persons purchase the reserved shares. The underwriters will offer
to the general public, on the same basis as the other shares to be sold in this
offering, any reserved shares that were not purchased.
We and certain stockholders have granted the underwriters an option,
exercisable not later than 30 days after the date of this prospectus, to
purchase up to 600,000 additional shares of common stock at the initial public
offering price less the underwriting discounts and commissions set forth on the
cover page of this prospectus. To the extent that the underwriters exercise this
option, each of the underwriters will have a firm commitment to purchase
approximately the same percentage of the option shares that the number of shares
of common stock to be purchased by it in the above table bears to 4,000,000. The
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the common stock offered in this offering. If
purchased, the underwriters
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will offer the additional shares on the same terms as those on which the
4,000,000 shares are being offered.
We and the selling stockholders have agreed to indemnify the underwriters
against specified liabilities, including liabilities under the Securities Act.
We have agreed not to offer, sell, sell short, transfer, hypothecate, pledge
or otherwise dispose of any shares of our common stock or other securities
convertible into or exchangeable or exercisable for shares of our common stock
or derivatives of our common stock, or enter into an agreement for our common
stock, for a period of 180 days after the date of our registration statement, of
which this prospectus is a part, directly or indirectly, by us or otherwise,
except as consideration for business acquisitions, on exercise of currently
outstanding stock options or on the issuance of options to key employees and
directors under our stock option plans and the exercise of such options, without
the prior written consent of Deutsche Bank Securities Inc.
All of our officers and directors and certain of our stockholders intend to
enter into lock-up agreements under which they agreed not to transfer or
otherwise dispose of, directly or indirectly, without the consent of Deutsche
Bank Securities Inc. any shares of our common stock or any securities
convertible into or exchangeable or exercisable for shares of our common stock
for a period of 180 days following the date of this registration statement.
Transfers or dispositions can be made during the lock-up periods in the case
of gifts for estate planning purposes where the donee signs a lock-up agreement.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
To facilitate this offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the market price of our common
stock. Specifically, the underwriters may over-allot shares of our common stock
in connection with this offering, creating a short position in the underwriters'
syndicate account. Additionally, to cover the over-allotments or to stabilize
the market price of our common stock, the underwriters may bid for, and
purchase, shares of our common stock in the open market. Any of these activities
may maintain the market price of our common stock at a level above that which
might otherwise prevail in the open market. The underwriters are not required to
engage in these activities and may end any of these activities at any time. The
representatives of the underwriters, on behalf of the syndicate of underwriters,
also may reclaim selling concessions allowed to an underwriter or dealer if the
syndicate repurchases shares distributed by that underwriter or dealer.
We paid $1.4 million and issued a warrant, exercisable for five years, to
purchase up to 150,448 shares of common stock at an exercise price of $8.70 per
share to Deutsche Bank Securities Inc. for providing placement agent services to
us in connection with the offering of Series C preferred stock that was
consummated on May 25, 1999. The amount paid for these services was determined
by arms' length negotiations between us and Deutsche Bank Securities Inc. We
believe that this amount is within standard industry parameters for a
transaction of that nature. The underwriters and their respective affiliates
may, in the future, be lenders to, engage in transactions with and perform
services for us in the ordinary course of business. No transactions with the
underwriters are presently contemplated.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock will
be determined by negotiations between us and the representatives of the
underwriters. Among the factors to be considered in these negotiations will be
prevailing market conditions, the results of our operations in recent periods,
the market capitalizations and stages of development of other companies which we
and the representatives of the underwriters believe to be comparable to us,
estimates of our business potential, the present state of our development and
other factors deemed relevant.
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LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Pepper Hamilton LLP. Some legal matters related to this offering
will be passed upon for the underwriters by Willkie Farr & Gallagher.
EXPERTS
Our financial statements as of December 31, 1997 and 1998, and for the years
ended December 31, 1996, 1997 and 1998 included in this prospectus and
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein upon the authority of said firm as experts in giving said
reports.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-l pursuant to
the Securities Act with respect to the common stock offered in this offering.
The prospectus, which is part of the registration statement, does not contain
all the information set forth in the registration statement. Statements
contained in the prospectus as to the contents of any contract, agreement or
other document filed with the registration statement as exhibits are necessarily
summaries of such documents, but are complete in all material respects, and are
qualified in their entirety by reference to the copy of the applicable document
filed as an exhibit to the registration statement. For further information about
us and the securities offered in this offering, reference is made to the
registration statement and to the financial statements, schedules and exhibits
filed as a part of the registration statement.
Upon completion of the offering, we will be subject to the information
requirements of the Exchange Act, and, in accordance therewith, will file
reports and other information with the SEC. The registration statement, the
exhibits and schedules forming a part of the registration statement and the
reports and other information filed by us with the SEC in accordance with the
Exchange Act may be inspected without charge at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the following regional offices of the SEC: 7 World Trade Center, Suite 1300, New
York, New York 10048; and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois, 60661-2511. Copies of these materials may also be
obtained from the Public Reference Room of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. You may obtain information
regarding the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC also maintains an Internet Web site at
http://www.sec.gov that contains reports, proxy statements and other
information.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Balance Sheets............................................................................................. F-3
Statements of Operations................................................................................... F-4
Statements of Mandatorily Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)........ F-5
Statements of Cash Flows................................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
After the 1-for-3.2 reverse stock split of each outstanding share of common
stock, as discussed in Note 13 to the financial statements, is effected, we
expect to be in a position to render the following audit report.
/s/ Arthur Andersen LLP
Philadelphia, PA
March 31, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Bluestone Software, Inc.:
We have audited the accompanying balance sheets of Bluestone Software, Inc.
(a Delaware corporation), formerly Bluestone Consulting, Inc., as of December
31, 1997 and 1998, and the related statements of operations, mandatorily
redeemable convertible preferred stock and stockholders' equity (deficit) and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly,
in all material respects, the financial position of Bluestone Software, Inc. as
of December 31, 1997 and 1998 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Philadelphia, PA
March 31, 1999 (except with
respect to matters discussed
in Note 2, as to which the
date is May 25, 1999)
and Note 13, as to
which the date is .)
F-2
<PAGE>
BLUESTONE SOFTWARE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1999
------------------------- ---------------------------
1997 1998 ACTUAL PRO FORMA
---------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents... $2,330,372 $ 2,534,819 $ 20,600,454 $ 20,600,454
Restricted certificate of
deposit................... 400,000 -- -- --
Accounts receivable, net of
allowance of $37,012,
$44,473 and $210,314...... 1,747,672 3,369,514 2,757,076 2,757,076
Prepaid expenses and
other..................... 312,011 149,318 259,878 259,878
Due from related party...... 79,011 -- -- --
---------- ------------ ------------ ------------
Total current assets.... 4,869,066 6,053,651 23,617,408 23,617,408
---------- ------------ ------------ ------------
Property and equipment:
Equipment................... 1,465,570 2,418,590 2,577,672 2,577,672
Furniture and fixtures...... 86,852 183,767 185,704 185,704
Leasehold improvements...... 20,552 131,845 134,445 134,445
---------- ------------ ------------ ------------
1,572,974 2,734,202 2,897,821 2,897,821
Less--Accumulated
depreciation and
amortization.............. (640,741) (1,284,921) (1,585,649) (1,585,649)
---------- ------------ ------------ ------------
Net property and
equipment............. 932,233 1,449,281 1,312,172 1,312,172
---------- ------------ ------------ ------------
Deposits...................... 13,744 32,997 38,981 38,981
---------- ------------ ------------ ------------
$5,815,043 $ 7,535,929 $ 24,968,561 $ 24,968,561
---------- ------------ ------------ ------------
---------- ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Line of credit.............. $1,610,561 $ 473,365 $ 671,366 $ 671,366
Current portion of long-term
debt...................... 83,971 356,728 436,648 436,648
Accounts payable............ 781,703 1,094,286 1,294,176 1,294,176
Accrued wages............... 478,970 579,371 1,604,540 1,604,540
Other accrued expenses...... 401,468 477,246 1,228,117 1,228,117
Due to related parties...... -- 188,898 29,103 29,103
Deferred revenues........... 1,560,632 3,223,338 1,777,584 1,777,584
---------- ------------ ------------ ------------
Total current
liabilities........... 4,917,305 6,393,232 7,041,534 7,041,534
---------- ------------ ------------ ------------
Long-term debt................ 269,676 875,642 654,169 654,169
---------- ------------ ------------ ------------
Subordinated notes due to
related parties............. 1,000,000 1,000,000 1,000,000 1,000,000
---------- ------------ ------------ ------------
Mandatorily redeemable Series
A convertible preferred
stock....................... 5,330,727 5,672,339 5,841,856 --
---------- ------------ ------------ ------------
Mandatorily redeemable Series
B convertible preferred
stock....................... -- 11,742,212 12,102,550 --
---------- ------------ ------------ ------------
Mandatorily redeemable Series
C convertible preferred
stock....................... -- -- 22,508,745 --
---------- ------------ ------------ ------------
Commitments and contingencies
(Note 12)
Stockholders' equity
(deficit):
Common stock, $.001 par
value, 53,800,000 shares
authorized, 2,812,500,
2,815,039, 2,819,955 and
13,302,473 shares issued
and outstanding........... 2,813 2,816 2,821 13,304
Common stock warrants....... -- -- 1,900,000 1,900,000
Deferred stock-based
compensation.............. -- -- (1,303,344) (1,303,344)
Additional paid-in
capital................... 6,187 11,871 1,629,797 42,072,465
Accumulated deficit......... (5,711,665) (18,162,183) (26,409,567) (26,409,567)
---------- ------------ ------------ ------------
Total stockholders'
equity (deficit)...... (5,702,665) (18,147,496) (24,180,293) 16,272,858
---------- ------------ ------------ ------------
$5,815,043 $ 7,535,929 $ 24,968,561 $ 24,968,561
---------- ------------ ------------ ------------
---------- ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
BLUESTONE SOFTWARE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
Software license
fees............ $ 1,475,368 $ 2,337,199 $ 3,391,226 $ 1,192,117 $ 4,726,889
Services.......... 42,908 2,178,664 3,619,997 1,706,506 1,865,096
Third party
products and
related
services........ 6,555,095 5,225,429 1,106,688 932,162 --
----------- ----------- ------------ ----------- -----------
Total
revenues.... 8,073,371 9,741,292 8,117,911 3,830,785 6,591,985
Cost of revenues:
Software license
fees............ 112,732 202,219 258,572 96,047 156,232
Services.......... 305,109 2,516,451 4,433,309 2,077,872 2,466,660
Third party
products and
related
services........ 4,261,078 2,797,656 643,120 534,522 --
----------- ----------- ------------ ----------- -----------
Total cost of
revenues.... 4,678,919 5,516,326 5,335,001 2,708,441 2,622,892
----------- ----------- ------------ ----------- -----------
Gross profit.... 3,394,452 4,224,966 2,782,910 1,122,344 3,969,093
Operating expenses:
Sales and
marketing....... 3,004,760 5,130,799 9,551,284 3,747,872 6,185,414
Product
development..... 701,789 1,295,148 2,473,771 903,833 1,868,554
General and
administrative... 1,515,456 1,615,787 2,316,017 949,520 2,124,128
Amortization of
stock-based
compensation.... -- -- -- -- 112,204
----------- ----------- ------------ ----------- -----------
Total
operating
expenses.... 5,222,005 8,041,734 14,341,072 5,601,225 10,290,300
----------- ----------- ------------ ----------- -----------
Operating
loss........ (1,827,553) (3,816,768) (11,558,162) (4,478,881) (6,321,207)
Interest expense,
net............... (50,458) (79,701) (46,520) (33,575) (1,147,676)
----------- ----------- ------------ ----------- -----------
Loss from continuing
operations........ (1,878,011) (3,896,469) (11,604,682) (4,512,456) (7,468,883)
Income (loss) from
discontinued
operations........ (737,699) 98,898 -- -- --
----------- ----------- ------------ ----------- -----------
Net loss............ (2,615,710) (3,797,571) (11,604,682) (4,512,456) (7,468,883)
Accretion of
preferred stock
redemption
value............. -- (240,399) (845,836) (307,768) (778,501)
----------- ----------- ------------ ----------- -----------
Net loss available
to common
stockholders...... $(2,615,710) $(4,037,970) $(12,450,518) $(4,820,224) $(8,247,384)
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
Basic and diluted
net loss per
share:
Continuing
operations...... $ (0.67) $ (1.39) $ (4.12) $ (1.60) $ (2.65)
Discontinued
operations...... (0.26) 0.04 -- -- --
Accretion of
preferred stock
redemption
value........... -- (0.09) (0.30) (0.11) (0.28)
----------- ----------- ------------ ----------- -----------
$ (0.93) $ (1.44) $ (4.42) $ (1.71) $ (2.93)
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
Shares used in
computing net
loss per
share........... 2,812,500 2,812,500 2,814,105 2,813,612 2,815,488
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
BLUESTONE SOFTWARE, INC.
STATEMENTS OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS'BLUESTONE SOFTWARE, INC.
STATEMENTS OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
STOCKHOLDERS' DEFICIT
------------------------------------------------
SERIES A SERIES B SERIES C
CONVERTIBLE CONVERTIBLE CONVERTIBLE COMMON STOCK
PREFERRED PREFERRED PREFERRED ----------------- COMMON STOCK DEFERRED
STOCK STOCK STOCK SHARES AMOUNT WARRANTS COMPENSATION
----------- ----------- ------------ --------- ------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995.............. $ -- $ -- $ -- 2,812,500 $2,813 $ -- $ --
Distribution of foreign tax credits... -- -- -- -- -- -- --
Net loss.............................. -- -- -- -- -- -- --
----------- ----------- ------------ --------- ------ -------------- -------------
Balance, December 31, 1996.............. -- -- -- 2,812,500 2,813 -- --
Spin-off of consulting division to
majority stockholder................ -- -- -- -- -- -- --
Issuance of Preferred stock, net of
financing costs..................... 5,090,328 -- -- -- -- -- --
Accretion of Preferred stock
redemption value.................... 240,399 -- -- -- -- -- --
Net loss.............................. -- -- -- -- -- -- --
----------- ----------- ------------ --------- ------ -------------- -------------
Balance, December 31, 1997.............. 5,330,727 -- -- 2,812,500 2,813 -- --
Issuance of Preferred stock, net of
financing costs..................... -- 11,237,988 -- -- -- -- --
Accretion of preferred stock
redemption value.................... 341,612 504,224 -- -- -- -- --
Exercise of common stock options...... -- -- -- 2,539 3 -- --
Net loss.............................. -- -- -- -- -- -- --
----------- ----------- ------------ --------- ------ -------------- -------------
Balance, December 31, 1998.............. 5,672,339 11,742,212 -- 2,815,039 2,816 -- --
Issuance of preferred stock, net of
financing costs..................... -- -- 22,260,099 -- -- -- --
Accretion of preferred stock
redemption value (unaudited)........ 169,517 360,338 248,646 -- -- -- --
Issuance of options to purchase common
stock below fair market value
(unaudited)......................... -- -- -- -- -- -- (1,415,548)
Amortization of stock-based
compensation (unaudited)............ -- -- -- -- -- -- 112,204
Issuance of common stock options to
non-employees (unaudited)........... -- -- -- -- -- -- --
Issuance of common stock warrants
(unaudited)......................... -- -- -- -- -- 1,900,000 --
Exercise of common stock options
(unaudited)......................... -- -- -- 4,916 5 -- --
Net loss (unaudited).................. -- -- -- -- -- -- --
----------- ----------- ------------ --------- ------ -------------- -------------
Balance, June 30, 1999 (unaudited)...... $ 5,841,856 $12,102,550 $ 22,508,745 2,819,955 $2,821 $ 1,900,000 $(1,303,344)
----------- ----------- ------------ --------- ------ -------------- -------------
----------- ----------- ------------ --------- ------ -------------- -------------
<CAPTION>
ADDITIONAL
PAID-IN- ACCUMULATED
CAPITAL DEFICIT TOTAL
---------- ------------ ------------
<S> <C> <C> <C>
Balance, December 31, 1995.............. $ 6,187 $ 1,366,254 $ 1,375,254
Distribution of foreign tax credits... -- (28,501) (28,501)
Net loss.............................. -- (2,615,710) (2,615,710)
---------- ------------ ------------
Balance, December 31, 1996.............. 6,187 (1,277,957) (1,268,957)
Spin-off of consulting division to
majority stockholder................ -- (395,738) (395,738)
Issuance of Preferred stock, net of
financing costs..................... -- -- --
Accretion of Preferred stock
redemption value.................... -- (240,399) (240,399)
Net loss.............................. -- (3,797,571) (3,797,571)
---------- ------------ ------------
Balance, December 31, 1997.............. 6,187 (5,711,665) (5,702,665)
Issuance of Preferred stock, net of
financing costs..................... -- -- --
Accretion of preferred stock
redemption value.................... -- (845,836) (845,836)
Exercise of common stock options...... 5,684 -- 5,687
Net loss.............................. -- (11,604,682) (11,604,682)
---------- ------------ ------------
Balance, December 31, 1998.............. 11,871 (18,162,183) (18,147,496)
Issuance of preferred stock, net of
financing costs..................... -- -- --
Accretion of preferred stock
redemption value (unaudited)........ -- (778,501) (778,501)
Issuance of options to purchase common
stock below fair market value
(unaudited)......................... 1,415,548 -- --
Amortization of stock-based
compensation (unaudited)............ -- -- 112,204
Issuance of common stock options to
non-employees (unaudited)........... 190,954 -- 190,954
Issuance of common stock warrants
(unaudited)......................... -- -- 1,900,000
Exercise of common stock options
(unaudited)......................... 11,424 -- 11,429
Net loss (unaudited).................. -- (7,468,883) (7,468,883)
---------- ------------ ------------
Balance, June 30, 1999 (unaudited)...... 1$,629,797 $(26,409,567) $(24,180,293)
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
BLUESTONE SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss.................................................. $(2,615,710) $(3,797,571) $(11,604,682) $(4,512,456) $(7,468,883)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization........................... 302,010 239,835 656,654 273,388 304,522
Provision for doubtful accounts......................... 94,217 95,883 32,800 7,462 140,000
Accrued interest on subordinated notes.................. 30,048 103,109 109,352 49,799 (57,278)
Issuance of Bridge loan warrants........................ -- -- -- -- 1,100,000
Amortization of stock-based compensation................ -- -- -- -- 112,204
Issuance of common stock options to non-employees....... -- -- -- -- 190,954
Changes in operating assets and liabilities--
Accounts receivable................................... (975,630) (310,896) (1,654,641) 322,865 409,827
Prepaid expenses and other assets..................... (81,801) (84,169) 130,619 188,325 (57,729)
Accounts payable and accrued expenses................. 1,308,129 408,822 379,410 118,871 2,033,208
Deferred revenues..................................... 221,186 314,263 1,662,706 (464,804) (1,445,754)
----------- ----------- ------------ ----------- -----------
Net cash used in operating activities............... (1,717,551) (3,030,724) (10,287,782) (4,016,550) (4,738,929)
----------- ----------- ------------ ----------- -----------
Investing activities:
Purchases of property and equipment....................... (273,936) (871,717) (1,160,882) (500,959) (163,617)
----------- ----------- ------------ ----------- -----------
Financing activities:
Net proceeds from (repayments of) line of credit.......... 2,190,000 604,311 (1,137,196) (1,610,424) 198,001
Proceeds from long-term debt.............................. 54,000 315,620 919,481 -- --
Proceeds from subordinated notes.......................... 750,000 250,000 -- -- --
Repayments of long-term debt.............................. (63,030) (122,056) (40,758) (35,239) (141,553)
Proceeds from issuance of preferred stock, net............ -- 4,840,328 11,237,988 11,237,988 23,060,099
Restricted cash........................................... -- (400,000) 400,000 400,000 --
Spin-off of consulting division to sole stockholder....... -- (274,538) -- -- --
Net advances from (repayments to) related party........... -- (66,532) 267,909 192,453 (159,795)
Proceeds from exercise of common stock options............ -- -- 5,687 -- 11,429
----------- ----------- ------------ ----------- -----------
Net cash provided by financing activities........... 2,930,970 5,147,133 11,653,111 10,184,778 22,968,181
----------- ----------- ------------ ----------- -----------
Net increase in cash and cash equivalents................... 939,483 1,244,692 204,447 5,667,269 18,065,635
Cash and cash equivalents, beginning of period.............. 146,197 1,085,680 2,330,372 2,330,372 2,534,819
----------- ----------- ------------ ----------- -----------
Cash and cash equivalents, end of period.................... $ 1,085,680 $ 2,330,372 $ 2,534,819 $ 7,997,641 $20,600,454
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
Supplemental cash flow information:
Cash paid for interest.................................... $ 169,870 $ 133,409 $ 170,232 $ 93,033 $ 204,965
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. BACKGROUND:
Bluestone Software, Inc. (the "Company"), formerly Bluestone Consulting,
Inc., was incorporated in New Jersey on March 17, 1989. The Company develops,
markets and supports web application server software products that enable its
customers to deploy information across the Internet, intranets and extranets. On
April 17, 1997, in connection with the sale of Series A Convertible Preferred
Stock (see Note 7), the Company spun off its consulting division to its then
sole stockholder for no consideration. The Company reincorporated in Delaware as
Bluestone Software, Inc. The consulting division, Bluestone Consulting, Inc.
("BCI") provides its clients information technology staffing resources and in
1997 provided the Company with certain administrative services under a shared
services agreement (see Note 11). The consulting division spin-off is reported
in the accompanying financial statements as a discontinued operation (see Note
3).
2. LIQUIDITY:
The Company has recurring operating losses that have continued subsequent to
year-end. The losses are primarily due to product development costs, marketing
expenditures and administrative infrastructure costs related to the expansion of
the Company's business.
On January 21, 1999, the Company and substantially all of the Series B
Preferred stockholders (collectively, the "Investors") entered into the Note and
Warrant Purchase Agreement, whereby the Company could, from time to time before
May 30, 1999, request that the Investors purchase 10% convertible subordinated
secured notes totaling an aggregate of $5 million. Upon the purchase of a note,
the Investors would be granted a warrant to purchase the number of shares of the
Company's Common stock equal to the note amount multiplied by .1008, at an
exercise price of $1.98 per share. The Company issued warrants to purchase an
aggregate of 136,088 shares of common stock in connection with notes purchased
in April 1999 and May 1999. The Company also issued warrants to purchase an
aggregate of 1,520 shares of common stock at an exercise price of $8.70 per
share related to interest on the notes. The warrants issued in connection with
the notes and related interest thereon were valued at $1,100,000 using the
black-scholes option pricing model and the following assumptions: volatility of
70%, risk-free interest rates of 5.2% to 5.3%, fair market value of a share of
common stock of $8.70 and a term of 10 years. The value of the warrants was
charged to operations during the three months ended June 30, 1999. The notes
were converted into 496,322 shares of Series C Preferred stock on May 25, 1999
(see below).
On March 31, 1999, the Company amended its bank loan agreement, which had
expired on February 7, 1999. The amendment extended the Company's credit
facility through April 1, 2000 and reset certain financial covenants. The
amended agreement provides for the interest rate on the credit facility to
increase by 0.50% and for certain quarterly fees to be paid if the Company does
not meet certain quarterly net revenue requirements, as defined in the
amendment.
On May 25, 1999, the Company sold 9,191,176 shares of Series C Convertible
Preferred Stock to certain venture capital investors, including certain Series B
Preferred investors for $25 million in cash. The Series C Preferred will be
senior to the Series A Preferred and Series B Preferred and is automatically
convertible into Common stock upon a public stock offering, as defined.
Dividends on the Series C Preferred are cumulative at $0.1632 per share per
annum. The Series C Preferred stockholders participate in Common stock dividends
and have Common stock voting rights on an as converted basis.
F-7
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
2. LIQUIDITY: (CONTINUED)
In conjunction with the sale of the Series C Preferred, the Company issued a
warrant to purchase 150,448 shares of common stock at $8.70 to the placement
agent, valued at $800,000 using the black-scholes option pricing model and the
following assumptions: volatility of 70%, a risk-free interest rate of 5.2%,
fair market value of a share of common stock of $8.70 and a term of 5 years. The
value of the warrant was recorded as a cost of the Series C Preferred Stock sale
and, accordingly, deducted from the proceeds of the Series C Preferred Stock.
The Company believes that the proceeds from the sale of the Series C
Convertible Preferred Stock and borrowing availability under its amended credit
facility will provide adequate funding to sustain the Company's operations
through 1999. However, there is no assurance that the funding will be sufficient
to sustain operations until the Company begins generating positive cash flows.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL STATEMENTS
The financial statements as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 are unaudited and, in the opinion of management, include
adjustments necessary for a fair presentation of results for those interim
periods. The results of operations for the six months ended June 30, 1998 and
1999 are not necessarily indicative of the results to be expected for the entire
year.
PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma balance sheet as of June 30, 1999 reflects the
conversion of all outstanding preferred stock and all accrued preferred stock
dividends as of June 30, 1999 into common stock immediately before the
completion of the contemplated public offering.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and related disclosures at the date of the financial statements and the reported
amounts of certain revenues and expenses during the reporting periods. Actual
results could differ from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
PREPAID EXPENSES AND OTHER
Prepaid expenses and other at December 31, 1997 includes $243,834 of
deferred costs related to support contracts purchased from third parties for
resale in connection with the sale of third party product.
F-8
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided using
the double declining balance method over the estimated useful lives of the
related assets, generally three to seven years. Leasehold improvements are
amortized on a straight-line basis over the lease term.
PRODUCT DEVELOPMENT
Product development expenditures are charged to operations as incurred.
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed," requires
the capitalization of certain software development costs subsequent to the
establishment of technological feasibility. The Company has determined that
technological feasibility for its products is generally achieved upon completion
of a working model. Since software development costs have not been significant
after the completion of a working model, all such costs have been charged to
product development expense.
REVENUE RECOGNITION
The Company sells perpetual licenses to end-users and annual and multi-year
licenses primarily to independent software vendors. The Company also sells its
software through value added resellers and system integrators. The Company
derives its services revenues from annual maintenance agreements, which consist
of customer technical support services and unspecified product
upgrades/enhancements on a when-and-if-available basis, and consulting and
training services.
License fee revenue is generally recognized when a formal agreement exists,
delivery of the product has occurred, the license fee is deemed fixed and
determinable and collectibility is probable. License revenue from arrangements
with resellers and system integrators is not recognized until the product is
delivered to end-users. Maintenance revenue is recognized on a straight-line
basis over the term of the contract. Revenues from training and consulting
services are recognized as services are performed.
Deferred revenues generally consist of advance customer payments on
maintenance contracts. Certain of the Company's multi-year license agreements
provide for payment terms that extend beyond 12 months. Revenue on such
long-term arrangements are recognized when payments become due. Included in
accounts receivable and deferred revenues at December 31, 1998 is $1,865,294
related to an extended term license fee where the Company received payment and
recorded revenue in February 1999.
CONCENTRATION OF CREDIT RISK
One customer accounted for approximately 11% of the Company's net revenues
for the year ended December 31, 1998 and one customer accounted for
approximately 55% of net accounts receivable at December 31, 1998. One customer
accounted for approximately 29% of net revenues for the six months ended June
30, 1999. No one customer accounted for greater than 10% of net revenues for the
years ended December 31, 1996 and 1997 or greater than 10% of net accounts
receivable at December 31, 1996 and 1997 and June 30, 1999.
F-9
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense for
continuing operations for the years ended December 31, 1996, 1997 and 1998 and
the six months ended June 30, 1998 and 1999 was $781,634, $615,374, $882,761,
$199,910 and $793,921, respectively, including $394,808, $251,640, $549,487,
$184,094 and $307,352, respectively, related to attending trade shows.
INCOME TAXES
Prior to April 17, 1997, the Company was taxed as a subchapter S corporation
under the Internal Revenue Code for federal and state income tax purposes.
Accordingly, all S Corporation taxable income or losses were included in the
sole stockholder's tax return. In connection with the Series A Convertible
Preferred Stock sale (see Note 7), the Company's subchapter S election was
terminated.
Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using enacted tax rates. The Company accounts for certain income and
expense items for financial reporting purposes differently than for income tax
purposes. The principal differences relate to the Company's conversion to the
accrual basis of accounting for income taxes and certain financial statement
reserves that are not currently deductible for income tax purposes.
STOCK COMPENSATION
The Company has elected to follow Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employee stock options. Under APB No. 25,
if the exercise price of the Company's employee stock options equals or exceeds
the market price of the underlying stock on the date of the grant, no
compensation expense is recognized. If the exercise price of an option is below
the market price of the underlying stock on the date of grant, compensation cost
is recorded and is recognized in the statements of operations over the vesting
period (see Note 9).
EARNINGS PER SHARE
The Company follows SFAS No. 128, "Earnings Per Share," which requires a
dual presentation of "basic" and "diluted" earnings per share ("EPS") on the
face of the statements of operations. Basic EPS is computed by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding for the period. Diluted EPS includes the dilutive effect, if any,
from the potential exercise or conversion of securities like stock options,
which would result in the issuance of additional shares of common stock. For
each of the three years in the period ended December 31, 1998 and the six months
ended June 30, 1998 and 1999, the impact of stock options was not considered as
their effect on EPS would be anti-dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, prepaid expenses, accounts payable and accrued
expenses are reflected in the accompanying financial statements at fair value
due to the short-term nature of those
F-10
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
instruments. The carrying amount of long-term debt obligations approximate fair
value at the balance sheet dates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 is effective for fiscal years
beginning December 31. 1997, SFAS No. 130 establishes standards for the
reporting and display of comprehensive income in a set of financial statements.
Comprehensive income is defined as the change in net assets of a business
enterprise during a period from transactions generated from non-owner sources.
It includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. The Company has no other
comprehensive income items, therefore, the adoption of SFAS No. 130 had no
impact on the financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 applies to all public companies and is effective for fiscal years beginning
after December 15, 1997. SFAS No. 131 requires that business segment financial
information be reported in the financial statements utilizing the management
approach. The management approach is defined as the manner in which management
organizes the segments within the enterprise for making operating decisions and
assessing performance. Subsequent to the spin-off of the consulting segment,
management believes the Company operates in one business segment, therefore, the
adoption of SFAS No. 131 had no impact on the financial statements.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The Company adopted SOP 98-1
in January 1999. The adoption had no material effect on the Company's financial
position or results of operations.
DISCONTINUED OPERATIONS
On April 17, 1997, in connection with the sale of Series A Convertible
Preferred Stock (see Note 7), the Company spun off its consulting division,
which operated as a separate segment, to its then sole stockholder for no
consideration. The spin-off, which included cash of $274,538, has been recorded
as a deemed distribution in the accompanying financial statements. The
discontinued operation generated net revenues of $13,369,459 and $4,537,147 for
the years ended December 31, 1996 and 1997, respectively. The spin-off was
treated as a tax-free reorganization for federal and state income tax purposes.
RECLASSIFICATIONS
Prior year financial statements have been reclassified to conform with the
current year presentation.
F-11
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
4. LINE OF CREDIT:
On December 8, 1997, the Company entered into an agreement with a bank that
provides for a $1,750,000 revolving line of credit and a $500,000 equipment line
(see Note 5). The revolver is collateralized by substantially all of the
Company's assets and a $400,000 certificate of deposit at December 31, 1997.
Borrowings under the line are subject to a borrowing base of 80% of eligible
accounts receivable, as defined. The restricted certificate of deposit was sold
in 1998 as it was no longer required collateral. The line bore interest at prime
plus 1.5%, through August 16, 1998 at which date the interest rate was changed
to prime plus .75% in conjunction with the equipment line modification (see Note
5), and expired on December 7, 1998. In December 1998, the Company and the bank
agreed to extended the term of the credit facility to February 7, 1999. The line
is cross-defaulted and cross-collateralized with the equipment line with the
bank (see Note 5). The loan agreement also requires the Company to maintain
certain financial and nonfinancial covenants, as defined.
On March 31, 1999, the Company amended its bank loan agreement. The
amendment extended the Company's credit facility through April 1, 2000 and reset
certain financial covenants. The amended agreement provides for the interest
rate on the credit facility to increase to prime plus 1.25% and for certain
quarterly fees to be paid if the Company does not meet certain quarterly net
revenue requirements, as defined in the amendment. At June 30, 1999, borrowings
of $1,023,463 were available under the line.
A warrant to purchase 9,766 shares of the Company's Common stock at $2.56
per share, as adjusted was issued to the bank in December 1997 in conjunction
with the loan agreement. The warrant is fully exercisable, has a seven-year term
and is subject to an anti-dilution provision, as defined. No value has been
assigned to the warrant as it is not material to the Company's financial
statements.
5. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1997 1998 1999
---------- ------------ ------------
<S> <C> <C> <C>
Equipment line with bank.................................................. $ 237,620 $ 1,157,101 $ 1,037,461
Capital leases............................................................ 116,027 75,269 53,356
---------- ------------ ------------
353,647 1,232,370 1,090,817
Less- Current portion..................................................... (83,971) (356,728) (436,648)
---------- ------------ ------------
$ 269,676 $ 875,642 $ 654,169
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
At December 31, 1997, the Company's equipment line provided for borrowings
of up to $500,000 for approved capital expenditures, as defined and interest
payable monthly on the outstanding balance at a rate of prime plus 1.5%. In June
1998, the outstanding borrowings as of that date of $237,620 converted to a term
note payable in 36 monthly installments. On August 16, 1998, the Company and the
bank modified the equipment line to provide for additional borrowings of up to
$1,762,380 for approved capital expenditures, as defined. Interest is payable
monthly on the outstanding balance at a rate of prime plus 1.25%. On March 31,
1999, in connection with the loan agreement amendment, the then outstanding
balance of $959,086 was converted to a term note payable in 36 monthly
installments
F-12
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
5. LONG-TERM DEBT: (CONTINUED)
and no additional borrowings are available under the equipment line. The
equipment line is secured by equipment and is cross-defaulted and
cross-collateralized with the Company's line of credit (see Note 4).
At December 31, 1997, 1998 and June 30, 1999, property under capital leases
totaled $130,897 with corresponding accumulated amortization of $30,908, $90,900
and $104,232, respectively.
6. SUBORDINATED NOTES DUE TO RELATED PARTIES:
<TABLE>
<S> <C>
Note payable to Bluestone Consulting, Inc..................................................................... $ 500,000
Convertible subordinated note to related party................................................................ 500,000
----------
$1,000,000
----------
----------
</TABLE>
In January 1996, the Company entered into a $1,000,000, subordinated 10%
loan agreement with the brother of the Company's founder. The agreement, as
amended in connection with the BCI spin-off, provided for BCI to assume $500,000
of the convertible note with the Company assuming the remaining $500,000 of the
convertible note. To achieve an equal distribution of debt between BCI and the
Company as part of the spin-off, the Company issued BCI a $500,000, 10% note.
Interest on both notes is payable annually. Principal on the convertible note is
due on December 31, 2002 and principal on the note with BCI is due on December
31, 2005. At December 31, 1997 and 1998 and June 30, 1999 other accrued expenses
includes $97,526, $206,878 and $149,600, respectively, related to interest on
the notes. The $500,000 convertible subordinated note is convertible into
218,750 shares of the Company's Common stock at the option of the holder.
7. MANDATORILY REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK:
On April 18, 1997, the Company sold 5,526,316 shares of $0.001 par value
Series A Convertible Preferred Stock to certain venture capital investors, an
individual investor and the Company's former sole shareholder for $5,250,000.
This includes 263,158 shares sold to the former sole stockholder in exchange for
canceling a $250,000 note payable due him. The Series A Preferred stock is
convertible into 0.3125 shares of Common stock, subject to adjustment, as
defined, and is automatically convertible upon a public stock offering, as
defined.
Dividends on the Series A Preferred are cumulative at $0.057 per share per
annum and the Series A Preferred has a liquidation preference of $0.95 per
share. At December 31, 1997 and 1998 cumulative dividends accrued but not
declared were $222,658 and $537,658, respectively. Beginning in April 2003, the
holders may require the Company to redeem the Preferred at $0.95 per share plus
accrued dividends over a three-year period. The Series A Preferred stockholders
participate in Common stock dividends and have Common stock voting rights on an
as converted basis.
F-13
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
8. MANDATORILY REDEEMABLE SERIES B CONVERTIBLE PREFERRED STOCK:
On April 23, 1998, the Company sold 8,782,695 shares of Series B Convertible
Preferred Stock to certain venture capital investors, including its original
investors (see Note 7) for approximately $11.4 million in cash. The Series B
Preferred is senior to the Series A Preferred and was originally convertible
into 0.3125 shares of Common stock. In 1998, in accordance with the original
terms of the Series B Preferred stock purchase agreement, the conversion ratio
was adjusted so that each share of Series B Preferred is convertible into 0.6541
shares of Common stock. In addition, the Series B Preferred is automatically
convertible upon a public stock offering, as defined.
Dividends on the Series B Preferred are cumulative at $0.078 per share per
annum and the Series B Preferred has a liquidation preference of $1.296 per
share. At December 31, 1998, cumulative dividends accrued but not declared were
$476,720. Beginning in October 2001, the holders may require the Company to
redeem the Preferred at $1.296 per share plus accrued dividends over an
eighteen-month period. The Series B Preferred stockholders participate in Common
stock dividends and have Common stock voting rights on an as converted basis.
9. STOCK OPTION AND EMPLOYEE BENEFIT PLANS:
STOCK OPTION PLANS
In 1996, the Company adopted the 1996 Incentive and Non-Qualified Stock
Option Plan (the "1996 Plan") under which incentive and nonstatutory stock
options to acquire shares of the Company's Common stock may be granted to
officers, employees and consultants of the Company. Incentive stock options must
be issued at an exercise price not less than the fair market value of the
underlying shares on the date of grant. Options granted under the 1996 Plan are
exercisable over a period of time, not to exceed ten years, and are subject to
other terms and conditions specified in the individual option grants. In April
1997, in connection with the sale of Series A Convertible Preferred Stock (see
Note 7), the 1996 Plan was amended and restated, increasing the total shares
available under the plan to 781,250. On August 7, 1997, all outstanding options
granted under the 1996 Plan were canceled and 151,219 were reissued at an
exercise price of $2.24 per share. In April 1998, in connection with the sale of
Series B Convertible Preferred Stock (see Note 8), the 1996 Plan was amended and
restated, increasing the total shares available under the plan to 1,406,250. In
June 1999, the 1996 Plan was amended to increase the total shares available
under the plan to 2,946,578.
F-14
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
9. STOCK OPTION AND EMPLOYEE BENEFIT PLANS: (CONTINUED)
Information relative to the 1996 Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
RANGE OF AGGREGATE AVERAGE
EXERCISES EXERCISE EXERCISE
SHARES PRICES PRICE PRICE
----------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Outstanding January 1, 1996................................ -- $ -- $ -- $ --
Granted at fair market value........................... 238,156 6.40 1,524,200 6.40
----------- ------------- ------------- -----
Outstanding December 31, 1996.............................. 238,156 6.40 1,524,200 6.40
Granted at fair market value........................... 512,545 2.24-9.60 1,279,200 2.50
Canceled............................................... (334,688) 2.24-9.60 (1,871,530) 5.59
----------- ------------- ------------- -----
Outstanding December 31, 1997.............................. 416,013 2.24 931,870 2.24
Granted at fair market value........................... 787,118 2.24-3.07 2,249,416 2.86
Exercised.............................................. (2,539) 2.24 (5,688) 2.24
Canceled............................................... (18,523) 2.24 (41,493) 2.24
----------- ------------- ------------- -----
Outstanding December 31, 1998.............................. 1,182,069 2.24-3.07 3,134,105 2.65
Granted at fair market value........................... 1,215,045 3.07-8.70 6,441,779 5.30
Granted below fair market value........................ 309,313 3.07-8.70 1,224,108 3.96
Exercised.............................................. (4,916) 2.24-3.07 (11,429) 2.32
Canceled............................................... (37,922) 2.24-3.07 (105,020) 2.77
----------- ------------- ------------- -----
$
Outstanding June 30, 1999.................................. 2,663,589 2.24-$8.70 $ 10,683,543 $ 4.01
----------- ------------- ------------- -----
----------- ------------- ------------- -----
</TABLE>
The options under the 1996 Plan generally vest over a four year period. At
June 30, 1999 there were options to purchase 1,028,050 shares of common stock
exercisable and options to purchase 275,534 shares of common stock were
available for future grant under the 1996 Plan. The weighted average remaining
contractual life of the outstanding options at June 30, 1999 was 9.23 years.
In connection with certain options granted to employees during the six
months ended June 30, 1999, the Company recorded $1,415,548 of deferred
compensation. This amount represents the difference between the fair market
value of the Company's common stock on the date of grant and the exercise price
of options to purchase 284,313 shares of the Company's common stock. Deferred
compensation is amortized over the vesting periods of the options, which range
from immediate vesting to periods of up to four years. For the six months ended
June 30, 1999 $112,204 of deferred compensation was charged to expense. At June
30, 1999, the Company had $1,303,344 of deferred compensation to be amortized
over the remaining vesting periods of four years.
Included in options granted below fair market value during the six months
ended June 30, 1999 are options to purchase 25,000 shares of common stock issued
to non-employees for consulting services. The Company recorded $190,954 in
general and administrative expenses during the six months ended June 30, 1999
related to these options.
In 1999 the Company established an executive bonus pool for issuance of
common stock options to the Chairman and to certain officers of the Company
under the 1996 Plan. Grants of stock option awards under the bonus pool are
contingent upon the Company meeting certain performance goals.
F-15
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
9. STOCK OPTION AND EMPLOYEE BENEFIT PLANS: (CONTINUED)
The Company granted 52,650 options relating to the bonus pool in May 1999 for
the Company's operating results during the three months ended March 31, 1999. In
August 1999 the Company will grant 60,259 options relating to the bonus pool for
the Company's operating results for the three months ended 6/30/99. Options
granted in connection with the bonus pool vest immediately.
In June 1999, the Company adopted the Directors' Compensation Plan under
which non-qualified options to acquire shares of the Company's common stock may
be granted to non-employee directors of the Company. Options granted under the
Directors Compensation Plan vest immediately and are exercisable over a period
of time not to exceed five years. The total number of shares available under the
Directors Compensation Plan is 156,250.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and the related interpretations, in accounting
for its stock option plan. Had compensation cost for the 1996 Plan been
determined based upon the fair value of the options at the date of grant, as
prescribed under SFAS 123, the Company's net loss for the years ended December
31, 1997 and 1998 would have increased to the following pro forma amount:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998
------------- --------------
<S> <C> <C>
Net loss, as reported.............................................................. $ (3,797,571) $ (11,604,682)
------------- --------------
------------- --------------
Pro forma net loss................................................................. $ (3,871,550) $ (11,764,529)
------------- --------------
------------- --------------
</TABLE>
The weighted average fair value of the options granted are estimated as
$0.25 to $0.28 per share on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: no expected dividend yield,
a volatility of 0.0%, risk-free interest rates ranging from 4.514% to 6.738%
based on the rates in effect on the date of grant, and an expected life of seven
years.
RETIREMENT SAVINGS PLAN
The Company has a retirement savings plan (the "Plan") that qualifies under
Section 401(k) of the Internal Revenue Code. Eligible employees may contribute
up to 15% of their annual compensation, as defined by the Plan. The Company
contributes to the Plan at a rate of 10% of the employee's contributions up to a
maximum of 6% of the employee's salary. The Company's contributions to the Plan
were $10,452, $22,009, $31,807, $14,351 and $22,688 for the years ended December
31, 1996, 1997 and 1998, and the six months ended June 30, 1998 and 1999,
respectively.
F-16
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
10. INCOME TAXES:
The income tax provision consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Current provision...................................................................... $ -- $ --
Deferred benefit....................................................................... (64,000) (81,000)
Net operating loss not benefited....................................................... (1,134,000) (4,410,000)
Termination of S corporation status.................................................... (121,000) --
Increase in valuation allowance........................................................ 1,319,000 4,491,000
----------- -----------
$ -- $ --
----------- -----------
----------- -----------
</TABLE>
The tax effect of the differences that give rise to deferred income taxes is
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
Net operating loss
carryforwards............... $ 1,134,000 $ 5,544,000
Accounts receivable........... 15,000 18,000
Accrued expenses.............. 71,000 174,000
Property and equipment........ 24,000 24,000
Deferred revenue adjustment... 315,000 252,000
Cash-to-accrual adjustment.... (240,000) (202,000)
----------- -----------
1,319,000 5,810,000
Less-Valuation allowance...... (1,319,000) (5,810,000)
----------- -----------
$ -- $ --
----------- -----------
----------- -----------
</TABLE>
The Company has established a valuation allowance for the full amount of the
net deferred tax asset due to the limited operating history of the Company and
uncertainty surrounding realizability. At December 31, 1998, the Company had a
net operating loss carryforward of approximately $14 million beginning to expire
in 2012 for federal tax purposes and in 2004 for state tax purposes.
11. TRANSACTIONS WITH BCI:
On April 17, 1997, in connection with the sale of the Series A Convertible
Preferred Stock (see Note 7), the Company spun off its consulting division, BCI,
to its then sole stockholder, who is currently a director of the Company.
In connection with the spin-off, the Company entered into the Intercompany
Services Agreement with BCI, whereby BCI provided the Company certain
administrative services at an allocated cost based on actual cost and usage. For
the year ended December 31, 1997, general and administrative expense includes
$871,784 for such services provided by BCI.
The Company also sells certain software products and services to BCI and
purchases certain consulting services from BCI. For the years ended December 31,
1997 and 1998 and for the six months ended June 30, 1998 and 1999, the Company's
sales to BCI totaled $40,448, $58,607, $28,582 and
F-17
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
11. TRANSACTIONS WITH BCI: (CONTINUED)
$75,520, respectively, and total purchases from BCI were $47,088, $351,739,
$194,638 and $52,725, respectively. At December 31, 1997 and 1998 and June 30,
1999, accounts receivable includes $5,217, $23,299 and $85,860, respectively,
due from BCI and accounts payable includes $43,889, $77,097 and $3,925,
respectively, payable to BCI.
On March 31, 1998, the Company decided to no longer sell non-proprietary
software products. In addition, the Company agreed to allow BCI to commence the
sale and support of this product line, and sub-contracted support services to
BCI related to previously sold maintenance contracts. The Company paid BCI
$450,000 in 1998 and paid BCI $150,000 in 1999, for the sub-contracted support
services.
The Company also sub-leases a portion of its operating facility to BCI (see
Note 12). Amounts charged to BCI, which reduced the Company's rent expense for
the years ended December 31, 1997 and 1998 and the six months ended June 30,
1998 and 1999, totaled $130,588, $74,165, $28,586 and $46,949, respectively.
During the year ended December 31, 1998 and the six months ended June 30, 1998
and 1999, the Company rented certain equipment from BCI, totaling $89,489,
$39,845 and $49,510, respectively.
In connection with the Series A Convertible Preferred Stock sale and
spin-off of BCI, the Company issued a $500,000, 10% note payable to BCI (see
Note 6).
12. COMMITMENTS AND CONTINGENCIES:
The Company has operating leases on its office facilities (see Note 11) and
certain equipment. Future minimum lease payments under such noncancelable
operating leases are summarized as follows, as of December 31, 1998:
<TABLE>
<S> <C>
1999.......................................................................................................... $ 739,851
2000.......................................................................................................... 598,608
2001.......................................................................................................... 502,980
2002.......................................................................................................... 502,980
2003.......................................................................................................... 454,662
----------
$2,799,081
----------
----------
</TABLE>
Rent expense for continuing operations was $263,079, $551,832, $691,615,
$272,788 and $430,500 for the years ended December 31, 1996, 1997 and 1998 and
the six months ended June 30, 1998 and 1999, respectively.
The Company is involved in certain legal actions arising in the ordinary
course of business. Management believes that the outcome of such actions will
not have a material adverse effect on the Company's financial position or
results of operations.
13. PUBLIC OFFERING SUBSEQUENT TO DECEMBER 31, 1998:
On June 10, 1999, the Company's Board of Directors authorized management to
file a Registration Statement with the SEC to permit the Company to commence an
initial public offering. In connection therewith, on August 13, 1999, the
Company's Board of Directors authorized a 1-for-3.2 reverse split of its common
stock to be effected immediately prior to the offering. The reverse stock split
has been retroactively reflected in the accompanying financial statements.
F-18
<PAGE>
After the 1-for-3.2 reverse stock split of each outstanding share of common
stock, as discussed in Note 13 to the financial statements, is effected, we
expect to be in a position to render the following audit report.
/s/ Arthur Andersen LLP
Philadelphia, PA
March 31, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Bluestone Software, Inc.
We have audited, in accordance with generally accepted auditing standards, the
financial statements of Bluestone Software, Inc. included in this registration
statement and have issued our report thereon dated March 31, 1999. Our audit was
made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The accompanying financial statement schedule is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Philadelphia, PA
March 31, 1999
S-1
<PAGE>
BLUESTONE SOFTWARE, INC.,
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts:
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO SPIN-OFF OF BALANCE AT
BEGINNING OF COSTS AND CONSULTING END OF
PERIOD EXPENSES DIVISION WRITE-OFFS PERIOD
------------ ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1998.............................................. $ 37,012 $ 32,800 $ -- $ (25,339) $ 44,473
1997.............................................. 77,090 95,883 (104,372) (31,589) 37,012
1996.............................................. 69,073 94,217 -- (86,200) 77,090
</TABLE>
S-2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
You may rely only on the information contained in this prospectus. We have
not authorized anyone to provide information different from that contained in
this prospectus. Neither the delivery of this prospectus nor the sale of common
stock means that information contained in this prospectus is correct after the
date of the prospectus. This prospectus is not an offer to sell or solicitation
of an offer to buy these shares of common stock in any circumstances under which
the offer or solicitation is unlawful.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
---------
<S> <C>
Prospectus Summary.............................. 1
Risk Factors.................................... 5
Forward-looking Statements...................... 16
Use of Proceeds................................. 16
Dividend Policy................................. 16
Capitalization.................................. 17
Dilution........................................ 18
Selected Financial Data......................... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 20
Business........................................ 31
Management...................................... 42
Certain Transactions............................ 51
Principal and Selling Stockholders.............. 56
Description of Securities....................... 59
Shares Eligible For Future Sale................. 62
Plan of Distribution............................ 64
Legal Matters................................... 66
Experts......................................... 66
Where You Can Find More Information Glossary.... 67
Index to Financial Statements................... F-1
</TABLE>
------------------------
Until , 1999 (25 days after the date of this prospectus), all dealers
that buy, sell or trade these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
4,000,000 Shares
[LOGO]
Common Stock
---------------------
PROSPECTUS
---------------------
Deutsche Banc Alex / / Brown
SoundView Technology Group
C.E. Unterberg, Towbin
Legg Mason Wood Walker
Incorporated
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............... 15,346
NASD and Blue Sky fees and expenses............................... 15,000
Nasdaq National Market listing fee................................ 95,000
Accountants' fees and expenses.................................... 125,000
Legal fees and expenses........................................... 300,000
Transfer Agent's fees and expenses................................ 6,300
Printing and engraving expenses................................... 200,000
Miscellaneous..................................................... 43,354
---------
Total Expenses.................................................... $ 800,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits each Delaware
business corporation to indemnify its directors, officers, employees and agents
against liability for each such person's acts taken in his or her capacity as a
director, officer, employee or agent of the corporation if such actions were
taken in good faith and in a manner which he or she reasonably believed to be in
or not opposed to the best interests of the corporation, and with respect to any
criminal action, if he or she had no reasonable cause to believe his or her
conduct was unlawful. Section 23.1 of Bluestone's bylaws provides that
Bluestone, to the full extent permitted by Section 145 of the Delaware General
Corporation Law, shall indemnify all past and present directors, officers,
employees and agents of Bluestone who were or are parties or are threatened to
be made parties to or are involved in any action, suit or proceeding against all
expenses, liability and losses in connection with such proceeding. Such expenses
may be paid by Bluestone in advance of the final disposition of the action upon
receipt of an undertaking to repay the advance if it is ultimately determined
that such person is not entitled to indemnification.
As permitted by Section 102(b)(7) of the Delaware General Corporation Law,
Article VIII of Bluestone's certificate of incorporation provides that no
director of Bluestone shall be liable to Bluestone for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to Bluestone or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for the unlawful payment of dividends on or
redemption of Bluestone's capital stock, or (iv) for any transaction from which
the director derived an improper personal benefit.
Bluestone has obtained a policy insuring it and its directors and officers
against certain liabilities, including liabilities under the Securities Act.
It is anticipated that the Underwriting Agreement to be filed as Exhibit 1.1
to this Registration Statement will provide for indemnification by the
Underwriters of the Registrant and its officers and directors for certain
liabilities arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Registrant has sold the securities set
forth below which were not registered under the Securities Act:
Pursuant to a stock purchase agreement dated April 18, 1997, the Registrant
issued 5,526,316 shares of Series A preferred stock to institutional and
accredited investors for a total purchase price of $5.25 million or $0.95 per
share, including 263,158 shares of Series A preferred stock to Mel Baiada. No
underwriters were used for such offering.
II-1
<PAGE>
In connection with the Registrant's credit facility with Silicon Valley
Bank, the Registrant issued to Silicon Valley Bank a warrant dated November 24,
1997 to purchase up to 9,766 shares of common stock at an exercise price equal
to $2.56 per share. The warrant may be exercised at any time prior to November
24, 2004. The exercise price of the warrant and the number of shares of common
stock into which the warrant is exercisable are subject to proportionate
adjustment in the event of stock dividends payable in shares of common stock and
combinations and splits of common stock. In addition, pursuant to an
antidilution agreement between the Registrant and Silicon Valley Bank dated
November 24, 1997, the exercise price of the warrant and the number of shares of
common stock into which the warrant is exercisable are subject to adjustment on
a broad-based weighted average basis for issuance of securities after November
24, 1997 for less than the then applicable exercise price for the warrant.
Pursuant to a stock purchase agreement dated April 22, 1998, the Registrant
issued 8,782,695 shares of Series B preferred stock to institutional and
accredited investors for a total purchase price of $11.4 million or $1.296 per
share.
On January 21, 1999, the Registrant entered into the Note and Warrant
Purchase Agreement with substantially all of the holders of the Series B
preferred stock (the "Investors"). Under the Note and Warrant Purchase
Agreement, the Investors agreed to provide subordinated secured debt financing
of up to $5.0 million (the "Committed Principal Amount"). The Registrant drew
down $1.35 million of such debt and issued 10% Convertible Subordinated Secured
Notes and warrants to purchase up to 136,088 shares of common stock at an
exercise price equal to $1.98 per share to the Investors. The outstanding $1.35
million of the Committed Principal Amount was converted into Series C preferred
stock as part of our issuance of 9,191,176 shares of Series C preferred stock at
$2.72 per share on May 25, 1999.
Pursuant to a stock purchase agreement dated May 25, 1999, the Registrant
issued 9,191,176 shares of Series C preferred stock to institutional and
accredited investors for a total purchase price of $25.0 million, or $2.72 per
share. Deutsche Bank Securities Inc. acted as the placement agent for such
offering for which it received $1.4 million and a warrant to purchase up to
150,448 shares of common stock at $8.70 per share.
From March 1, 1996 to June 30, 1999, the Registrant granted stock options to
purchase 3,062,177 shares of common stock at exercise prices ranging from $2.24
to $8.70 per share to employees, consultants and directores pursuant to its
Amended and Restated 1996 Incentive and Non-Qualified Stock Option Plan.
Between March 1998 and June 1999, 7,455 shares of common stock of the
Registrant have been issued to current and former employees pursuant to the
exercise of stock options.
The Registrant believes that all grants of options or sales of common stock
made pursuant to the exercise of stock options were made in reliance upon Rule
701 under the Securities Act or on Section 4(2) of the Securities Act. The
Registrant believes that all of the other transactions described above were
exempt from registration under Section 3(b) or 4(2) of the Securities Act
because the subject securities were sold to a limited group of persons, each of
whom was believed to have been a sophisticated, accredited investor or to have
had a pre-existing business or personal relationship with the Registrant or its
management and to have been purchasing for investment without a view to further
distribution. In addition, the recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates issued in such
transactions. All recipients had adequate access to information about the
Registrant.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1** Contribution and Distribution Agreement, dated April 17, 1997, between Bluestone and Bluestone
Consulting, Inc.
3.1** Third Amended and Restated Certificate of Incorporation of Bluestone, as amended.
3.2** Bylaws of Bluestone.
3.3* Form of Fourth Amended and Restated Certificate of Incorporation of Bluestone.
3.4* Form of Amended and Restated Bylaws of Bluestone.
3.5 Certificate of Amendment of the Third Amended and Restated Certificate of Incorporation of Bluestone
dated August , 1999.
4.1* Specimen Stock Certificate of Bluestone.
5.1* Opinion of Pepper Hamilton LLP.
10.1+ 1996 Incentive and Non-Qualified Stock Option Plan of Bluestone, as amended, including forms of
Incentive Stock Option Agreement, Non-Qualified Stock Option Agreement and Stock Purchase and
Restriction Agreement.
10.2+ Directors Compensation Plan of Bluestone.
10.3**+ Forms of Employee Confidentiality Agreements of Bluestone.
10.4**+ Executive Employment Agreement, dated April 18, 1997, between Mel Baiada and Bluestone.
10.5**+ First Amendment to Executive Employment Agreement, dated January 13, 1999, between Mel Baiada and
Bluestone.
10.6**+ Executive Employment Agreement, dated April 24, 1997, between Robert Bickel and Bluestone.
10.7**+ Severance Agreement, dated September 17, 1998, between P. Kevin Kilroy and Bluestone.
10.8**+ Severance Agreement, dated September 17, 1998, between Robert Bickel and Bluestone.
10.9**+ Severance Agreement, dated September 17, 1998, between John H. Capobianco and Bluestone.
10.10**+ Severance Agreement, dated September 17, 1998, between Enrico J. Ballezzi and Bluestone.
10.11** Consulting Agreement between Bluestone and Andrew J. Filipowski dated as of May 3, 1999.
10.12 Reseller Agreement, dated January 1, 1998, between Bluestone and Bluestone Consulting, Inc.
10.13** Subcontract Agreement, dated April 23, 1998, between Bluestone and Bluestone Consulting, Inc.
10.14** Intercompany Services Agreement, dated April 17, 1997, between Bluestone and Bluestone Consulting,
Inc.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
10.15** Service Mark License Agreement, dated April 17, 1997, between Bluestone and Bluestone Consulting, Inc.
10.16** $500,000 Amended and Restated Convertible and Subordinated Note, dated April 17, 1997, by Bluestone in
favor of Mark Baiada.
10.17** $500,000 Promissory Note, dated April 17, 1997, by Bluestone in favor of Bluestone Consulting, Inc.
10.18 Sublease Agreement dated as of April 30, 1997 between Bluestone (as sublandlord) and Bluestone
Consulting, Inc. (as subtenant).
10.19 Equipment Lease, dated September 5, 1997, between Bluestone and Colonial Pacific Leasing.
10.20** Loan and Security Agreement, dated as of December 8, 1997, between Silicon Valley Bank and Bluestone.
10.21** First Loan Modification Agreement, dated as of August 16, 1998, between Silicon Valley Bank and
Bluestone.
10.22** Second Loan Modification Agreement, dated as of January 21, 1999, between Silicon Valley Bank and
Bluestone.
10.23** Third Loan Modification Agreement, dated as of March 30, 1999, between Silicon Valley Bank and
Bluestone.
10.24** Negative Pledge Agreement, dated as of August 16, 1998, between Silicon Valley Bank and Bluestone.
10.25** Warrant to purchase 31,250 shares of Common Stock of Bluestone, dated as of November 24, 1997, issued
by Bluestone to Silicon Valley Bank, as amended.
10.26** Antidilution Agreement, dated as of November 24, 1997, between Silicon Valley Bank and Bluestone.
10.27** Registration Rights Agreement, dated as of November 24, 1997, between Silicon Valley Bank and
Bluestone.
10.28 Warrant to purchase 481,434 shares of Common Stock of Bluestone, dated as of April 28, 1999, issued by
Bluestone to Deutsche Banc Alex. Brown
10.29** Series A Preferred Stock Purchase Agreement, dated as of April 18, 1997, between Bluestone and the
investors listed therein.
10.30** Series B Preferred Stock Purchase Agreement, dated as of April 22, 1998, between Bluestone and the
investors listed therein.
10.31** Convertible Subordinated Secured Note and Warrant Purchase Agreement, dated as of January 21, 1999,
between Bluestone and the investors listed therein.
10.32** Form of Warrant issued to the investors under the Convertible Subordinated Secured Note and Warrant
Purchase Agreement dated January 21, 1999.
10.33** Preferred Stock Purchase Agreement relating to the sale of Series C Preferred Stock, dated as of May
25, 1999, between Bluestone and the purchasers listed therein.
10.34** Second Restated First Refusal and Co-Sale Agreement, dated as of May 25, 1999, between Bluestone and
the investors and stockholders listed therein.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
10.35** Second Restated Investors' Rights Agreement, dated as of May 25, 1999, between Bluestone and the
investors and stockholders listed therein, as amended by the First Amendment dated as of June 16,
1999.
10.36** Restated Voting Agreement, dated as of April 23, 1998, between Bluestone and the investors and
founders listed therein, as amended by the First Amendment dated as of June 16, 1999.
10.37** Lease for headquarters space at 1000 Briggs Road, Mount Laurel, New Jersey, dated September 27, 1993,
with Liberty Property Limited Partnership (successor to Briggs Properties Partnership) as landlord.
10.38 Stock Repurchase Agreement between Bluestone and Mel Baiada dated April 18, 1997.
10.39*+ Executive Bonus Pool
23.1 Consent of Arthur Andersen LLP.
23.2* Consent of Pepper Hamilton LLP (included in Exhibit 5.1).
23.3 Consent of International Data Corporation
24.1** Powers of Attorney (included in the signature page to the Registration Statement).
27.1 Financial Data Schedule (in electronic format only).
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
+ Management contract or compensatory plan.
(b) The following financial statement schedule and the report related
thereto are included with this Registration Statement:
1. Schedule II--Valuation and Qualifying Accounts of Bluestone.
2. Report of Arthur Andersen LLP on financial statement schedule.
Schedules, other than those referred to above, are omitted as non-applicable
or not required, or the required information is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreements
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to
II-5
<PAGE>
a court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(c) The Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
(ii) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this amendment to its registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in Mount Laurel, New Jersey on
the 20th day of August, 1999.
BLUESTONE SOFTWARE, INC.
By: /s/ P. KEVIN KILROY
-----------------------------------------
P. Kevin Kilroy
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
<C> <S> <C>
*/s/ P. MELAN BAIADA Chairman of the Board of
- ------------------------------ Directors August 20, 1999
P. Melan Baiada
President and Chief
/s/ P. KEVIN KILROY Executive Officer and
- ------------------------------ Director (Principal August 20, 1999
P. Kevin Kilroy Executive Officer)
Senior Vice President Chief
/s/ S. CRAIG HUKE Financial Officer
- ------------------------------ (Principal Financial and August 20, 1999
S. Craig Huke Accounting Officer)
*/s/ GREGORY M. CASE Director
- ------------------------------ August 20, 1999
Gregory M. Case
*/s/ WILLIAM C. HULLEY Director
- ------------------------------ August 20, 1999
William C. Hulley
*/s/ ANTON SIMUNOVIC Director
- ------------------------------ August 20, 1999
Anton Simunovic
*/s/ ANDREW J. FILIPOWSKI Director
- ------------------------------ August 20, 1999
Andrew J. Filipowski
*/s/ PAUL E. BLONDIN Director
- ------------------------------ August 20, 1999
Paul E. Blondin
</TABLE>
*/s/ P. KEVIN KILROY
------------------------------
P. Kevin Kilroy
By: ATTORNEY-IN-FACT
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1** Contribution and Distribution Agreement, dated April 17, 1997, between Bluestone and Bluestone
Consulting, Inc.
3.1** Third Amended and Restated Certificate of Incorporation of Bluestone, as amended.
3.2** Bylaws of Bluestone.
3.3* Form of Fourth Amended and Restated Certificate of Incorporation of Bluestone.
3.4* Form of Amended and Restated Bylaws of Bluestone.
3.5 Certificate of Amendment of the Third Amended and Restated Certificate of Incorporation dated August
, 1999.
4.1* Specimen Stock Certificate of Bluestone.
5.1* Opinion of Pepper Hamilton LLP.
10.1+ 1996 Incentive and Non-Qualified Stock Option Plan of Bluestone, as amended, including forms of
Incentive Stock Option Agreement, Non-Qualified Stock Option Agreement and Stock Purchase and
Restriction Agreement.
10.2+ Directors Compensation Plan of Bluestone.
10.3**+ Forms of Employee Confidentiality Agreements of Bluestone.
10.4**+ Executive Employment Agreement, dated April 18, 1997, between Mel Baiada and Bluestone.
10.5**+ First Amendment to Executive Employment Agreement, dated January 13, 1999, between Mel Baiada and
Bluestone.
10.6**+ Executive Employment Agreement, dated April 24, 1997, between Robert Bickel and Bluestone.
10.7**+ Severance Agreement, dated September 17, 1998, between P. Kevin Kilroy and Bluestone.
10.8**+ Severance Agreement, dated September 17, 1998, between Robert Bickel and Bluestone.
10.9**+ Severance Agreement, dated September 17, 1998, between John H. Capobianco and Bluestone.
10.10**+ Severance Agreement, dated September 17, 1998, between Enrico J. Ballezzi and Bluestone.
10.11** Consulting Agreement between Bluestone and Andrew J. Filipowski dated as of May 3, 1999.
10.12 Reseller Agreement, dated January 1, 1998, between Bluestone and Bluestone Consulting, Inc.
10.13** Subcontract Agreement, dated April 23, 1998, between Bluestone and Bluestone Consulting, Inc.
10.14** Intercompany Services Agreement, dated April 17, 1997, between Bluestone and Bluestone Consulting,
Inc.
10.15** Service Mark License Agreement, dated April 17, 1997, between Bluestone and Bluestone Consulting, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
10.16** $500,000 Amended and Restated Convertible and Subordinated Note, dated April 17, 1997, by Bluestone in
favor of Mark Baiada.
10.17** $500,000 Promissory Note, dated April 17, 1997, by Bluestone in favor of Bluestone Consulting, Inc.
10.18 Sublease Agreement dated as of April 30, 1997 between Bluestone (as sublandlord) and Bluestone
Consulting, Inc. (as subtenant).
10.19 Equipment Lease, dated September 5, 1997, between Bluestone and Colonial Pacific Leasing.
10.20** Loan and Security Agreement, dated as of December 8, 1997, between Silicon Valley Bank and Bluestone.
10.21** First Loan Modification Agreement, dated as of August 16, 1998, between Silicon Valley Bank and
Bluestone.
10.22** Second Loan Modification Agreement, dated as of January 21, 1999, between Silicon Valley Bank and
Bluestone.
10.23** Third Loan Modification Agreement, dated as of March 30, 1999, between Silicon Valley Bank and
Bluestone.
10.24** Negative Pledge Agreement, dated as of August 16, 1998, between Silicon Valley Bank and Bluestone.
10.25** Warrant to purchase 31,250 shares of Common Stock of Bluestone, dated as of November 24, 1997, issued
by Bluestone to Silicon Valley Bank, as amended.
10.26** Antidilution Agreement, dated as of November 24, 1997, between Silicon Valley Bank and Bluestone.
10.27** Registration Rights Agreement, dated as of November 24, 1997, between Silicon Valley Bank and
Bluestone.
10.28 Warrant to purchase 481,434 shares of Common Stock of Bluestone, dated as of April 28, 1999, issued by
Bluestone to Deutsche Banc Alex. Brown
10.29** Series A Preferred Stock Purchase Agreement, dated as of April 18, 1997, between Bluestone and the
investors listed therein.
10.30** Series B Preferred Stock Purchase Agreement, dated as of April 22, 1998, between Bluestone and the
investors listed therein.
10.31** Convertible Subordinated Secured Note and Warrant Purchase Agreement, dated as of January 21, 1999,
between Bluestone and the investors listed therein.
10.32** Form of Warrant issued to the investors under the Convertible Subordinated Secured Note and Warrant
Purchase Agreement dated January 21, 1999.
10.33** Preferred Stock Purchase Agreement relating to the sale of Series C Preferred Stock, dated as of May
25, 1999, between Bluestone and the purchasers listed therein.
10.34** Second Restated First Refusal and Co-Sale Agreement, dated as of May 25, 1999, between Bluestone and
the investors and stockholders listed therein.
10.35** Second Restated Investors' Rights Agreement, dated as of May 25, 1999, between Bluestone and the
investors and stockholders listed therein, as amended by the First Amendment dated as of June 16,
1999.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
10.36** Restated Voting Agreement, dated as of April 23, 1998, between Bluestone and the investors and
founders listed therein, as amended by the First Amendment dated as of June 16, 1999.
10.37** Lease for headquarters space at 1000 Briggs Road, Mount Laurel, New Jersey, dated September 27, 1993,
with Liberty Property Limited Partnership (successor to Briggs Properties Partnership) as landlord.
10.38 Stock Repurchase Agreement between Bluestone and Mel Baiada dated April 18, 1997.
10.39*+ Executive Bonus Pool.
23.1 Consent of Arthur Andersen LLP.
23.2* Consent of Pepper Hamilton LLP (included in Exhibit 5.1).
23.3 Consent of International Data Corporation
24.1** Powers of Attorney (included in the signature page to the Registration Statement).
27.1 Financial Data Schedule (in electronic format only).
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
+ Management contract or compensatory plan.
<PAGE>
Exhibit 3.5
CERTIFICATE OF AMENDMENT
OF THE
THIRD AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
BLUESTONE SOFTWARE, INC.
Bluestone Software, Inc. (the "Corporation"), a corporation organized
and existing under, and by virtue of, the General Corporation Law of the State
of Delaware (the "DGCL"), does hereby certify:
FIRST: That the Board of Directors of the Corporation, by written
consent filed with the minutes of proceedings of the board, duly adopted a
resolution declaring advisable the amendment of the Third Amended and Restated
Certificate of Incorporation of the Corporation (the "Certificate of
Incorporation") and submitted the same to the stockholders of the Corporation
for approval. The resolution setting forth the proposed amendment is as follows:
RESOLVED, that the Board hereby deems it advisable and in the best interest of
the Corporation to amend the Corporation's Certificate of Incorporation as
follows:
The first clause of "Authorized Capital Stock"of Article FOURTH shall
be amended to read as follows:
The Corporation shall have the authority to issue an aggregate
78,400,187 shares of capital stock which shall be divided into
54,900,000 shares of Common Stock, par value $.001 per share
("Common Stock")
SECOND: That the stockholders of the Corporation duly consented in
writing to the aforesaid amendment in accordance with the provisions of
Section 228 of the DGCL.
THIRD: That the amendment was duly adopted in accordance with the
provisions of Section 242 of the DGCL.
<PAGE>
IN WITNESS WHEREOF, Bluestone Software, Inc. has caused this
Certificate to be signed by Kevin Kilroy, its President and Chief Executive
Officer, this 20th day of August, 1999.
BLUESTONE SOFTWARE, INC.
/s/ KEVIN KILROY
---------------------------------------------
Kevin Kilroy
President and Chief Executive Officer
-2-
<PAGE>
Exhibit 10.1
BLUESTONE SOFTWARE, INC.
1996 INCENTIVE AND NON-QUALIFIED
STOCK OPTION PLAN
AS AMENDED AND RESTATED EFFECTIVE AUGUST 20, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 1. Name and Purposes................................................................................... 1
Section 2. Definitions......................................................................................... 1
Section 3. Administration...................................................................................... 5
Section 4. Eligibility......................................................................................... 7
Section 5. Stock Subject to the Plan........................................................................... 7
Section 6. Terms and Conditions of Options..................................................................... 8
Section 7. Fair Market Value of Common Stock................................................................... 11
Section 8. Adjustments......................................................................................... 12
Section 9. Rights as a Stockholder............................................................................. 12
Section 10. Forfeiture.......................................................................................... 12
Section 11. Time of Granting Options............................................................................ 13
Section 12. Modification, Extension, Renewal of Option.......................................................... 13
Section 13. Transferability..................................................................................... 13
Section 14. Power of Board if Change of Control................................................................. 13
Section 15. Amendment or Termination of the Plan................................................................ 14
Section 16. Application of Funds................................................................................ 14
Section 17. No Obligation to Exercise Option.................................................................... 14
Section 18. Approval of Stockholders............................................................................ 14
Section 19. Conditions Upon Issuance of Shares.................................................................. 15
Section 20. Reservation of Shares............................................................................... 15
Section 21. Other Agreements.................................................................................... 16
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 22. Taxes, Fees, Expenses and Withholding.............................................................. 16
Section 23. Notices............................................................................................ 16
Section 24. No Enlargement of Employee Rights.................................................................. 17
Section 25. Information to Optionees........................................................................... 17
Section 26. Availability of Plan............................................................................... 17
Section 27. Invalid Provisions................................................................................. 17
Section 28. Applicable Law..................................................................................... 17
Section 29. Board Action....................................................................................... 18
Section 30. Miscellaneous...................................................................................... 18
INCENTIVE STOCK OPTION AGREEMENT............................................................................ TAB 1
NON-QUALIFIED STOCK OPTION AGREEMENT......................................................................... TAB 2
STOCK PURCHASE AND RESTRICTION AGREEMENT..................................................................... TAB 3
</TABLE>
<PAGE>
BLUESTONE SOFTWARE, INC.
1996 INCENTIVE AND NON-QUALIFIED
STOCK OPTION PLAN
Section 1. NAME AND PURPOSES OF THE PLAN.
(a) NAME. The Plan will be known as the Bluestone Software,
Inc. 1996 Incentive and Non-Qualified Stock Option Plan. The Plan was formerly
known as the Bluestone Consulting, Inc. 1996 Incentive and Non-Qualified Stock
Option Plan, but pursuant to a corporate transaction in which Bluestone
Consulting, Inc., a New Jersey corporation, merged into Bluestone Software,
Inc., a Delaware corporation, Bluestone Software, Inc. became the successor
sponsor of the Plan.
(b) PURPOSES. The purpose of the Plan is to provide key
Employees and Consultants with an opportunity to share in the capital
appreciation of the Common Stock of the Company. The Options granted pursuant to
the Plan are intended to constitute either Incentive Stock Options or
Non-Qualified Stock Options, as determined by the Administrator of the Plan at
the time of grant.
Section 2. DEFINITIONS. As used herein, the following
definitions shall apply:
(a) "ADMINISTRATOR" shall be the Board or a Committee
appointed by the Board pursuant to Section 3 of the Plan, which shall administer
the Plan.
(b) "AFFILIATE" shall mean, whether now or hereafter existing,
a person or entity that directly, or indirectly controls or is controlled by, or
is under common control with, the Company, except that when used in connection
with an Incentive Stock Option, "Affiliate" shall mean a Subsidiary.
(c) "BCI" shall mean Bluestone Consulting, Inc., a Delaware
corporation, that was spun off from the Company on April 17, 1997.
(d) "BOARD" shall mean the Board of Directors of the Company,
as constituted from time to time.
(e) "CHANGE OF CONTROL" shall mean the happening of an event
(excluding a Public Offering) that shall be deemed to have occurred upon the
earliest to occur of the following events:
(i) the date the stockholders of the Company (or
the Board, if stockholder action is not
required) approve a plan or other
arrangement pursuant to which the Company
will be dissolved or liquidated;
<PAGE>
(ii) the date the stockholders of the Company (or
the Board, if stockholder action is not
required) approve a definitive agreement to
sell or otherwise dispose of all or
substantially all of the assets of the
Company, or
(iii) the date the stockholders of the Company (or
the Board, if stockholder action is not
required) and the stockholders of the other
constituent corporations (or their
respective boards of directors, if and to
the extent that stockholder action is not
required) have approved a definitive
agreement to merge or consolidate the
Company with or into another corporation,
other than, in either case, a merger or
consolidation of the Company in which
holders of shares of the Company's voting
capital stock immediately prior to the
merger or consolidation will have at least
fifty percent (50%) of the ownership of
voting capital stock of the surviving
corporation immediately after the merger or
consolidation (on a fully diluted basis),
which voting capital stock is to be held in
the same proportion (on a fully diluted
basis) as such holders' ownership of voting
capital stock of the Company immediately
before the merger or consolidation, or
(iv) the date any entity, person or group (within
the meaning of Section 13(d)(3) or Section
14(d)(2) of the Exchange Act), other than
(A) the Company, (B) any of its
Subsidiaries, (C) any of the holders of the
capital stock of the Company, as determined
on the date that this Plan is adopted by the
Board, (D) any employee benefit plan (or
related trust) sponsored or maintained by
the Company or any of its Subsidiaries or
(E) any Affiliate of any of the foregoing,
shall have acquired beneficial ownership of,
or shall have acquired voting control over
more than fifty percent (50%) of the
outstanding shares of the Company's voting
capital stock (on a fully diluted basis),
unless the transaction pursuant to which
such person, entity or group acquired such
beneficial ownership or control resulted
from the original issuance by the Company of
shares of its voting capital stock and was
approved by at least a majority of directors
who shall have been members of the Board for
at least twelve (12) months prior to the
date of such approval, or
(v) the first day after the date of this Plan
when directors are elected such that there
shall have been a change in the composition
of the Board such that a majority of the
Board shall have been members of the Board
for less than twelve (12) months, unless the
nomination for election of each new director
who was not a director at the beginning of
such twelve (12) month period was
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approved by a vote of at least sixty percent
(60%) of the directors then still in office
who were directors at the beginning of such
period, or
(vi) the date upon which the Board determines (in
its sole discretion) that based on then
current available information, the events
described in clause (iv) are reasonably
likely to occur.
(f) "CODE" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and any successor thereto.
(g) "COMMITTEE" shall mean the Committee appointed by the
Board in accordance with Section 3(a) of the Plan, if one is appointed, in which
event the Committee shall possess the power and authority of the Board with
respect to the Plan as set forth in section 3(b) of the Plan.
(h) "COMMON STOCK" shall mean the common stock of the Company,
$.001 par value per share.
(i) "COMPANY" shall mean BLUESTONE SOFTWARE, INC., a Delaware
corporation, formerly known as Bluestone Consulting, Inc., a New Jersey
corporation, and any successor in interest that agrees to assume and maintain
the Plan.
(j) "CONSULTANT" shall mean (i) any person associated with the
Company who is engaged by the Company to render services and is compensated by
the Company for such services, including but not limited to, an advisor or
independent contractor; (ii) any director of the Company whether or not
compensated for such services in his capacity as a director; and (iii) solely
for purposes of the Plan, any person employed by BCI or any other company so
designated by the Board.
(k) "DISABILITY" or "DISABLED" with respect to an Optionee
shall mean (i) when the Optionee is determined to be disabled within the meaning
of any long-term disability policy or program sponsored by the Company or BCI
covering the Optionee, as in effect as of the date of such determination, or
(ii) if no such policy or program shall be in effect, when the Optionee is
unable to engage in any substantial gainful activity by reason of a physical or
mental impairment that can be expected to result in death or that has lasted or
can be expected to last for a continuous period of not less than twelve (12)
months. The determination of whether an Optionee is Disabled pursuant to
subparagraph (ii) shall be determined by the Board of Directors, whose
determination shall be conclusive; provided that, (iii) if an Optionee is bound
by the terms of an employment agreement between the Optionee and the Company or
Optionee and BCI, whether the Optionee is "Disabled" for purposes of the Plan
shall be determined in accordance with the procedures set forth in said
employment agreement, if such procedures are therein provided; and (iv) an
Optionee bound by such an employment agreement shall not be determined to be
Disabled under the Plan any earlier than he or she would be determined to be
disabled under his or her employment agreement.
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(l) "EMPLOYEE" shall mean any person, including but not
limited to, officers and directors, employed by the Company or any Subsidiary of
the Company. The payment of directors' fees by the Company shall not be
sufficient to constitute "employment" by the Company.
(m) "EXCHANGE ACT" shall mean the Securities Exchange Act of
1934, as amended.
(n) "FAIR MARKET VALUE" shall mean, as of any date, the fair
market value of a share of Common Stock as determined pursuant to Section 7
hereof.
(o) "INCENTIVE STOCK OPTION" shall mean any Option that is
intended to be and is designated as an Incentive Stock Option within the meaning
of Section 422 of the Code.
(p) "NON-EMPLOYEE DIRECTOR" shall have the meaning set forth
in Rule 16b- 3(b)(3)(i) promulgated by the Securities and Exchange Commission
under the Exchange Act, or any successor definition adopted by the Securities
and Exchange Commission; provided, however, that the Administrator may, in its
sole discretion, determine from time to time whether the rules and regulations
under Section 162(m) of the Code shall apply for purposes of determining which
individuals are "Non-Employee Directors."
(q) "NON-QUALIFIED STOCK OPTION" shall mean any Option that is
not intended to qualify as an Incentive Stock Option.
(r) "OPTION" shall mean an Incentive Stock Option or a
Non-Qualified Stock Option as the case may be, granted pursuant to the Plan.
(s) "OPTION AGREEMENT" shall mean the written agreement by and
between the Company and an Optionee under which Optionee may purchase the Shares
pursuant to the exercise of an Option.
(t) "OPTIONEE" shall mean an Employee or Consultant to whom an
Option is granted.
(u) "PLAN" shall mean this Bluestone Software, Inc. 1996
Incentive and NonQualified Stock Option Plan, as amended from time to time.
(v) "PUBLIC OFFERING" shall mean the consummation of a firm
commitment underwritten public offering of equity securities of the Company
registered under the Securities Act.
(w) "SALE OF THE COMPANY" shall mean the earliest of: (i) the
closing of a sale, transfer or other disposition of all or substantially all of
the shares of the capital stock then outstanding of the Company (except if such
transferee is then an Affiliate); (ii) the closing of a sale, transfer or other
disposition of all or substantially all of the assets of the Company (except if
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such transferee is then an Affiliate); or (iii) the merger or consolidation of
the Company with or into another corporation (except an Affiliate), other than a
merger or consolidation of the Company in which the holders of shares of the
Company's voting capital stock outstanding immediately before such merger or
consolidation hold greater than fifty percent (50%) of the surviving entity's
voting capital stock after such consolidation or merger.
(x) "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.
(y) "SECURITIES BROKER" means a registered securities broker
acceptable to the Board who agrees to effect the cashless exercise of an Option.
(z) "SHARE" or "SHARES" shall mean a share or shares of Common
Stock, as adjusted in accordance with Section 8 of the Plan, that is allocated
to the Plan.
(aa) "STOCK PURCHASE AND RESTRICTION AGREEMENT" shall mean an
agreement in such form or forms as the Board (subject to the terms and
conditions of this Plan) may from time to time approve, which an Optionee shall
be required to execute as a condition of purchasing Shares upon the exercise of
an Option.
(bb) "SUBSIDIARY" shall mean, whether now or hereafter
existing, a subsidiary or parent corporation of the Company as such term is
defined in Sections 424(e), (f) and (g) of the Code.
(cc) "TRANSFER" or "TRANSFERRED" shall mean the transfer of
employment or other engagement from the Company to BCI, or from BCI to the
Company.
Section 3. ADMINISTRATION.
(a) PROCEDURE. The Plan shall be administered by the Board or
a Committee consisting of not less than two persons appointed by the Board (in
either case, the "Administrator"). Members of the Board or the Committee who are
eligible for Options or who have been granted Options may vote on any matters
affecting the administration of the Plan or the grant of any Options pursuant to
the Plan, except that no such member shall act upon the granting of an Option to
himself or herself, but any such member may be counted in determining the
existence of a quorum at any meeting of the Board or the Committee during which
action is taken with respect to the granting of Options to such member.
In the event the Company has a class of equity securities
registered under Section 12 of the Exchange Act, the Plan shall be administered
either by the Board, or by a Committee, appointed in the same manner and subject
to the same terms as provided in the preceding sentence of this subsection 3(a),
provided that said Committee shall consist of not less than two (2) persons,
each of whom is a Non-Employee Director.
(b) COMMITTEE. If a Committee is appointed by the Board, then
the Committee shall possess the power and authority of the Board in
administering the Plan on
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behalf of the Board, subject to the terms and conditions as the Board may
prescribe. Members of the Committee may or may not be members of the Board and
shall serve for such period of time as the Board may determine. From time to
time, the Board may increase the size of the Committee and appoint additional
members thereto, remove members (with or without cause) and appoint new members
in substitution therefor, fill vacancies however caused, or remove all members
of the Committee and thereafter directly administer the Plan.
(c) POWERS OF THE ADMINISTRATOR. Subject to the provisions of
the Plan (and, in the case of the Committee, the specific duties delegated by
the Board to such Committee), the Administrator shall have the authority, in its
sole discretion:
(i) to determine whether and to what extent Options
are granted hereunder;
(ii) to determine the Fair Market Value of the Common
Stock based upon review of relevant information and in accordance with Section 7
of the Plan;
(iii) to determine the exercise price of the Options
in accordance with Section 6(b) of the Plan;
(iv) to select the Optionees to whom Options may from
time to time be granted;
(v) to determine the number of Shares to be subject
to each Option granted hereunder;
(vi) to prescribe, amend and rescind rules and
regulations relating to the Plan;
(vii) to determine the terms and provisions of each
Option granted under the Plan, each Option Agreement and each other agreement
that in the sole discretion of the Administrator may be required (all of which
agreements need not be identical with the terms of other Options, Option
Agreements or other agreements);
(viii) to determine the circumstances under which the
vesting or exercise date of an Option will be accelerated;
(ix) to interpret the Plan or any agreement entered
into with respect to the grant or exercise of Options;
(x) to authorize any person to execute on behalf of
the Company any instrument required to effectuate the grant of an Option
previously granted by the Board or to take such other actions as may be
necessary or appropriate with respect to the Company's rights pursuant to
Options or agreements relating to the granting or exercise thereof;
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(xi) to determine whether and under what
circumstances an Option may be exercised without a payment of cash under Section
6(c) hereof;
(xii) to terminate the Plan in the event of a Change
of Control;
(xiii) to determine whether or not a Transfer has
occurred; and
(xiv) to make such other determinations and establish
such other procedures as it deems necessary or advisable for the administration
of the Plan.
(d) EFFECT OF THE ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator pursuant to the
provisions of the Plan shall be final and binding on all Optionees and any other
holders of Options.
(e) LIMITATION OF LIABILITY. Notwithstanding anything herein
to the contrary, no member of the Board or the Committee shall be liable for any
good faith determination, act or failure to act in connection with the Plan or
any Option awarded hereunder.
Section 4. ELIGIBILITY.
(a) ELIGIBLE PERSONS. Options may be granted at any time and
from time to time to any Employee or Consultant who shall be selected by the
Administrator. Any grant of Options may include or exclude any Employee or
Consultant as the Administrator shall determine in its sole discretion.
Consultants who are not also Employees of the Company are eligible to be granted
Non-Qualified Stock Options under the Plan but are not eligible to be granted
Incentive Stock Options under the Plan.
(b) VESTING OF OPTIONS. Subject to the provisions of Section 6
hereof and except to the extent the Board provides otherwise, each Option shall
vest at a rate of twenty-five percent (25%) of the Shares subject to the Option
per year (the total number of Shares so vested being the "Vested Amount") during
the consecutive four (4) year period commencing on the date of grant. Options
that are not vested may not be exercised.
(c) EFFECT UPON ENGAGEMENT. The Plan will not confer upon any
Optionee any right with respect to the continuation of any employment,
consulting or any other relationship with the Company or BCI nor will it
interfere in any way with such Optionee's right or the Company's or BCI's right
to terminate that Optionee's employment, consulting or other relationship with
the Company or BCI at any time, whether with or without cause.
Section 5. STOCK SUBJECT TO THE PLAN.
(a) MAXIMUM NUMBER OF SHARES. Subject to the provisions of
Section 8 of the Plan, the maximum aggregate number of Shares which may be
optioned and sold under the Plan is Ten Million Five Hundred Twenty Nine
Thousand Forty Nine (10,529,049) Shares. The Shares may be authorized, but
unissued or reacquired, Common Stock. Notwithstanding the
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foregoing, no individual shall receive, over the term of the Plan, awards for
more than an aggregate of Ten Million Five Hundred Twenty-Nine Thousand
Forty-Nine (10,529,049) Shares authorized for grant under the Plan.
(b) RETURN OF SHARES TO THE PLAN. If an Option expires, is
terminated or become unexercisable for any reason without having been exercised
in full, then the unpurchased Shares subject thereto shall, unless the Plan
shall have been terminated, return to the Plan and become available for future
grant under the Plan.
Section 6. TERMS AND CONDITIONS OF OPTIONS.
Each Option granted under the Plan shall be authorized by the
Board and shall be evidenced by an Option Agreement which shall state or
incorporate by reference all other terms and conditions of the Plan including,
without limitation, the following terms and conditions:
(a) NUMBER OF SHARES. The Option Agreement shall state the
number of Shares subject to the Option.
(b) OPTION EXERCISE PRICE. The per Share exercise price for
the Shares to be issued pursuant to the exercise of an Incentive Stock Option
shall be stated in the Option Agreement and shall be no less than the Fair
Market Value per share of the Common Stock on the date such Option is granted,
without regard to any restriction other than a restriction that by its terms
will never lapse; provided, however, that any Incentive Stock Option granted
under this Plan to an Employee who, at the time such Option is granted, owns
more than ten percent (10%) of the current total combined voting power of all
classes of the capital stock of the Company, shall have an exercise price per
Share of not less than one hundred ten percent (110%) of the Fair Market Value
of the Common Stock on the date such Option is granted. The per Share exercise
price for the Shares to be issued pursuant to the exercise of a Non-Qualified
Stock Option shall be stated in the Option Agreement and shall be determined by
the Administrator but shall be at least $.01 per Share.
(c) CONSIDERATION. The consideration to be paid for the Shares
to be issued upon the exercise of an Option, including the method of payment,
shall be determined by the Administrator and may consist entirely of: (i) cash;
(ii) check; (iii) authorization from the Company to retain from the total number
of Shares as to which the Option is exercised that number of Shares having a
Fair Market Value on the date of exercise equal to the exercise price for the
total Shares as to which the Option is exercised; (iv) to the extent permitted
under the Exchange Act, the delivery of a properly executed exercise notice
together with irrevocable instructions to a Securities Broker to promptly
deliver to the Company the amount of sale or loan proceeds required to pay the
exercise price; or (v) such other consideration and method of payment as the
Administrator may from time to time determine. In making its determination as to
the type of consideration to accept, the Administrator shall consider if the
acceptance of such consideration may be reasonably expected to benefit the
Company.
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(d) FORM OF OPTION. The Option Agreement shall state whether
the Option granted thereunder is intended to be an Incentive Stock Option or a
Non-Qualified Stock Option and shall, subject to the terms of the Option
Agreement, constitute a binding determination as to the form of Option granted
thereunder.
(e) EXERCISE OF AN OPTION.
(i) Unless otherwise provided by the Board, any
Option granted hereunder shall be exercisable, in whole or in part, in
accordance with the vesting schedule set forth in Section 4(b) hereof and shall
be exercisable at such times and under such further conditions as may be
determined by the Board and as set forth in the Option Agreement.
(ii) An Option may not be exercised for a fraction of
a Share. In the event of a "cashless exercise" as permitted under Section 6(c)
hereof, the Company shall issue shares for, the whole number of shares acquired
through such cashless exercise and cash for the value of any fractional share.
(iii) An Option may not be exercised after the date
of expiration of its term as shall be set forth in the Option Agreement.
(iv) An Option shall be deemed to be exercised when
written notice of such exercise has been received by the Company at its
principal executive office in accordance with the terms of the Option Agreement
by the person entitled to exercise the Option, and full payment for the Shares
with respect to which the Option is exercised has been received by the Company,
accompanied by an executed Stock Purchase and Restriction Agreement and any
other agreements required by the Administrator or the terms of the Plan and/or
Option Agreement. An Optionee shall have no right to vote or receive dividends
and shall have no other rights as a stockholder with respect to the Shares,
notwithstanding the exercise of the Option, until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such Shares.
No adjustment shall be made for a dividend or other right for which the record
date is prior to the date a stock certificate with respect to the Shares is
issued.
(v) As soon as practicable after the proper exercise
of an Option in accordance with the provisions of the Plan, the Company shall,
without transfer or issue tax to the Optionee, deliver to the Optionee at the
principal executive office of the Company or such other place as shall be
mutually agreed upon between the Company and the Optionee, a certificate or
certificates representing the Shares for which the Option shall have been
exercised. The time of issuance and delivery of the certificate(s) representing
the Shares for which the Option shall have been exercised may be postponed by
the Company for such period as may be required by the Company, with reasonable
diligence, to comply with any applicable listing requirements of any national or
regional securities exchange or any law or regulation applicable to the issuance
or delivery of such Shares.
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(vi) The exercise of an Option in any manner shall
result in a decrease in the number of Shares that thereafter may be available
both for purposes of the Plan and for sale under the Option by the number of
Shares as to which the Option is exercised.
(f) TERMINATION OF OPTIONS.
(i) TERMINATION IN GENERAL. Unless sooner terminated
as provided in this Plan, each Option shall be exercisable for the period of
time as shall be determined by the Administrator and set forth in the Option
Agreement and shall be void and unexercisable thereafter.
(ii) TERMINATION OF RELATIONSHIP WITH THE COMPANY.
Unless sooner terminated as provided in this Plan, in the event of the
termination of an Optionee's employment or consulting relationship with the
Company (as the case may be), including termination of employment or consulting
relationship with BCI, for any reason other than the death or Disability of the
Optionee, such Optionee may, within three (3) months (or such other period of
time as is determined by the Board) from the date of such termination (but in no
event later than the expiration date of the term of such Option as set forth in
the Option Agreement), exercise the Option up to the Vested Amount as of the
date of termination provided that the Optionee was entitled to exercise the
Option on the date of such termination; provided, however, that an Optionee who
has Transferred shall not be considered to have terminated his relationship with
the Company. To the extent the Optionee was not entitled to exercise the Option
on the date of such termination, or if the Optionee does not exercise such
Option to the extent so entitled within the time specified herein, the Option
will terminate.
(iii) DEATH OR DISABILITY. Unless sooner terminated
as provided in this Plan, in the event of the death or Disability of an Optionee
while employed or engaged by the Company (as the case may be), including
termination of employment or service with BCI, due to death or Disability,
Options held by such Optionee that are exercisable on the date of Disability or
death shall be exercisable up to the Vested Amount as of the date of Disability
or death for a period of twelve (12) months commencing on the date of the
Optionee's Disability or death. Such Options may be exercisable by the Optionee
or his or her legal guardian or representative or, in the case of death, by his
or her executor(s) or administrator(s); provided, however, if such disabled
Optionee shall commence any employment or engagement during such twelve (12)
month period with or by a competitor of the Company (INCLUDING, but not limited
to, full or part-time employment or independent consulting work, but EXCLUDING
any employment or engagement by BCI), as determined solely in the judgment of
the Administrator, then all Options held by such Optionee that have not yet been
exercised shall terminate immediately upon the commencement thereof.
(iv) AGREEMENT TO TERMINATE. Options may be
terminated at any time by agreement between the Company and the Optionee.
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(g) OTHER PROVISIONS.
(i) Notwithstanding any provision in this Plan or an
Option Agreement to the contrary, no Option granted to any Optionee under this
Plan shall be treated as an Incentive Stock Option to the extent that such
Option would cause the aggregate Fair Market Value of all Shares with respect to
which Incentive Stock Options are exercisable by such Optionee for the first
time during any calendar year (determined as of the date of grant of each such
Option) to exceed $100,000. For purposes of determining whether an Incentive
Stock Option granted to an Optionee would cause the aggregate Fair Market Value
to exceed the $100,000 limitation, such Incentive Stock Options shall be taken
into account in the order granted. For purposes of this subsection, Incentive
Stock Options granted to an Optionee shall include all incentive stock options
under all plans of the Company that are incentive stock option plans within the
meaning of Section 422 of the Code. Options may be exercised in any order
elected by the Optionee, whether or not the Optionee holds any unexercised
Options under this Plan or any other plan of the Company.
(ii) Notwithstanding any other provision of this Plan
or an Option Agreement to the contrary, no Option shall be (A) granted under
this Plan after ten (10) years from the date on which this Plan is adopted by
the Board, or (B) exercisable more than ten (10) years from the date of grant;
provided that if an Incentive Stock Option shall be granted under this Plan to
any Employee who, at the time of the grant of such Option, owns stock possessing
more than ten percent (10%) of the total combined voting power for all classes
of the Company's capital stock, the foregoing clause (B) shall be deemed
modified by substituting the term "five (5) years" for the term "ten (10) years"
that appears therein.
Section 7. FAIR MARKET VALUE OF COMMON STOCK.
The Fair Market Value of a Share of Common Stock, as of any
date, shall be determined as follows:
(a) If the Shares of Common Stock are listed on a national or
regional securities exchange or traded through NASDAQ/NMS, then the Fair Market
Value of a share of Common Stock shall be the closing price for a share of
Common Stock on the exchange or on NASDAQ/NMS, as reported in THE WALL STREET
JOURNAL or such other source as the Administrator deems reliable on the relevant
valuation date, or if there is no trading on that date, on the next trading
date.
(b) If the Shares of Common Stock are traded in the
over-the-counter market, then the Fair Market Value of a share of Common Stock
shall be the mean of the bid and asked prices for a share of Common Stock on the
relevant valuation date as reported in THE WALL STREET JOURNAL or other source
the Administrator deems reliable (or, if not so reported, as otherwise reported
by the National Association of Securities Dealers Automated Quotations
("NASDAQ") System or the NASD OTC Bulletin Board), or if there is no trading on
such date, on the next trading date.
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(c) In the absence of an established market for the Common
Stock, the Fair Market Value of a share of Common Stock shall be determined by
the Board in its sole discretion.
Section 8. ADJUSTMENTS.
(a) ADJUSTMENTS. Subject to any required action by the
stockholders of the Company, the number of Shares covered by each outstanding
Option, the number of Shares that have been authorized for issuance under the
Plan but as to which no Options have yet been granted or that have been returned
to the Plan upon cancellation or expiration of an Option, and the price per
Share of the Common Stock covered by an Option will each be proportionately
adjusted for any increase or decrease in the number of outstanding shares of
Common Stock resulting from stock splits, reverse stock splits, stock dividends,
reclassifications and recapitalizations. Such adjustment shall be made by the
Board whose determination in that respect will be final, binding and conclusive.
Except as provided herein, no issuance by the Company of shares of stock of any
class or securities convertible into shares of stock of any class, will affect,
and no adjustment by reason thereof will be made with respect to, the number or
price of shares of Common Stock subject to an Option.
(b) NO FRACTIONAL SHARES. No fractional Shares shall be
issuable on account of any action aforesaid, and the aggregate number of Shares
into which Shares then covered by the Option, when changed as the result of such
action, shall be reduced to the number of whole Shares resulting from such
action, unless the Board, in its sole discretion, shall determine to issue scrip
certificates in respect to any fractional Shares, which scrip certificates shall
be in a form and have such terms and conditions as the Board in its discretion
shall prescribe.
Section 9. RIGHTS AS A STOCKHOLDER.
An Optionee shall have no rights as a stockholder of the
Company and shall not have the right to vote nor receive dividends with respect
to any Shares subject to an Option until such Option has been exercised and a
stock certificate with respect to the Shares purchased upon such exercise of the
Option has been issued to Optionee as set forth in Section 6(e)(iv) and (v)
hereof.
Section 10. FORFEITURE.
Notwithstanding any other provision of this Plan, if an
Optionee's employment or consulting relationship with the Company (as the case
may be) is terminated by the Company or BCI and the Board makes a determination
that the Optionee (i) has engaged in any type of disloyalty to the Company or
BCI, including without limitation, fraud, embezzlement, theft, or dishonesty in
the course of Optionee's employment or consulting relationship, (ii) has been
convicted of a felony or other crime involving a breach of trust or fiduciary
duty owed to the Company or BCI, (iii) has made an unauthorized disclosure of
trade secrets or confidential information of the Company or BCI, or (iv) has
breached any confidentiality agreement or non-competition agreement with the
Company or BCI in any material respect, then, at the election of
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the Board, all unexercised Options held by the Optionee (whether or not then
exercisable) shall terminate. In the event of such an election by the Board, in
addition to immediate termination of all unexercised Options, the Optionee shall
forfeit all Shares for which the Company has not yet delivered stock
certificates to the Optionee and the Company shall refund to the Optionee the
exercise price paid to it upon exercise of the Option with respect to such
Shares. Notwithstanding anything herein to the contrary, the Company may
withhold delivery of stock certificates pending the resolution of any inquiry
that could lead to a finding resulting in forfeiture.
Section 11. TIME OF GRANTING OPTIONS.
The date of grant of an Option shall, for all purposes, be the
date on which the Administrator makes the determination to grant the Option or
such other date as is determined by the Administrator. Notice of the
determination shall be given to each Optionee to whom an Option is so granted
within a reasonable time after the date of such grant.
Section 12. MODIFICATION, EXTENSION, RENEWAL OF OPTION.
Subject to the terms and conditions of the Plan, the Board may
modify, extend or renew an Option, or accept the surrender of an Option (to the
extent not theretofore exercised); provided that no Incentive Stock Option may
be modified, extended or renewed if such action would cause such Option to cease
to be an "incentive stock option" within the meaning of Section 422 of the Code.
Section 13. TRANSFERABILITY.
No Option may be sold, pledged, assigned, transferred or
disposed of in any manner other than by will or by the laws of descent and
distribution. During the lifetime of the Optionee, his or her Options shall be
exercisable only by the Optionee, or, in the event of his or her legal
incapacity or Disability, by the legal guardian or representative of the
Optionee.
Section 14. POWER OF BOARD IF CHANGE OF CONTROL.
Notwithstanding anything to the contrary set forth in this
Plan, in the event of a Sale of the Company, fifty percent (50%) of all Options
that have not vested as of the date of a Sale of the Company shall become
immediately vested and exercisable. All remaining unvested Options shall vest in
accordance with the vesting schedule set forth in the applicable Option
Agreement. Notwithstanding the preceding, the Board shall have the right, in its
sole discretion, to accelerate the vesting of all Options that have not vested
as of the date of the Change of Control and/or to establish an earlier date for
the expiration of the exercise of an Option (notwithstanding a later expiration
of exercisability set forth in an Option Agreement). In addition, in the event
of a Change of Control of the Company, the Board shall have the right, in its
sole discretion, subject to and conditioned upon a Sale of the Company: (i) to
arrange for the successor company (or other entity) to assume all of the rights
and obligations of the Company under this Plan; or (ii) to terminate this Plan
and (A) to pay to all Optionees cash with respect to
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those Options that are vested as of the date of the Sale of the Company in an
amount equal to the difference between the Option Price and the Fair Market
Value of a Share of Common Stock (determined as of the date the Plan is
terminated) multiplied by the number of Options that are vested as of the date
of the Sale of the Company which are held by the Optionee as of the date of the
Sale of the Company, or (B) to arrange for the exchange of all Options for
options to purchase common stock in the successor corporation, or (C) to
distribute to each Optionee other property in an amount equal to and in the same
form as the Optionee would have received from the successor corporation if the
Optionee had owned the Shares subject to Options that are vested as of the date
of the Sale of the Company rather than the Option at the time of the Sale of the
Company. The form of payment or distribution to the Optionee pursuant to this
Section shall be determined by the Board in its sole discretion.
Section 15. AMENDMENT OR TERMINATION OF THE PLAN.
Insofar as permitted by law and the Plan, the Board may at any
time suspend, terminate, discontinue, alter or amend the Plan in any respect
whatsoever; provided, however, that without prior approval of at least a
majority of the stockholders entitled to vote thereon, no such revision or
amendment may change the aggregate number of Shares for which Options may be
granted hereunder, change the designation of the class of Optionees eligible to
receive Options or decrease the price at which Options may be granted. Any other
provision of this Section notwithstanding, the Board specifically is authorized
to adopt any amendment to this Plan deemed by the Board to be necessary or
advisable to assure that the Incentive Stock Options or the Non-Qualified Stock
Options available under the Plan continue to be treated as such, respectively,
under all applicable laws.
Section 16. APPLICATION OF FUNDS.
The proceeds received by the Company from the sale of Shares
pursuant to the exercise of Options shall be used for general corporate
purposes.
Section 17. NO OBLIGATION TO EXERCISE OPTION.
The granting of an Option shall impose no obligation upon the
Optionee to exercise such Option.
Section 18. APPROVAL OF STOCKHOLDERS.
This Plan shall become effective on the date that it is
adopted by the Board; provided that it shall become limited to a non-qualified
stock option plan if it is not approved by the stockholders of a majority of the
Company's outstanding voting stock within one year (365 days) of its adoption by
the Board. The Board may grant Options hereunder prior to approval of the Plan,
or any material amendments thereto, by the holders of a majority of the
Company's outstanding voting stock; provided that any and all Options so granted
shall be converted into non-qualified stock options if the Plan, or a material
amendment, is not approved by such stockholders within 365 days of its adoption
or material amendment.
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<PAGE>
Section 19. CONDITIONS UPON ISSUANCE OF SHARES.
(a) Options granted under the Plan are conditioned upon the
Company obtaining any required permit or order from appropriate governmental
agencies, authorizing the Company to issue such Options and Shares issuable upon
the exercise thereof.
(b) Shares shall not be issued pursuant to the exercise of an
Option unless the exercise of such Option and the issuance and delivery of such
Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act, the Exchange Act, the rules
and regulations promulgated thereunder, and the requirements of any stock
exchange upon which the Shares may then be listed, and shall be further subject
to the approval of counsel for the Company with respect to such compliance.
(c) As a condition to the exercise of an Option, the Board may
require the person exercising such Option to execute an agreement with, and/or
may require the person exercising such Option to make any representation and/or
warranty to, the Company as may be, in the judgment of counsel to the Company,
required under applicable law or regulation, including but not limited to, a
representation and warranty that the Shares are being purchased only for
investment and without any present intention to sell or distribute such Shares
if, in the opinion of counsel for the Company, such a representation and
warranty is appropriate under any of the aforementioned relevant provisions of
law.
Section 20. RESERVATION OF SHARES.
(a) The Company, during the term of this Plan, shall at all
times reserve and keep available such number of Shares as shall be sufficient to
satisfy the requirements of the Plan.
(b) The Company, during the term of this Plan, shall use its
best efforts to seek to obtain from appropriate regulatory agencies any
requisite authorization in order to issue and sell such number of Shares as
shall be sufficient to satisfy the requirements of the Plan. The inability of
the Company to obtain from any such regulatory agency having jurisdiction the
requisite authorization(s) deemed by the Company's counsel to be necessary for
the lawful issuance and sale of any Shares hereunder, or the inability of the
Company to confirm to its satisfaction that any issuance and sale of any Shares
hereunder will meet applicable legal requirements, shall relieve the Company of
any liability in respect to the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
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<PAGE>
Section 21. OTHER AGREEMENTS.
Options shall be evidenced by an Option Agreement in such form
or forms as the Board (subject to the terms and conditions of this Plan) may
from time to time approve, which Option Agreement shall evidence and reflect the
terms and conditions of an Option as set forth in Section 6 hereof. Upon
exercise of an Option, the Optionee shall execute and deliver to the Company a
Stock Purchase and Restriction Agreement in such form or forms as the Board
shall approve from time to time. The Administrator may, from time to time,
require such other agreements in connection with the Option as it, in its sole
discretion, deems advisable. The Option Agreement and the Stock Purchase and
Restriction Agreement and any other agreement required by the Plan or the Option
Agreement, as determined by the Board, may contain such other provisions as the
Board in its discretion deems advisable and that are not inconsistent with the
provisions of this Plan, including, without limitation, restrictions upon or
conditions precedent to the exercise of the Option.
Section 22. TAXES, FEES, EXPENSES AND WITHHOLDING.
(a) The Company shall pay all original issue and transfer
taxes (but not income taxes, if any) with respect to the grant of an Option
and/or the issue and transfer of Shares pursuant to the exercise thereof, and
all other fees and expenses necessarily incurred by the Company in connection
therewith, and will, from time to time, use its best efforts to comply with all
laws and regulations that, in the opinion of counsel for the Company, shall be
applicable thereto.
(b) The granting of Options hereunder and the issuance of
Shares pursuant to the exercise thereof is conditioned upon the Company's
reservation of the right to withhold in accordance with any applicable law, from
any compensation or other amounts payable to the Optionee, any taxes required to
be withheld under federal, state or local law as a result of the grant or
exercise of such Option or the sale of the Shares issued upon exercise thereof.
To the extent that compensation or other amounts, if any, payable to the
Optionee is insufficient to pay any taxes required to be so withheld, the
Company may, in its sole discretion, require the Optionee (or such other person
entitled herein to exercise the Option), as a condition to the exercise of an
Option, to pay in cash to the Company an amount sufficient to cover such tax
liability or otherwise to make adequate provision for the Company's satisfaction
of its withholding obligations under federal, state and local law.
Section 23. NOTICES.
Any notice to be given to the Company pursuant to the
provisions of this Plan shall be addressed to the Company in care of its
Secretary (or such other person as the Company may designate from time to time)
at its principal executive office, and any notice to be given to an Optionee
shall be delivered personally or addressed to the Optionee at the address given
beneath the signature of the Optionee on his or her Option Agreement, or at such
other address as such Optionee or his or her permitted transferee (upon the
transfer of the Shares) may hereafter designate in writing to the Company. Any
such notice shall be deemed duly given when
-16-
<PAGE>
enclosed in a properly sealed envelope or wrapper addressed as aforesaid,
registered or certified, and deposited, postage and registry or certification
fee prepaid, in a post office or branch post office regularly maintained by the
United States Postal Service. It shall be the obligation of each Optionee and
each permitted transferee holding Shares purchased upon exercise of an Option to
provide the Secretary of the Company, by letter mailed as provided herein, with
written notice of his or her direct mailing address.
Section 24. NO ENLARGEMENT OF RIGHTS.
This Plan is purely voluntary on the part of the Company, and
the continuance of the Plan shall not be deemed to constitute a contract between
the Company and any Employee or Consultant, or to be consideration for or a
condition of the employment or service of any Employee or Consultant as the case
may be. Nothing contained in this Plan shall be deemed to give any Employee or
Consultant the right to be retained in the employ or service of the Company or
BCI, or to interfere with the right of the Company or BCI to discharge or retire
any Employee or Consultant thereof at any time. No Employee or Consultant shall
have any right to or interest in Options authorized hereunder prior to the grant
thereof to such Employee or Consultant, and upon such grant such Employee or
Consultant shall have only such rights and interests as are expressly provided
herein, subject, however, to all applicable provisions of the Company's
Certificate of Incorporation, as the same may be amended from time to time.
Section 25. INFORMATION TO OPTIONEES.
The Company, upon request, shall provide without charge to
each Optionee copies of such annual and periodic reports as are provided by the
Company to its stockholders generally.
Section 26. AVAILABILITY OF PLAN.
A copy of this Plan shall be delivered to the Secretary of the
Company and shall be shown to any eligible person making reasonable inquiry
concerning it.
Section 27. INVALID PROVISIONS.
In the event that any provision of this Plan is found to be
invalid or otherwise unenforceable under any applicable law, such invalidity or
unenforceability shall not be construed as rendering any other provisions
contained herein as invalid or unenforceable, and all such other provisions
shall be given full force and effect to the same extent as though the invalid or
unenforceable provision was not contained herein.
Section 28. APPLICABLE LAW.
This Plan shall be governed by and construed in accordance
with the laws of the State of New Jersey.
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<PAGE>
Section 29. BOARD ACTION.
Notwithstanding anything to the contrary set forth in this
Plan, any and all actions of the Board or Committee, as the case may be, taken
under or in connection with this Plan and any agreements, instruments,
documents, certificates or other writings entered into, executed, granted,
issued and/or delivered pursuant to the terms hereof, shall be subject to and
limited by any and all votes, consents, approvals, waivers or other actions of
all or certain stockholders of the Company or other persons required pursuant to
(a) the Company's Certificate of Incorporation (as the same may be amended
and/or restated from time to time), (b) the Company's Bylaws (as the same may be
amended and/or restated from time to time), and (c) any other agreement,
instrument, document or writing now or hereafter existing, between or among the
Company and its stockholders or other persons (as the same may be amended from
time to time).
Section 30. MISCELLANEOUS.
This Plan is intended to comply with the conditions and
requirements for employee benefit plans under Rule 16b-3, as promulgated under
Section 16 of the Exchange Act, such that Options granted pursuant to the Plan
will be exempted from the provisions of Section 16(b) thereof. To the extent
that any provision of the Plan would cause a conflict with such requirements,
such provision shall be deemed null and void to the extent permitted by
applicable law. This section shall not be applicable if no class of the
Company's equity securities is then registered pursuant to Section 12 of the
Exchange Act.
PLAN HISTORY
ADOPTION AND APPROVAL OF PLAN AND ANY AMENDMENTS
<TABLE>
<S> <C>
Date Plan adopted by Board: February 17, 1996
Date Plan approved by Stockholders: February 28, 1996
Original Effective Date of Plan: March 1, 1996
Amended and Restated: April 17, 1997
Amended and Restated: July 2, 1998
Amended: January 21, 1999
Amended and Restated: March 11, 1999
Amended and Restated: August 20, 1999
</TABLE>
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<PAGE>
BLUESTONE SOFTWARE, INC.
1996 INCENTIVE AND NON-QUALIFIED
STOCK OPTION PLAN
INCENTIVE STOCK OPTION AGREEMENT
BLUESTONE SOFTWARE, INC., a Delaware corporation (the
"Company"), hereby grants to ____________________________ (the "Optionee") an
option (the "Option") to purchase a total of ______________ (___) shares of
Common Stock (the "Shares") of the Company, at the price and on the terms set
forth herein, and in all respects subject to the terms and provisions of the
BLUESTONE SOFTWARE, INC. 1996 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN (the
"Plan") applicable to incentive stock options, which terms and provisions are
incorporated herein by reference. Capitalized terms used but not otherwise
defined herein shall have the meanings given to them in the Plan.
1. NATURE OF THE OPTION. The Option is intended by the Company
and the Optionee to be an incentive stock option within the meaning of Section
422 of the Code.
2. DATE OF GRANT; TERM OF OPTION. The Option is granted this
____ day of ____________, ____, and it may not be exercised later than 5:00 p.m.
on the ____ day of
______________, ____.
3. OPTION EXERCISE PRICE. The Option exercise price is $_____
per Share which price is the Fair Market Value per Share on the date hereof; or
$________ per Share if Optionee, at the time of grant, owns stock possessing
more than 10% of the current total combined voting power of all classes of the
Company's capital stock, which price represents a price per Share equal to no
less than 110% of the Fair Market Value of the Common Stock on the date the
Option is granted.
4. EXERCISE OF OPTION. Except as otherwise provided herein,
the Option shall be exercisable during its term only in accordance with the
terms and provisions of the Plan and this Option Agreement as follows:
(A) VESTING. The Option shall vest at a rate of
twenty-five percent (25%) of the total number of Shares subject to the Option
per year (the total number of shares so vested being the "Vested Amount") on
each consecutive anniversary of the date of this Option Agreement, commencing on
the date of this Option Agreement.
<PAGE>
(B) RIGHT TO EXERCISE.
(i) Options that have not yet vested may not
be exercised.
(ii) The Option may not be exercised for a
fraction of a Share.
(iii) In the event of Optionee's death,
Disability or other termination of service, the exercisability shall be governed
by this Section 4, Sections 6 and 7 hereof, and the provisions of the Plan.
(iv) In no event may the Option be exercised
after the date of expiration of the term of the Option, as set forth in Section
2 hereof.
(C) METHOD OF EXERCISE. The Option shall be
exercisable by written notice that shall state the election to exercise the
Option, the number of Shares in respect to which the Option is being exercised
and such other representations and agreements as to the Optionee's investment
intent with respect to such Shares as may be required by the Company hereunder
or pursuant to the provisions of the Plan. Such written notice shall be signed
by the Optionee and shall be delivered in person or by certified mail to the
Secretary of the Company or such other person as may be designated by the
Company. The written notice shall be accompanied by payment of the purchase
price, an executed Stock Purchase and Restriction Agreement and any other
agreements required by the Administrator, the terms of the Plan and/or this
Option Agreement. The Option will be deemed to be exercised upon the receipt by
the Company of such written notice, payment of the purchase price, the Stock
Purchase and Restriction Agreement and any other agreements required by the
Administrator, the terms of the Plan and/or this Option Agreement. The Optionee
will have no right to vote or receive dividends and will have not other rights
as a stockholder with respect to such Shares notwithstanding the exercise of the
Option, until the issuance (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company) of the
stock certificate evidencing the Shares that are being issued upon exercise of
the Option. The Company will issue (or cause to be issued) such stock
certificates promptly following the exercise of the Option. The certificate or
certificates for the Shares as to which the Option shall be exercised shall be
registered in the name of the Optionee and shall contain any legend as may be
required under the Plan, the Stock Purchase and Restriction Agreement, any other
agreements required by the Administrator and/or applicable law.
(D) METHOD OF PAYMENT. The method of payment of the
purchase price shall be determined by the Administrator and may consist entirely
of cash, check or any combination of such methods of payment, or such other
consideration or method of payment as may be authorized by the Administrator and
permitted under the Plan.
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<PAGE>
(E) RESTRICTIONS ON EXERCISE. The Option may not be
exercised if the issuance of the Shares upon such exercise would constitute a
violation of any applicable federal or state securities laws or other laws or
regulations. As a condition to the exercise of the Option, the Company may
require the Optionee to make any representations and warranties to the Company
as may be required by any applicable law or regulation.
5. INVESTMENT REPRESENTATIONS. Unless the Shares have been
registered under the Securities Act, in connection with the grant of the Option,
the Optionee represents and warrants as follows:
(a) The Optionee is acquiring the Option, and upon
exercise of the Option, the Optionee will be acquiring the Shares for investment
for his or her own account, not as a nominee or agent, and not with a view to,
or for resale in connection with, any distribution thereof.
(b) The Optionee is aware of the Company's business
affairs and financial condition and has acquired sufficient information about
the Company to reach an informed and knowledgeable decision to acquire the
Shares. The Optionee has received all information as the Optionee deems
necessary and appropriate to enable him or her to evaluate the financial risk
inherent in making an investment in the Shares and has received satisfactory and
complete information concerning the business and financial condition of the
Company in response to all inquiries in respect thereof.
6. TERMINATION OF EMPLOYMENT WITH COMPANY. Subject to the
provisions of Section 8 hereof, upon termination of the Optionee's employment
with the Company for any reason other than death or Disability, the Optionee
shall have the right to exercise the Option at any time within the three (3)
month period after the date of such termination to the extent that the Optionee
was entitled to exercise the Option at the date of such termination; provided,
however, that if the Optionee Transfers, then to the extent the Option is not
exercised within such three (3) month period, the unexercised portion of the
Option shall automatically convert into a non-qualified stock option and shall
continue to be exercisable up to the earlier of the expiration of the Option as
set forth in Section 2 hereof or three (3) months after termination of service
with both the Company and BCI.
7. DEATH OR DISABILITY OF OPTIONEE. Upon the death or
Disability of the Optionee while in the employ of the Company, the Option may be
exercised at any time within twelve (12) months after the date of death or
termination due to Disability, in the case of death, by the Optionee's estate or
by a person who acquired the right to exercise the Option by bequest or
inheritance, or, in the case of Disability, by the Optionee or his legal
guardian or representative, but in any case only to the extent the Optionee was
entitled to exercise the Option at such date; provided, however, that if such
disabled Optionee shall commence any employment
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<PAGE>
or engagement during such twelve (12) month period with or by a competitor of
the Company (INCLUDING, but not limited to, full or part-time employment or
independent consulting work, but EXCLUDING any employment or engagement by BCI),
as determined solely in the judgment of the Board, the Option shall terminate
immediately upon the commencement thereof. In the event the Optionee Transfers
and such Option converts to a non-qualified option as provided in Section 6
hereof, in the event of death or Disability while in the service of BCI (or the
Company, in the event of a subsequent Transfer), the Option may be exercised by
the Optionee's estate, legal guardian, or representative within the twelve (12)
month period after termination of service due to death or Disability. To the
extent that the Optionee was not entitled to exercise the Option at the date of
termination, or to the extent the Option is not exercised within the time
specified herein, the Option shall terminate. Notwithstanding the foregoing, the
Option shall not be exercisable after the expiration of the term set forth in
Section 2 hereof.
8. FORFEITURE OF OPTION. Notwithstanding any other provision
of the Option Agreement, if the Optionee's employment is terminated and the
Board makes a determination that the Optionee (i) has engaged in any type of
disloyalty to the Company, including without limitation, fraud, embezzlement,
theft, or dishonesty in the course of his employment, (ii) has been convicted of
a felony or other crime involving a breach of trust or other fiduciary duty owed
to the Company, (iii) has disclosed trade secrets or confidential information of
the Company, (iv) has breached any agreement with the Company in respect of
confidentiality, non-disclosure, non-competition or otherwise, then, at the
election of the Board, all unexercised Options shall terminate. In the event of
such an election by the Board, in addition to immediate termination of all
unexercised Options, the Optionee shall forfeit all Shares for which the Company
has not yet delivered share certificates to the Optionee and the Company shall
refund to the Optionee the Option price paid to the Company with respect to
those Shares. Notwithstanding anything herein to the contrary, the Company may
withhold delivery of share certificates pending the resolution of any inquiry
that could lead to a determination resulting in forfeiture. In the event the
Optionee's employment with the Company terminates, but the Optionee Transfers,
the preceding forfeiture provisions shall apply in the event Optionee's service
is terminated by BCI for any of the reasons stated in the immediately preceding
subsections (1) through (iv) hereof; provided that "BCI" shall be substituted
for "the Company" where it appears in such preceding subsections.
9. NON-TRANSFERABILITY OF OPTION. The Option may not be sold,
pledged, assigned, hypothecated, gifted, transferred or disposed of in any
manner either voluntarily or involuntarily by operation of law, other than by
will or by the laws of descent or distribution, and may be exercised during the
lifetime of the Optionee only by such Optionee. Subject to the foregoing and the
terms of the Plan, the terms of the Option Agreement shall be binding upon the
executors, administrators, heirs, successors and assigns of the Optionee.
-4-
<PAGE>
10. CONTINUATION OF EMPLOYMENT. Neither the Plan nor this
Option Agreement shall confer upon any Optionee any right to continue in the
employment of the Company, or BCI in the event of Transfer, or limit in any
respect the right of the Company or BCI to discharge or release the Optionee at
any time, with or without cause and with or without notice.
11. WITHHOLDING. The Company reserves the right to withhold,
in accordance with any applicable laws, from any consideration payable to
Optionee any taxes required to be withheld by federal, state or local law as a
result of the grant or exercise of the Option or the sale or other disposition
of the Shares issued upon exercise of the Option. If the amount of any
consideration payable to the Optionee is insufficient to pay such taxes or if no
consideration is payable to the Optionee, then upon the request of the Company,
the Optionee (or such other person entitled to exercise the Option pursuant to
Section 7 hereof) shall pay to the Company an amount sufficient for the Company
to satisfy any federal, state or local tax withholding requirements the Company
may incur, as a result of the grant or exercise of the Option or the sale or
other disposition of the Shares issued upon the exercise of the Option.
12. THE PLAN. The Option is subject to, and the Company and
the Optionee agree to be bound by, all of the terms and conditions of the Plan
as such Plan may be amended from time to time in accordance with the terms
thereof. Pursuant to the Plan, the Board is authorized to adopt rules and
regulations not inconsistent with the Plan as it shall deem appropriate and
proper. A copy of the Plan in its present form is available for inspection
during business hours by the Optionee or the persons entitled to exercise the
Option at the Company's principal office.
13. CONVERSION TO NON-QUALIFIED OPTION. Notwithstanding
anything to the contrary set forth herein, this Option is being granted subject
to the condition that in the event the Plan is not approved by the stockholders
of the Company within 365 days of the date that the Plan was adopted by the
Board, this Option shall automatically be converted into a non-qualified stock
option.
14. EARLY DISPOSITION OF STOCK. Subject to the fulfillment by
the Optionee of any conditions upon the disposition of Shares received under the
Option, the Optionee hereby agrees that if he or she disposes of any Shares
received under the Option within two (2) years from date of grant or one (1)
year after such Shares were transferred to him or her upon exercise of the
Option, he or she will notify the Company in writing within thirty (30) days
after the date of such disposition. The Optionee acknowledges that disposition
by him or her within two years from the date of grant and one year from the date
of exercise of the Option would disqualify him or her from capital gain
treatment for any gain realized upon such disposition.
-5-
<PAGE>
15. ENTIRE AGREEMENT. The Option, together with the Plan and
the other exhibits attached thereto or hereto, represents the entire agreement
between the parties.
16. GOVERNING LAW. This Option shall be construed in
accordance with the laws of the State of New Jersey.
17. AMENDMENT. Subject to the provisions of the Plan, this
Option Agreement may only be amended by a writing signed by each of the parties
hereto.
Date: BLUESTONE SOFTWARE, INC.
--------------------------
By:
----------------------------
Title:
-------------------------
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<PAGE>
ACKNOWLEDGMENT
The Optionee acknowledges receipt of a copy of the Plan, a
copy of which is attached hereto, and represents that he or she has read and is
familiar with the terms and provisions thereof, and hereby accepts the Option
subject to all of the terms and provisions thereof. The Optionee hereby agrees
to accept as binding, conclusive and final all decisions or interpretations of
the Administrator upon any questions arising under the Plan.
Date:
---------------------------- -------------------------
Signature of Optionee
-------------------------
Address
-------------------------
City, State, Zip
THE OPTION AND THE SECURITIES THAT MAY BE PURCHASED UPON
EXERCISE OF THE OPTION HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO,
OR IN CONNECTION WITH, THE SALE, TRANSFER OR DISTRIBUTION THEREOF. NO SUCH SALE,
TRANSFER OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED.
THE SHARES WHICH MAY BE PURCHASED UPON EXERCISE OF THE OPTION
MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF A STOCK PURCHASE AND
RESTRICTION AGREEMENT TO BE ENTERED INTO BETWEEN THE HOLDER OF THE OPTION AND
THE COMPANY UPON EXERCISE OF THIS OPTION, A COPY OF WHICH AGREEMENT IS ON FILE
WITH THE SECRETARY OF THE COMPANY.
-7-
<PAGE>
BLUESTONE SOFTWARE, INC.
1996 INCENTIVE AND NON-QUALIFIED
STOCK OPTION PLAN
NON-QUALIFIED STOCK OPTION AGREEMENT
BLUESTONE SOFTWARE, INC., a Delaware corporation (the
"Company"), hereby grants to ____________________________ (the "Optionee") an
option (the "Option") to purchase a total of ______________ (___) shares of
Common Stock (the "Shares") of the Company, at the price and on the terms set
forth herein, and in all respects subject to the terms and provisions of the
BLUESTONE SOFTWARE, INC. 1996 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN (the
"Plan") applicable to non-qualified stock options, which terms and provisions
are incorporated by reference herein. Unless otherwise defined herein,
capitalized terms used but not defined herein shall have the meanings given to
them in the Plan.
1. NATURE OF THE OPTION. The Option is intended to be a
nonstatutory stock option and is NOT intended to be an incentive stock option
within the meaning of Section 422 of the Code, or to otherwise qualify for any
special tax benefits to the Optionee.
2. DATE OF GRANT; TERM OF OPTION. The Option is granted this
____ day of ____________, ____, and it may not be exercised later than 5:00 p.m.
on the ____ day of
______________ , _____.
3. OPTION EXERCISE PRICE. The Option exercise price is
______________ ($_____) per Share.
4. EXERCISE OF OPTION. Except as otherwise provided herein,
the Option shall be exercisable during its term only in accordance with the
terms and provisions of the Plan and this Option Agreement as follows:
(A) VESTING. The Option shall vest at a rate of
twenty-five percent (25%) of the total number of Shares subject to the Option
per year (the total number of Shares so vested being the "Vested Amount") on
each consecutive anniversary of the date of this Option Agreement, commencing on
the date of this Option Agreement.
<PAGE>
(B) RIGHT TO EXERCISE.
(i) Options that have not yet vested may not
be exercised.
(ii) The Option may not be exercised for a
fraction of a Share.
(iii) In the event of Optionee's death,
Disability or other termination of service, the exercisability shall be governed
by this Section 4, Sections 6 and 7 hereof, and the provisions of the Plan.
(iv) In no event may the Option be exercised
after the date of expiration of the term of the Option, as set forth in Section
2 hereof.
(C) METHOD OF EXERCISE. The Option shall be
exercisable by written notice that shall state the election to exercise the
Option, the number of Shares in respect to which the Option is being exercised
and such other representations and agreements as to the Optionee's investment
intent with respect to such Shares as may be required by the Administrator or
pursuant to the provisions of the Plan. Such written notice shall be signed by
the Optionee and shall be delivered in person or by certified mail to the
Secretary of the Company or such other person as may be designated by the
Company. The written notice shall be accompanied by payment of the purchase
price, an executed Stock Purchase and Restriction Agreement and any other
agreements required by the Administrator, the terms of the Plan and/or this
Option Agreement. The Option will be deemed to be exercised upon the receipt by
the Company of such written notice, payment of the purchase price, the Stock
Purchase and Restriction Agreement and any other agreements required by the
Administrator, the terms of the Plan and/or this Option Agreement. The Optionee
shall have no right to vote or receive dividends and shall have no other rights
as a stockholder with respect to such Shares, notwithstanding the exercise of
the Option, until the issuance by the Company (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of the
Company) of the stock certificate evidencing the Shares that are being issued
upon exercise of the Option. The Company will issue (or cause to be issued) such
stock certificates promptly following the exercise of the Option. The
certificate or certificates for the Shares as to which the Option shall be
exercised shall be registered in the name of the Optionee and shall contain any
legend as may be required under the Plan, the Stock Purchase and Restriction
Agreement, any other agreements required by the Administrator and/or applicable
law.
(D) METHOD OF PAYMENT. The method of payment of the
purchase price shall be determined by the Administrator and may consist entirely
of cash, check or any combination of such methods of payment, or such other
consideration or method of payment as may be authorized by the Administrator and
permitted under the Plan.
(E) RESTRICTIONS ON EXERCISE. The Option may not be
exercised if the issuance of the Shares upon such exercise would constitute a
violation of any applicable federal or state securities laws or other laws or
regulations. As a condition to the exercise of the Option,
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the Company may require the Optionee to make any representations and warranties
to the Company as may be required by any applicable law or regulation.
5. INVESTMENT REPRESENTATIONS. Unless the Shares have been
registered under the Securities Act, in connection with the acquisition of the
Option, the Optionee represents and warrants as follows:
(A) The Optionee is acquiring the Option, and upon
exercise of the Option, Optionee will be acquiring the Shares for investment for
his or her own account, not as a nominee or agent, and not with a view to, or
for resale in connection with, any distribution thereof.
(B) The Optionee is aware of the Company's business
affairs and financial condition and has acquired sufficient information about
the Company to reach an informed and knowledgeable decision to acquire the
Shares. The Optionee has received all such information as the Optionee deems
necessary and appropriate to enable him or her to evaluate the financial risk
inherent in making an investment in the Shares and has received satisfactory and
complete information concerning the business and financial condition of the
Company in response to all inquiries in respect thereof.
6. TERMINATION OF RELATIONSHIP WITH THE COMPANY. Subject to
the provisions of Section 8 hereof, upon termination of the Optionee's service
with the Company, including termination of service with BCI, for any reason
other than death or Disability, the Optionee shall have the right to exercise
this Option up to the Vested Amount as of the date of termination for a period
of three (3) months from the date of such termination, provided that the
Optionee may only exercise the Option to the extent that the Optionee was
entitled to exercise the Option at the date of such termination; provided,
however, that the Optionee shall not be considered to have terminated his
relationship with the Company if he Transfers.
7. DEATH OR DISABILITY OF OPTIONEE. Upon the death or
Disability of the Optionee while in the service of the Company, including
termination of service with BCI, the Option may be exercised up to the Vested
Amount at any time within twelve (12) months after the date of death or
termination due to Disability provided the Optionee was entitled to exercise the
Option at the date of his or her death or termination due to Disability. In the
case of death, the Option may be exercised by the Optionee's estate or by a
person who acquired the right to exercise this Option by bequest or inheritance.
In the case of Disability, the Option may be exercised by the Optionee or his or
her legal guardian or representative, but in any case, the Option may be
exercised only to the extent that the Optionee was entitled to exercise the
Option at such date; provided, however, that if such disabled Optionee shall
commence any employment or engagement during such twelve (12) month period with
or by a competitor of the Company (INCLUDING, but not limited to, full or
part-time employment or independent consulting work, but EXCLUDING any
employment or engagement by BCI), as determined solely in the judgment of the
Board, the Option shall terminate immediately upon the commencement thereof. To
the extent that the Optionee was not entitled to exercise the Option at the date
of termination, or to the extent the Option is not exercised within the time
specified herein, the Option shall terminate.
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Notwithstanding the foregoing, the Option shall not be exercisable after the
expiration of the term set forth in Section 2 hereof.
8. FORFEITURE OF OPTION. Notwithstanding any other provision
of this Option Agreement, if the Optionee's service with the Company or BCI is
terminated and the Board makes a determination that the Optionee (i) has engaged
in any type of disloyalty to the Company or BCI, including without limitation,
fraud, embezzlement, theft, or dishonesty in the course of his employment or
engagement, (ii) has been convicted of a felony or other crime involving a
breach of trust or other fiduciary duty owed to the Company or BCI, (iii) has
disclosed trade secrets or confidential information of the Company or BCI, or
(iv) has breached any agreement with the Company or BCI in respect of
confidentiality, non-disclosure, non-competition or otherwise, then, at the
election of the Board, all unexercised Options shall terminate. In the event of
such an election by the Board, in addition to immediate termination of all
unexercised Options, the Optionee shall forfeit all Shares for which the Company
has not yet delivered share certificates to the Optionee and the Company shall
refund to the Optionee the Option price paid to the Company with respect to
those Shares. Notwithstanding anything herein to the contrary, the Company may
withhold delivery of share certificates pending the resolution of any inquiry
that could lead to a determination resulting in forfeiture.
9. NON-TRANSFERABILITY OF OPTION. The Option may not be sold,
pledged, assigned, hypothecated, gifted, transferred or disposed of in any
manner either voluntarily or involuntarily by operation of law, other than by
will or by the laws of descent or distribution, and may be exercised during the
lifetime of the Optionee only by such Optionee. Subject to the foregoing and the
terms of the Plan, the terms of this Option Agreement shall be binding upon the
executors, administrators, heirs, successors and assigns of the Optionee.
10. CONTINUATION OF EMPLOYMENT OR ENGAGEMENT. Neither the Plan
nor this Option Agreement shall confer upon any Optionee any right to continue
in the service of the Company or BCI or limit, in any respect, the right of the
Company or BCI to discharge or release the Optionee at any time, with or without
cause and with or without notice.
11. WITHHOLDING. The Company reserves the right to withhold,
in accordance with any applicable laws, from any consideration payable to the
Optionee any taxes required to be withheld by federal, state or local law as a
result of the grant or exercise of the Option or the sale or other disposition
of the Shares issued upon exercise of the Option. If the amount of any
consideration payable to the Optionee is insufficient to pay such taxes or if no
consideration is payable to the Optionee, then upon the request of the Company,
the Optionee (or such other person entitled to exercise the Option pursuant to
Section 7 hereof) shall pay to the Company an amount sufficient for the Company
to satisfy any federal, state or local tax withholding requirements the Company
may incur as a result of the grant or exercise of the Option or the sale or
other disposition of the Shares issued upon the exercise of the Option.
12. THE PLAN. This Option Agreement is subject to, and the
Company and the Optionee agree to be bound by, all of the terms and conditions
of the Plan as such Plan may be amended from time to time in accordance with the
terms thereof. Pursuant to the Plan, the Board
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is authorized to adopt rules and regulations not inconsistent with the Plan as
it shall deem appropriate and proper. A copy of the Plan in its present form is
available for inspection during business hours by the Optionee or the persons
entitled to exercise the Option at the Company's principal office.
13. ENTIRE AGREEMENT. This Option Agreement, together with the
Plan, and any other and the other exhibits attached thereto or hereto,
represents the entire agreement between the parties.
14. GOVERNING LAW. This Option Agreement shall be construed in
accordance with the laws of the State of New Jersey.
15. AMENDMENT. Subject to the provisions of the Plan, this
Option Agreement may only be amended by a writing signed by each of the parties
hereto.
Date: BLUESTONE SOFTWARE, INC.
-------------------------
By:
-----------------------
Title:
---------------------
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ACKNOWLEDGMENT
The Optionee acknowledges receipt of a copy of the Plan, a
copy of which is attached hereto, and represents that he or she has read and is
familiar with the terms and provisions thereof, and hereby accepts the Option
subject to all of the terms and provisions thereof. The Optionee hereby agrees
to accept as binding, conclusive and final all decisions or interpretations of
the Administrator upon any questions arising under the Plan.
Date:
--------------------------- ---------------------------
Signature of Optionee
-------------------------
Address
-------------------------
City, State, Zip
THE OPTION AND THE SECURITIES THAT MAY BE PURCHASED UPON
EXERCISE OF THE OPTION HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO,
OR IN CONNECTION WITH, THE SALE, TRANSFER OR DISTRIBUTION THEREOF. NO SUCH SALE,
TRANSFER OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED.
THE SHARES WHICH MAY BE PURCHASED UPON EXERCISE OF THE OPTION
MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF A STOCK PURCHASE AND
RESTRICTION AGREEMENT TO BE ENTERED INTO BETWEEN THE HOLDER OF THE OPTION AND
THE COMPANY UPON EXERCISE OF THE OPTION, A COPY OF WHICH AGREEMENT IS ON FILE
WITH THE SECRETARY OF THE COMPANY.
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<PAGE>
BLUESTONE SOFTWARE, INC.
1996 INCENTIVE AND NON-QUALIFIED
STOCK OPTION PLAN
STOCK PURCHASE AND RESTRICTION AGREEMENT
This STOCK PURCHASE AND RESTRICTION AGREEMENT is made this
_____ day of ____________, 19__, by and between BLUESTONE SOFTWARE, INC., a
Delaware corporation (the "Company"), and ("Optionee").
R E C I T A L S:
1. Optionee was granted an Option (the "Option") on
________________, 19___ pursuant to the BLUESTONE SOFTWARE, INC. 1996 INCENTIVE
AND NONQUALIFIED STOCK OPTION PLAN (the "Plan"), the terms and conditions of
which are incorporated herein by reference. In addition, capitalized terms used
but not otherwise defined herein shall have the meanings given to them in the
Plan.
2. Pursuant to the Option, Optionee was granted the right to
purchase _____________ (____) shares of the Company's Common Stock, as adjusted
in accordance with the Plan (the "Optioned Shares").
3. Optionee has elected to exercise the Option to purchase
________________ (_____) of such Optioned Shares (herein referred to as the
"Shares") under the Stock Option Agreement evidencing the Option (the "Option
Agreement").
4. As required by the Plan and the Option Agreement, as a
condition to Optionee's exercise of the Option, Optionee is required to execute
this Agreement which gives the Company certain rights, including, but not
limited to, transfer restrictions with respect to the Shares, rights of
repurchase and first refusal upon a proposed sale or transfer of the Shares and
other rights to repurchase the Shares being issued pursuant to the terms hereof.
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, and intending to be
legally bound hereby, the parties hereto hereby agree as follows:
1. EXERCISE OF OPTION. Subject to the terms and conditions
hereof, Optionee shall exercise his or her Option or a portion thereof to
purchase ___________________ Shares at an exercise price of $_________ per
Share, subject to and in accordance with the terms set forth in this Agreement,
payable in accordance with the terms and provisions of the Option Agreement.
<PAGE>
2. TRANSFER RESTRICTIONS.
(a) The Optionee shall not sell, assign, transfer,
pledge, hypothecate, mortgage, encumber or otherwise dispose of all or any of
his or her Shares except as otherwise expressly provided in this Agreement.
(b) Notwithstanding anything to the contrary
contained herein, the Optionee may transfer all or any of his or her Shares (i)
by way of gift to his or her spouse, parents, siblings, or lineal descendants of
the Optionee or to any trust for the exclusive benefit of any such family member
or the Optionee, provided that any such transferee shall agree in writing with
the Company, prior to, and as a condition precedent to such transfer, to be
bound by all of the provisions of this Agreement to the same extent as if such
transferee were the Optionee, or (ii) by will or the laws of descent and
distribution, in which event each such transferee shall be bound by all of the
provisions of this Agreement to the same extent as if such transferee were the
Optionee.
(c) Any purported transfer in violation of the
provisions of this Agreement shall be void AB INITIO.
3. TERMINATION OF EMPLOYMENT OR ENGAGEMENT.
(a) In the event of the termination of the employment
or engagement (or other relationship) of the Optionee for any reason, including
termination of employment or engagement with BCI, the Company (which term, for
purposes of this Section 3, shall include the designees of the Company) shall
have the right to purchase from, and if the Company exercises its option
pursuant to subparagraphs (d), (e) and (f) below, the Optionee shall sell to the
Company upon the exercise of such right at a purchase price per Share equal to
the Fair Market Value per share as at the date of termination, all of the Shares
owned by the Optionee.
(b) In the event the Optionee does not exercise the
Option until after the Optionee's termination of employment or other engagement
with the Company or BCI, the Company shall have the right to purchase from, and
if the Company exercises its option pursuant to subparagraphs (d), (e) and (f)
below, the Optionee shall sell to the Company upon the exercise of such right at
a purchase price per Share equal to the Fair Market Value per share as at the
date of exercise, all of the Shares owned by the Optionee.
(c) The number of Shares subject to repurchase
pursuant to Sections 3(a) and 3(b) shall be adjusted to give effect to any stock
dividend, or other distribution of stock made on or in respect of such Shares,
or any subdivision, combination or reclassification of the outstanding capital
stock of the Company or received in exchange for the Shares.
(d) In order to exercise the option to purchase
Optionee's Shares under this Section 3, the Company shall deliver a written
notice to the stockholder indicating its election to purchase the Shares and
specifying the number of Shares which the Company elects to purchase and the
purchase price therefor.
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<PAGE>
(e) If the Company elects not to exercise its rights
pursuant to this Section 3 or if the Company is legally prohibited from or
unable to repurchase the Shares during the period referred to below, then the
Company shall notify the Optionee and each designee of the Company, if any,
within the 60-day period following (i) with respect to a repurchase pursuant to
Section 3(a), the termination of employment or engagement of the Optionee or
(ii) with respect to a repurchase pursuant to Section 3(b), the date of exercise
of the Option. In such event, the designees shall have the right, during the
30-day period following the Company's notice, to purchase such number of Shares
as the Company shall designate, on the same terms and conditions as were
applicable to the Company, which right shall be exercised by giving written
notice of acceptance to the Company specifying the number of Shares which such
designee elects to purchase and the purchase price therefor.
(f) The repurchase of Shares hereunder shall be made
on a date selected by the Company, within 120 days after (i) with respect to a
repurchase pursuant to Section 3(a), the termination of employment or engagement
or (ii) with respect to a repurchase pursuant to Section 3(b), the date of
exercise of the Option, by delivery of payment to the Optionee, by check or wire
transfer, against receipt of one or more certificates, properly endorsed,
evidencing the Optionee's Shares to be so repurchased.
(g) Anything contained herein to the contrary
notwithstanding, at the option of the Company, any purchaser of Shares pursuant
to Section 3 which is not the Company shall agree in writing, in advance, to be
bound by and comply with all applicable provisions of this Agreement.
4. RIGHT OF FIRST REFUSAL ON DISPOSITIONS.
(a) If at any time the Optionee desires to sell all
or any part of his or her Shares pursuant to a bona fide offer from a third
party (the "Proposed Transferee"), then the Optionee shall submit a written
offer (the "Offer") to sell such Shares (the "Offered Shares") to the Company or
any entity or person designated by the Company ("designee"), on terms and
conditions, including price, not less favorable to the Company or its designee
than those on which the Optionee proposes to sell such Offered Shares to the
Proposed Transferee. The Offer shall disclose the identity of the Proposed
Transferee, the number of Offered Shares proposed to be sold, the total number
of Shares owned by the Optionee, the terms and conditions, including price, of
the proposed sale, and any other material facts relating to the proposed sale.
The Offer shall further state that the Company or its designee may acquire, in
accordance with the provisions of this Agreement, all or any portion of the
Offered Shares for the price and upon the other terms and conditions set forth
therein.
(b) If the Company (or its designee, if one exists)
desires to purchase all or any part of the Offered Shares, then the Company or
its designee shall communicate in writing its election to purchase (an
"Acceptance") to the Optionee, which Acceptance shall state the number of
Offered Shares the Company or its designee desires to purchase and shall be
given to the Optionee within thirty (30) days after the date the Offer was made
to the Company. The Acceptance shall, when taken in conjunction with the Offer,
be deemed to constitute a valid,
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<PAGE>
legally binding and enforceable agreement for the sale and purchase of such
Offered Shares. Sales of the Offered Shares to be sold to the Company or its
designee pursuant to this Section 4 shall be made at the offices of the Company
on the 45th day following the date the Offer was made (or if such 45th day is
not a business day, then on the next succeeding business day). Such sales shall
be effected by the Optionee's delivery to the Company a certificate or
certificates evidencing the Offered Shares to be purchased by the Company or its
designee, duly endorsed for transfer to the Company or its designee, as the case
may be, which Shares shall be delivered free and clear of all liens, charges,
claims, and encumbrances of any nature whatsoever, against payment to the
Optionee of the purchase price therefor by the Company or its designee, as the
case may be.
(c) If the Company or its designee does not purchase
all of the Offered Shares, then the Offered Shares not so purchased may be sold
by the Optionee at any time within 90 days after the date the Offer was made to
the Company. Any such sale shall be to the Proposed Transferee, at not less than
the price and upon other terms and conditions, if any, not more favorable to the
Proposed Transferee than those specified in the Offer. Any Offered Shares not
sold within such 90-day period shall continue to be subject to the requirements
of a prior offer pursuant to this Section 4.
5. FAILURE TO DELIVER SHARES. If the Optionee becomes
obligated to sell any Shares to the Company or its designee under this Agreement
and fails to deliver such Shares in accordance with the terms of this Agreement,
then the Company or its designee may, at its option, in addition to all other
remedies it may have, send to the Optionee the purchase price for such Shares as
is herein specified. Thereupon, the Company upon written notice to the Optionee,
(a) shall cancel on its books the certificate or certificates representing the
Shares to be sold and (b) in the case of a designee, shall issue, in lieu
thereof, in the name of such designee, a new certificate or certificates
representing such Shares, and thereupon all of the Optionee's rights in and to
such Shares shall terminate.
6. FURTHER LIMITATION AS TO TRANSFERS BY THE STOCKHOLDER. In
addition to the other restrictions provided in this Agreement or otherwise, if
requested by the Company or its underwriters for a public offering of securities
of the Company, the Optionee shall not sell or otherwise transfer or dispose of
any Shares or other securities of the Company held by such Optionee during the
period of fourteen (14) days before, and one hundred eighty (180) days
following, the effective date of a registration statement filed by the Company
with the Securities and Exchange Commission relating to such offering (other
than a registration statement on Form S-8 or Form S-4, or their successors, or
any other comparable form for similarly limited purposes promulgated after the
date hereof, or any registration statement covering only securities proposed to
be issued in exchange for securities or assets of another corporation).
7. REMEDIES.
(a) The Optionee expressly agrees that the Company or
its designee, as the case may be, will be irreparably damaged if this Agreement
is not specifically enforced. In case any one or more of the covenants and/or
agreements set forth in this Agreement shall have
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<PAGE>
been breached by the Optionee, the Company or its designee (as the case may be)
may proceed to protect and enforce their rights either by suit in equity and/or
by action at law, including, but not limited to, an action for damages as a
result of any such breach; and/or an action for specific performance of any such
covenant or agreement contained in this Agreement and/or a temporary or
permanent injunction, in any case without showing any actual damage. The rights,
powers and remedies of the parties under this Agreement are cumulative and not
exclusive of any other right, power or remedy which such parties may have under
any other agreement or law. No single or partial assertion or exercise of any
right, power or remedy of a party hereunder shall preclude any other or further
assertion or exercise thereof.
(b) The Optionee agrees that, until a public market
for the Shares exists, the Shares cannot be readily purchased, sold, or
evaluated in the open market, that they have a unique and special value, and
that the Company and its stockholders would be irreparably damaged if the terms
of this Agreement were not capable of being specifically enforced, and for this
reason, among others, the Company shall be entitled to a decree of specific
performance of the terms hereof or an injunction restraining violation of this
Agreement, said right to be in addition to any other remedies of the Company.
8. ASSIGNMENT. The Company may assign its rights under this
Agreement to one or more persons or entities, who shall have the right to so
exercise such rights in his, her or its own name and for his, her or its own
account. If the exercise of any such right requires the consent of any state or
other regulatory authority, then the Optionee shall cooperate with the Company
in requesting such consent.
9. ADJUSTMENT. The number of Shares subject to the terms and
provisions of this Agreement during the term of this Agreement shall be adjusted
to give effect to any stock dividend or liquidating dividend of cash and/or
property, stock split or other change or reclassification of the outstanding
securities of the Company. In such event, any and all new, substituted or
additional securities or other property to which the Optionee is entitled by
reason of his or her ownership of Shares shall be immediately subject to the
terms of this Agreement, and be included in the term "Shares" for all purposes
with the same force and effect as the Shares presently subject to such rights
and restrictions.
10. LEGENDS. All certificates representing any Shares of the
Company subject to the provisions of this Agreement shall have endorsed thereon
the following legend in substantially the following form unless in the opinion
of counsel such legend is no longer necessary:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR ANY
APPLICABLE STATE SECURITIES LAWS. THESE SHARES HAVE NOT BEEN
ACQUIRED WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE
SOLD, ASSIGNED, EXCHANGED, MORTGAGED, PLEDGED, HYPOTHECATED OR
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<PAGE>
OTHERWISE TRANSFERRED OR DISPOSED OF, BY GIFT OR OTHERWISE, OR
IN ANY WAY ENCUMBERED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT FOR SUCH SHARES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND ANY APPLICABLE STATE SECURITIES LAWS, OR AN
OPINION OF COUNSEL SATISFACTORY TO BLUESTONE SOFTWARE, INC.
THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT AND UNDER
APPLICABLE STATE SECURITIES LAWS. MOREOVER, THE SHARES
REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AND RESTRICTED
BY THE PROVISIONS OF A CERTAIN STOCK PURCHASE AND RESTRICTION
AGREEMENT BETWEEN BLUESTONE SOFTWARE, INC. AND THE
STOCKHOLDER, A COPY OF WHICH AGREEMENT WILL BE FURNISHED BY
BLUESTONE SOFTWARE, INC. UPON WRITTEN REQUEST AND WITHOUT
CHARGE, AND ALL OF THE PROVISIONS OF SUCH AGREEMENT ARE
INCORPORATED BY REFERENCE IN THIS CERTIFICATE.
11. INVESTMENT REPRESENTATIONS. Unless the Shares have been
registered under the Securities Act of 1933, as amended (the "Act"), in which
event the Company will so advise Optionee in writing, Optionee acknowledges,
agrees, represents and warrants, in connection with the proposed purchase of the
Shares, as follows:
(a) The Optionee is purchasing the Shares solely for
his or her own account for investment and not with a view to, or for resale in
connection with any distribution thereof within the meaning of the Act. The
Optionee further represents that he or she does not have any present intention
of selling, offering to sell or otherwise disposing of or distributing the
Shares or any portion thereof; and that the entire legal and beneficial interest
of the Shares he or she is purchasing is being purchased for, and will be held
for the account of, the Optionee only and neither in whole nor in part for any
other person.
(b) The Optionee is aware of the Company's business
affairs and financial condition and has acquired sufficient information about
the Company to reach an informed and knowledgeable decision to acquire the
Shares. The Optionee has a preexisting personal or business relationship with
the officers and directors of the Company and that the Optionee has such
knowledge and experience in business and financial matters to enable him or her
to evaluate the risks of the prospective investment and to make an informed
investment decision with respect thereto and that the Optionee has the capacity
to protect his or her own interests in connection with the purchase of the
Shares. The Optionee has discussed the Company and its plans, operations and
financial condition with its officers, has received all such information as the
Optionee deems necessary and appropriate to enable him or her to evaluate the
financial risk inherent in making an investment in the Shares and has received
satisfactory and
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<PAGE>
complete information concerning the business and financial condition of the
Company in response to all inquiries in respect thereof.
(c) The Optionee realizes that his or her purchase of
the Shares will be a speculative investment and that Optionee is able, without
impairing his or her financial condition, to hold the Shares for an indefinite
period of time and to suffer a complete loss on the investment.
(d) The Company has disclosed in writing that: (i)
the sale of the Shares has not been registered under the Act, and the Shares
must be held indefinitely unless a transfer of them is subsequently registered
under the Act or an exemption from such registration is available, and the
Company is under no obligation to register the Shares; and (ii) the Company
shall make a notation in its records of the aforementioned restrictions on
transfer and legends.
(e) The Optionee is aware of the provisions of Rule
144, promulgated under the Act, which, in substance, permits limited public
resale of "restricted securities" acquired, directly or indirectly, from the
issuer thereof (or an affiliate of such issuer) in a non-public offering subject
to the satisfaction of certain conditions, including among other things: the
resale occurring not less than one (1) year from the date Optionee has purchased
and paid for the Shares; the availability of certain public information
concerning the Company; the sale being through a broker in an unsolicited
"brokers' transaction" or in a transaction directly with a market maker (as said
term is defined under the Securities Exchange Act of 1934, as amended); and that
any sale of the Shares may be made by Optionee, if Optionee is an affiliate of
the Company, only in limited amounts during any three-month period not exceeding
specified limitations. The Optionee understands that at the time Optionee wishes
to sell the Shares there may be no public market upon which to make such a sale,
and that, even if such public market then exists, the Company may not be
satisfying the current public information requirements of Rule 144, and that, in
such event, Optionee would be precluded from selling the Shares under Rule 144
even if the one-year minimum holding period had been satisfied. The Optionee
understands that in the event all of the requirements of Rule 144 are not
satisfied, registration under the Act, compliance with Regulation A, or some
other registration exemption will be required; and that, notwithstanding the
fact that Rule 144 is not exclusive, the Staff of the SEC has expressed its
opinion that persons proposing to sell private placement securities other than
in a registered offering and otherwise than pursuant to Rule 144 will have a
substantial burden of proof in establishing that an exemption from registration
is available for such offers or sales, and such persons and their respective
brokers who participate in such transactions do so at their own risk.
(f) Without in any way limiting the Optionee's
representations and warranties set forth herein, the Optionee shall in no event
make any disposition of all or any portion of the Shares that he or she is
purchasing unless and until:
(i) there is then in effect a Registration
Statement under the Act covering such proposed disposition and such disposition
is made in accordance with said Registration Statement; or
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(ii) the Optionee shall have (a) notified
the Company of the proposed disposition and furnished the Company with a
detailed statement of the circumstances surrounding the proposed disposition,
and (b) furnished the Company with an opinion of Optionee's own counsel
(satisfactory to the Company) to the effect that such disposition will not
require registration of such shares under the Act, and such opinion of the
Optionee's counsel shall have been concurred in by counsel for the Company and
the Company shall have advised the Optionee of such concurrence.
12. ESCROW. As security for the Optionee's faithful
performance of the terms of this Agreement and to insure the availability for
delivery of the Optionee's Shares upon exercise, under this Agreement, of the
rights of the Company and the rights of the other beneficiaries to this
Agreement, the Optionee shall, if requested in writing by the Company, deliver
to and deposit with the Chief Financial Officer of the Company or his nominee
(the "Escrow Agent"), as Escrow Agent in this transaction, two Stock Assignments
duly endorsed (with date and number of shares blank) in the form attached hereto
as ATTACHMENT A, together with the certificate or certificates evidencing the
Shares; such documents are to be held by the Escrow Agent and delivered to said
Escrow Agent pursuant to the Joint Escrow Instructions of the Company and
Optionee set forth in ATTACHMENT B attached hereto and incorporated herein by
this reference, which instructions shall also be delivered to the Escrow Agent
at the closing hereunder.
13. RESTRICTION ON ALIENATION. The Optionee shall not sell,
transfer, gift, pledge, hypothecate, assign or otherwise dispose of any of the
Shares or any right or interest therein, whether voluntary, by operation of law
or otherwise, without the prior written consent of the Company, except a
transfer which meets the requirements of this Agreement. Any sale, transfer,
gift, pledge, hypothecation, assignment or disposition or purported sale,
transfer or other disposition of such Shares by Optionee shall be null and void
AB INITIO unless the terms, conditions and provisions of this Agreement are
strictly observed.
14. TERM. Except for Sections 3, 4 and 5 hereof, which shall
terminate upon the consummation of a Public Offering of shares of the Company's
equity capital, this Agreement shall continue in full force and effect until
such time as the Optionee has transferred all of the Shares (other than pursuant
to Section 2(b)) in accordance with the terms of this Agreement.
15. MISCELLANEOUS.
(a) The Company shall not be required (i) to
transfer on its books any Shares that shall have been sold or transferred in
violation of any of the provisions set forth in this Agreement, or (ii) to treat
as owner of such Shares or to accord the right to vote as such owner or to pay
dividends to any transferee to whom such Shares shall have been so transferred.
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(b) Subject to the provisions of this Agreement,
Optionee shall, during the term of this Agreement, exercise all rights and
privileges of a stockholder of the Company with respect to the Shares.
(c) The parties agree to execute such further
instruments and to take such further action as may reasonably be necessary to
carry out the intent of this Agreement.
(d) Any notice, consent or other communication
required or permitted hereunder shall be given in writing and shall be deemed
effectively given: (a) upon personal delivery; (b) two (2) business days after
day of deposit if sent by regular mail; (c) one (1) business day after the
business day of deposit with a carrier if sent by Federal Express, Express Mail
or other express service (receipt requested), in each case to the appropriate
addresses, telex numbers and telecopier numbers set forth below (or at such
other address or numbers as such party may designate by ten (10) days' advance
written notice to the other party hereto):
(i) To the Optionee:
-------------------
-------------------
-------------------
(ii) To the Company:
Bluestone Software, Inc.
1000 Briggs Road
Mount Laurel, NJ 08054
Attn: President
(e) This Agreement shall inure to the benefit of the
successors and assigns of the Company and, subject to all compliance with the
restrictions on transfer herein set forth, be binding upon Optionee, his heirs,
executors, administrators, and permitted successors and assigns.
(f) This Agreement shall be construed under the laws
of the State of New Jersey and constitutes the entire Agreement of the parties
with respect to the subject matter hereof, superseding all prior written or oral
agreements with respect thereto, and no amendment or addition hereto shall be
deemed effective unless agreed to in writing by the parties hereto.
(g) If any provision of this Agreement is held by a
court of competent jurisdiction to be invalid, void or unenforceable, then the
remaining provisions shall nevertheless continue in full force and effect
without being impaired or invalidated in any way and shall be construed in
accordance with the purposes and tenor and effect of this Agreement.
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<PAGE>
(h) Nothing in this Agreement shall be deemed to
create any term of employment or engagement or affect in any manner whatsoever
the right or power of the Company or BCI to terminate Optionee's employment or
engagement.
(i) Notwithstanding (i) the execution and delivery of
this Agreement by the parties hereto or (ii) anything to the contrary contained
herein, if the Optionee's employment or engagement with the Company or BCI (as
the case may be) is terminated and the Board makes a determination that the
Optionee (A) has engaged in any type of disloyalty to the Company or BCI,
including without limitation, fraud, embezzlement, theft, or dishonesty in the
course of his or her employment or engagement, (B) has been convicted of a
felony, (C) has disclosed trade secrets or confidential information of the
Company or BCI, or (D) has breached any agreement with the Company or BCI in
respect of confidentiality, non-disclosure, non-competition or otherwise, then,
at the election of the Board, the Optionee shall forfeit all shares for which
the Company has not yet delivered share certificates to the Optionee or Escrow
Agent, as the case may be, and the Company shall refund to the Optionee the
Option purchase price paid to the Company upon exercise of the Option with
respect to those Shares. In addition, the Company may withhold delivery of share
certificates pending the resolution of any inquiry that could lead to a
determination resulting in forfeiture.
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IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above-written.
BLUESTONE SOFTWARE, INC.
By:
------------------------------------
Title:
------------------------------------
OPTIONEE:
----------------------------------
(Signature)
----------------------------------
(Print Name)
Address:
------------------------------------
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Exhibit 10.2
BLUESTONE SOFTWARE, INC.
DIRECTORS' COMPENSATION PLAN
<PAGE>
BLUESTONE SOFTWARE, INC. DIRECTORS' COMPENSATION PLAN
Section 1. PURPOSES.
The purposes of the Plan are (a) to recognize the contributions made
to Bluestone Software, Inc. (the "Company") by Non-Employee Directors, (b) to
provide such persons with additional incentive to devote themselves to the
future success of the Company, and (c) to improve the ability of the Company to
attract, retain and motivate individuals who may serve as members of the Board
by providing such persons with an opportunity to acquire or increase their
proprietary interest in the Company through the receipt of rights to acquire the
Company's Common Stock. The Options granted pursuant to the Plan are intended to
constitute non-qualified stock options.
Section 2. DEFINITIONS.
(a) "AFFILIATE" means, whether now or hereafter existing, a
person or entity that directly, or indirectly controls or is controlled by, or
is under common control with, the Company.
(b) "AWARD" means a grant of an Option to a Non-Employee Director
pursuant to the provisions of the Plan.
(c) "BOARD" means the Board of Directors of the Company, as
constituted from time to time.
(d) "CHANGE OF CONTROL" means the happening of an event
(excluding a Public Offering) that shall be deemed to have occurred upon the
earliest to occur of the following events:
(i) the date the stockholders of the Company (or the Board,
if stockholder action is not required) approve a plan or other arrangement
pursuant to which the Company will be dissolved or liquidated;
(ii) the date the stockholders of the Company (or the Board,
if stockholder action is not required) approve a definitive agreement to sell or
otherwise dispose of all or substantially all of the assets of the Company, or
(iii) the date the stockholders of the Company (or the
Board, if stockholder action is not required) and the stockholders of the other
constituent corporations (or their respective boards of directors, if and to the
extent that stockholder action is not required) have approved a definitive
agreement to merge or consolidate the Company with or into another corporation,
other than, in either case, a merger or consolidation of the Company in which
holders of shares of the Company's voting capital stock immediately prior to the
merger or consolidation will have at least fifty percent (50%) of the ownership
of voting capital stock of the surviving corporation immediately after the
merger or consolidation (on a fully diluted basis),
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which voting capital stock is to be held in the same proportion (on a fully
diluted basis) as such holders' ownership of voting capital stock of the Company
immediately before the merger or consolidation, or
(iv) the date any entity, person or group (within the
meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act), other than
(A) the Company, (B) any of its Subsidiaries, (C) any of the holders of the
capital stock of the Company, as determined on the date that this Plan is
adopted by the Board, (D) any employee benefit plan (or related trust) sponsored
or maintained by the Company or any of its Subsidiaries or (E) any Affiliate of
any of the foregoing, shall have acquired beneficial ownership of, or shall have
acquired voting control over more than fifty percent (50%) of the outstanding
shares of the Company's voting capital stock (on a fully diluted basis), unless
the transaction pursuant to which such person, entity or group acquired such
beneficial ownership or control resulted from the original issuance by the
Company of shares of its voting capital stock and was approved by at least a
majority of directors who shall have been members of the Board for at least
twelve (12) months prior to the date of such approval, or
(v) the first day after the date of this Plan when directors
are elected such that there shall have been a change in the composition of the
Board such that a majority of the Board shall have been members of the Board for
less than twelve (12) months, unless the nomination for election of each new
director who was not a director at the beginning of such twelve (12) month
period was approved by a vote of at least sixty percent (60%) of the directors
then still in office who were directors at the beginning of such period, or
(vi) the date upon which the Board determines (in its sole
discretion) that based on then current available information, the events
described in clause (iv) are reasonably likely to occur.
(e) "CODE" means the Internal Revenue Code of 1986, as amended.
(f) "COMMON STOCK" means common stock of the Company, $.001 par
value per share.
(g) "COMPANY" means Bluestone Software, Inc., a Delaware
corporation, and any successor in interest that agrees to assume and maintain
the Plan.
(h) "DISABILITY" or "DISABLED" with respect to an Optionee shall
mean when the Optionee is unable to engage in any substantial gainful activity
by reason of a physical or mental impairment that can be expected to result in
death or that has lasted or can be expected to last for a continuous period of
not less than twelve (12) months. The determination of whether an Optionee is
Disabled shall be determined by the Board of Directors, whose determination
shall be conclusive.
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<PAGE>
(i) "EFFECTIVE DATE" means June 10, 1999.
(j) "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
(k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(l) "FAIR MARKET VALUE" means the fair market value of a share of
Common Stock, as determined pursuant to Section 10 hereof.
(m) "NON-EMPLOYEE DIRECTOr" has the meaning set forth in Rule
16b-3(b)(3)(i) promulgated by the Securities and Exchange Commission under the
Exchange Act, or any successor definition adopted by the Securities and Exchange
Commission.
(n) "OPTION" means a non-qualified stock option to purchase
Shares that is granted pursuant to the Plan.
(o) "OPTION AGREEMENT" means a written agreement in such form as
the President of the Company (subject to the terms and conditions of this Plan)
may from time to time approve evidencing and reflecting the terms of an Option.
(p) "OPTIONEE" means the holder of an Option.
(q) "PLAN" means this Bluestone Software, Inc. Directors'
Compensation Plan, as amended from time to time.
(r) "PUBLIC OFFERING" means the consummation of a firm commitment
underwritten public offering of equity securities of the Company registered
under the Securities Act.
(s) "SALE OF THE COMPANY" means the earliest of: (i) the closing
of a sale, transfer or other disposition of all or substantially all of the
shares of the capital stock then outstanding of the Company (except if such
transferee is then an Affiliate); (ii) the closing of a sale, transfer or other
disposition of all or substantially all of the assets of the Company (except if
such transferee is then an Affiliate); or (iii) the merger or consolidation of
the Company with or into another corporation (except an Affiliate), other than a
merger or consolidation of the Company in which the holders of shares of the
Company's voting capital stock outstanding immediately before such merger or
consolidation hold greater than fifty percent (50%) of the surviving entity's
voting capital stock after such consolidation or merger.
(t) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
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(u) "SHARES" means shares of Common Stock, as adjusted in
accordance with Section 11 of the Plan.
(v) "SUBSIDIARY" means, whether now or hereafter existing, a
subsidiary or parent corporation of the Company as such term is defined in
Sections 424(e), (f) and (g) of the Code.
Section 3. ADMINISTRATION.
(a) GENERAL. The Plan shall be administered by the Board. Subject
to the provisions of the Plan, the Board shall have the authority, in its
discretion:
(i) to adopt, alter and repeal such administrative rules,
guidelines and practices governing the Plan as it shall, from time to time, deem
advisable;
(ii) to interpret the terms and provisions of the Plan and
any Award issued under the Plan (and any agreements relating thereto);
(iii) to determine or modify the terms and conditions, not
inconsistent with the terms of the Plan, of any Option granted hereunder,
including but not limited to, the exercise price and any restriction or
limitation, any vesting provisions, or any vesting acceleration or forfeiture
waiver regarding any Option, or the length of the period following termination
of service of any Optionee during which any Option may be exercised, based on
such factors as the Board shall determine in its sole discretion;
(iv) to amend the terms of any agreement relating to any
Award issued under the Plan;
(v) to authorize any person to execute on behalf of the
Company any instrument required to effectuate the Award of an Option previously
granted or to take such other actions as may be necessary or appropriate with
respect to the Company's rights pursuant to Options or agreements relating to
the Award or exercise thereof; and
(vi) to make such other determinations and establish such
other procedures as it deems necessary or advisable for the administration of
the Plan. The Board may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or in any Award granted in the manner and to the
extent it shall deem necessary to carry out the intent of the Plan.
(b) EFFECT OF BOARD DECISIONS. All decisions, determinations and
interpretations of the Board shall be final and binding on all persons,
including the Company and Optionees.
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<PAGE>
(c) LIMITATION OF LIABILITY. Notwithstanding anything herein to
the contrary, no member of the Board shall be liable for any good faith
determination, act or failure to act in connection with the Plan or any Option
granted hereunder.
Section 4. STOCK SUBJECT TO THE PLAN.
Subject to the provisions of Section 11 of the Plan, the maximum
aggregate number of Shares which may be granted and sold under the Plan is Five
Hundred Thousand (500,000) Shares. If an Option should expire or become
unexercisable for any reason without having been exercised in full, the
unpurchased Shares which were subject thereto shall, unless the Plan shall have
been terminated, return to the Plan and become available for future Awards under
the Plan.
Section 5. PARTICIPATION.
Only Non-Employee Directors may be granted Options under the Plan.
Section 6. AWARDS. Options shall be granted as follows:
(a) Upon a Non-Employee Director's initial election to the Board,
such Non-Employee Director shall receive an Option for 20,000 Shares. Upon the
anniversary date of a Non-Employee Director's election to the Board, such
Non-Employee Director shall receive an Option for 10,000 Shares, provided the
Non-Employee Director has served continuously as a Non-Employee Director from
the date of his initial election.
(b) Upon a Non-Employee Director's appointment to serve on the
compensation, audit or other duly constituted Committees of the Board, such
Non-Employee Director shall receive an Option for 2,500 Shares. Upon the
anniversary date of such appointment, the Non-Employee Director shall receive an
Option for 2,500 Shares, provided the Non-Employee Director has served
continuously on such Committee from the date of his initial election.
(c) Upon a Non-Employee Director's appointment to serve as the
Chairperson of the Board, such Non-Employee Director shall receive an Option for
10,000 Shares. Upon the anniversary date of a Non-Employee Director's election
as Chairperson of the Board, such Non-Employee Director shall receive an Option
for 2,500 Shares, provided the Non-Employee Director has served continuously in
such position from the date of his initial election.
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<PAGE>
Section 7. TERMS AND CONDITIONS OF OPTIONS/VESTING.
(a) OPTION AGREEMENT. Each Option granted pursuant to the Plan
shall be evidenced by an Option Agreement in such form as the Board may from
time to time determine. Each Option Agreement shall incorporate by reference all
terms and conditions of the Plan.
(b) VESTING. All Options shall be fully vested and exercisable at
the time they are granted.
(c) EXERCISE PRICE. The exercise price for Options granted under
the Plan will be 100% of the Fair Market Value of such Shares on the date the
Option is granted.
(d) TERM OF OPTIONS. The right of an Optionee to exercise any
part of an option granted pursuant to the Plan terminates on the first to occur
of the following: (i) five (5) years from and including the date of grant; (ii)
expiration of three (3) months from and including the date the Optionee's
service as a member of the Board terminates for any reason other than death or
Disability; or (iii) the expiration of one (1) year from and including the date
the Optionee's service as a member of the Board terminates by reason of death or
Disability.
Section 8. EXERCISE OF OPTIONS.
(a) EXERCISABILITY. To the extent then vested, Options shall be
exercisable in full or in part from and after their respective dates of grant.
No Option may be exercised at any time after the fifth anniversary of the date
of grant.
(b) MANNER OF EXERCISE. An Option shall be deemed to be exercised
when written notice of such exercise has been given to the Company at its
principal executive office in accordance with the terms of the Option Agreement
by the person entitled to exercise the Option and full payment for the Shares
with respect to which the Option is exercised has been received by the Company,
accompanied by any other documents required by the terms of the Plan and/or
Option Agreement. Full payment may consist of any consideration and method of
payment allowable under Section 9 of the Plan.
(c) DELIVERY OF SHARES. As soon as practicable after any proper
exercise of an Option in accordance with the provisions of the Plan, the Company
shall, without transfer or issue tax to the Optionee, deliver to the Optionee at
the principal executive office of the Company or such other place as shall be
mutually agreed upon between the Company and the Optionee, a certificate or
certificates representing the Shares for which the Option shall have been
exercised. The time of issuance and delivery of the certificate(s) representing
the Shares for which the Option shall have been exercised may be postponed by
the Company for such period as may be required by the Company, with reasonable
diligence, to comply with any applicable
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<PAGE>
listing requirements of any national or regional securities exchange or any law
or regulation applicable to the issuance or delivery of such Shares.
(d) EFFECT ON PLAN. Exercise of an Option in any manner shall
result in a decrease in the number of Shares which thereafter may be available,
both for grant under the Plan and for sale under the Option, by the number of
Shares as to which the Option is exercised.
Section 9. FORM OF PAYMENT.
Subject to Section 20 hereof, the consideration to be paid for the
Shares to be issued upon the exercise of an Option, including the method of
payment, shall be determined by the Board and may consist entirely of: (i) cash;
(ii) check; (iii) to the extent permitted under the Exchange Act, the delivery
of a properly executed exercise notice together with irrevocable instructions to
a securities broker to promptly deliver to the Company the amount of sale or
loan proceeds required to pay the exercise price; or (iv) such other
consideration and method of payment as the Board may from time to time
determine. In making its determination as to the type of consideration to
accept, the Board shall consider if the acceptance of such consideration may be
reasonably expected to benefit the Company.
Section 10. DETERMINATION OF FAIR MARKET VALUE OF COMMON STOCK.
(a) Except to the extent otherwise provided in this Section 10,
the Fair Market Value of a share of Common Stock shall be determined by the
Board in its sole discretion.
(b) In the event Shares are listed on the American Stock Exchange
or any other national or regional securities exchange or traded on the Nasdaq
Stock Market ("Nasdaq") the Fair Market Value of a share of Common Stock shall
be the closing price of a share of Common Stock on the exchange or on Nasdaq, as
reported in The Wall Street Journal on the relevant valuation date, or if there
is no trading on that date, on the next trading date. In the event that Shares
are traded in the over-the-counter market, the Fair Market Value of a share of
Common Stock shall be the mean of the bid and asked prices for a share of Common
Stock on the relevant valuation date as reported in The Wall Street Journal (or,
if not so reported, as otherwise reported by the National Quotation Bureau,
Inc.) as applicable or, if there is no trading on such date, on the next trading
date.
Section 11. ADJUSTMENTS.
(a) STOCK SPLITS, ETC. Subject to required action by the
shareholders, if any, the number of Shares as to which Options may be granted
under the Plan and the number of Shares subject to outstanding Options and the
exercise prices thereof shall be adjusted proportionately for any increase or
decrease in the number of outstanding shares of Common
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Stock of the Company resulting from stock splits, reverse stock splits, stock
dividends, reclassifications and recapitalizations.
(b) FRACTIONAL SHARES. No fractional Shares shall be issuable on
account of any action aforesaid, and the aggregate number of Shares into which
Shares then covered by the Option, when changed as the result of such action,
shall be reduced to the number of whole Shares resulting from such action.
Section 12. RIGHTS AS A SHAREHOLDER.
The Optionee shall have no rights as a shareholder of the Company and
shall not have the right to vote or receive dividends with respect to any Shares
subject to an Option until such Option has been exercised and a certificate with
respect to the Shares purchased upon such exercise has been issued to him.
Section 13. PURCHASE FOR INVESTMENT AND OTHER RESTRICTIONS.
At the option of the Board, the issuance of Shares on the exercise of
an Option may be conditioned on receipt by the Company of such appropriate
representations and warranties of the Optionee, including a representation and
warranty that the purchase of Shares or the exercise of an Option shall be for
investment, and not with a view to the public resale or distribution thereof,
unless the Shares subject to the Option are registered under the Securities Act
and the transfer or sale of such Shares complies with all other laws, rules and
regulations applicable thereto. Unless the Shares subject to the Option are
registered under the Securities Act, the Optionee shall acknowledge that the
Shares purchased on exercise of the Option are not registered under the
Securities Act and may not be sold or otherwise transferred unless the Shares
have been registered under the Securities Act in connection with the sale or
other transfer thereof, or that counsel satisfactory to the Company has issued
an opinion satisfactory to the Company that the sale or other transfer of such
Shares is exempt from registration under the Securities Act, and unless said
sale or transfer is in compliance with all other applicable laws, rules and
regulations, including all applicable federal and state securities laws, rules
and regulations. Unless the Shares issued or issuable upon the exercise of an
Option are registered under the Securities Act, the certificates representing
the Shares shall contain the following legend in substantially the following
form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE
SECURITIES LAWS. THESE SHARES HAVE NOT BEEN ACQUIRED WITH A VIEW TO
DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, ASSIGNED, EXCHANGED,
MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED OR DISPOSED
OF, BY GIFT
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OR OTHERWISE, OR IN ANY WAY ENCUMBERED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT FOR SUCH SHARES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND ANY APPLICABLE STATE SECURITIES LAWS, OR A
SATISFACTORY OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT
REGISTRATION IS NOT REQUIRED UNDER SUCH ACT AND UNDER APPLICABLE STATE
SECURITIES LAWS.
Section 14. TRANSFERABILITY.
No Option shall be assignable or transferable otherwise than by will
or by the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined by the Code or Title I of ERISA, as amended. During
the lifetime of the Optionee, his Options shall be exercisable only by him, or,
in the event of his legal incapacity, by his legal guardian or representative,
except as otherwise permitted by the Board.
Section 15. CHANGE OF CONTROL.
(a) In the event of a Change of Control, the Board shall have the
right, in its sole discretion, to establish an earlier date for the expiration
of the exercise of an Option (notwithstanding a later expiration of
exercisability set forth in an Option Agreement).
(b) In addition, in the event of a Change of Control, the Board
shall have the right, in its sole discretion, subject to and conditioned upon a
Sale of the Company:
(i) to arrange for the successor company (or other entity)
to assume all of the rights and obligations of the Company under this Plan; or
(ii) to terminate this Plan and:
(a) to pay to all Optionees cash with respect to those
Options that are vested as of the date of the Sale of the Company in an amount
equal to the difference between the Option Price and the Fair Market Value of a
Share of Common Stock (determined as of the date the Plan is terminated)
multiplied by the number of Options that are vested as of the date of the Sale
of the Company which are held by the Optionee as of the date of the Sale of the
Company; or
(b) to arrange for the exchange of all Options for
options to purchase common stock in the successor corporation; or
(c) to distribute to each Optionee other property in an
amount equal to and in the same form as the Optionee would have received from
the successor
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corporation if the Optionee had owned the Shares subject to Options that are
vested as of the date of the Sale of the Company rather than the Option at the
time of the Sale of the Company.
The form of payment or distribution to the Optionee pursuant to this Section
shall be determined by the Board in its sole discretion.
Section 16. AMENDMENT OF THE PLAN.
The Board, in its discretion, may from time to time suspend, terminate
or discontinue the Plan or revise or amend it any respect.
Section 17. APPLICATION OF FUNDS.
The proceeds received by the Company from the sale of Shares pursuant
to the exercise of Options shall be used for general corporate purposes.
Section 18. CONDITIONS UPON ISSUANCE OF SHARES.
Shares shall not be issued pursuant to the exercise of an Option
unless the exercise of such Option and the issuance and delivery of such Shares
pursuant thereto shall comply with all relevant provisions of law, including,
without limitation, the Securities Act, the Exchange Act, the rules and
regulations promulgated thereunder, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
Section 19. RESERVATION OF SHARES.
The Company, during the term of this Plan, shall at all times reserve
and keep available such number of Shares as shall be sufficient to satisfy the
requirements of the Plan.
Section 20. TAXES, FEES, EXPENSES AND WITHHOLDING OF TAXES.
(a) TRANSFER TAXES. The Company shall pay all original issue and
transfer taxes (but not income taxes, if any) with respect to the grant of
Options and/or the issue and transfer of Shares pursuant to the exercise
thereof, and all other fees and expenses necessarily incurred by the Company in
connection therewith, and will from time to time use its best efforts to comply
with all laws and regulations which, in the opinion of counsel for the Company,
shall be applicable thereto.
(b) WITHHOLDING RIGHT. The grant of Options hereunder and the
issuance of Shares pursuant to the exercise thereof is conditioned upon the
Company's reservation of the right to withhold in accordance with any applicable
law, from any compensation or other amounts payable to the Optionee, any taxes
required to be withheld under
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federal, state or local law as a result of the grant or exercise of such Option
or the sale of the Shares issued upon exercise thereof. The Company may, in its
sole discretion, require the Optionee (or such other person entitled herein to
exercise the Option), as a condition of the exercise of an Option, to pay in
cash to the Company an amount sufficient to cover such tax liability or
otherwise to make adequate provision for the Company's satisfaction of its
withholding obligations under federal, state and local law.
Section 21. NOTICES.
Any notice to be given to the Company pursuant to the provisions of
the Plan shall be addressed to the Company in care of its Secretary (or such
other person as the Company may designate from time to time) at its principal
executive office, and any notice to be given to an Optionee shall be delivered
personally or addressed to him at the address given beneath his signature on his
Option Agreement, or at such other address as such Optionee or his permitted
transferee (upon the transfer of the Shares) may hereafter designate in writing
to the Company. Any such notice shall be deemed duly given when enclosed in a
properly sealed envelope or wrapper addressed as aforesaid, registered or
certified, and deposited, postage and registry or certification fee prepaid, in
a post office or branch post office regularly maintained by the United States
Postal Service. It shall be the obligation of each Optionee and each permitted
transferee holding Shares purchased upon exercise of an Option to provide the
Secretary of the Company, by letter mailed as provided herein, with written
notice of his direct mailing address.
Section 22. NO ENLARGEMENT OF RIGHTS.
The Plan is purely voluntary on the part of the Company, and the
continuance of the Plan shall not be deemed to constitute a contract between the
Company and any Non-Employee Director for the continuation of his service as a
Non-Employee Director. Nothing contained in the Plan shall be deemed to give any
Non-Employee Director the right to be retained in the service of the Company.
Upon the grant of an Option to a Non-Employee Director, he shall have only such
rights and interests as are expressly provided herein, subject, however, to all
applicable provisions of the Company's Certificate of Incorporation, as the same
may be amended from time to time.
Section 23. INVALID PROVISIONS.
In the event that any provision of the Plan is found to be invalid or
otherwise unenforceable under any applicable law, such invalidity or
unenforceability shall not be construed as rendering any other provisions
contained herein as invalid or unenforceable, and all such other provisions
shall be given full force and effect to the same extent as though the invalid or
unenforceable provision was not contained herein.
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Section 24. TERMINATION.
The Board may terminate the Plan at any time. Unless it has been
previously terminated, the Plan shall terminate after five (5) years from the
date the Plan become effective.
Section 25. APPLICABLE LAW.
The Plan shall be governed by and construed in accordance with the
laws of the State of New Jersey.
-12-
<PAGE>
SAPPHIRE/WEB VAR AGREEMENT - NORTH AMERICA
Subject to the terms and conditions of this Agreement and the terms annexed
hereto, Bluestone Software, Inc. ("Bluestone") appoints Reseller as a
non-exclusive Reseller of the Bluestone product listed below, in the Territory
designated below. Reseller hereby accepts such appointment, subject to such
terms.
TERM:
This Agreement shall commence on January 1, 1998 and shall terminate on December
31, 1998.
CONTRACT TYPE New Agreement Renewal X
------- -------
PROGRAM LEVEL Opal Diamond X
------- -------
PRODUCT:
Sapphire/Web
TERRITORY:
United States and Canada
DISCOUNTS:
BENEFITS:
REQUIREMENTS:
<PAGE>
1. RESELLER OBLIGATIONS Reseller shall use its best efforts to
sell Products in the Territory. Reseller shall not, whether directly or
indirectly, solicit sales outside the Territory. Reseller shall ensure that the
Product delivered to the end-user is accompanied by the current End-User License
Agreement.
Reseller shall at all relevant times, have in its employ a full-time technical
support representative capable of demonstrating the Products and supporting the
Products on such computer system or workstation for which Reseller distributes
Products. Reseller shall distribute software updates (available via Bluestone's
ftp site or reseller can order new documentation and media) to customers with
current support agreements.
NFR licenses are to be used for in-house evaluation and demonstration purposes
only. Any misuse of this license will result in revocation. Sapphire/Web NFR
product licenses are not intended for resale, for employee personal use at home,
or for installation at a customer site (customer product evaluations are
available through Bluestone Software Inc.'s 30 day Evaluation Program).
Reseller shall not itself create or market any product with the same or similar
functionality as the Products, during the term or this Agreement and for six
months thereafter.
Reseller shall ensure that the Product and the marketing thereof, and the
performance by Reseller of all obligations hereunder are in compliance with all
applicable legislation.
Failure to achieve quota will result in the following: Diamond Level - Resellers
will be assigned to Opal Level; Opal Level - Resellers will be subject to
Termination as per Section 6.
2. PRICE AND PAYMENT Reseller may purchase products from
Bluestone at Bluestone's then current list price less Discount. Price is
determined by quantity of customer order and not by aggregate orders.
To provide for quick shipment to end-users, Reseller may purchase from Bluestone
inventory copies of the Media and Manual Kits and marketing material at
Bluestone's then current reseller list price.
All Software, Media and Manual Kits and marketing materials will be delivered to
Reseller, F.O.B. Mt. Laurel, NJ, (in accordance with the International Chamber
of Commerce INCOTERMS) and Reseller will be responsible for all customs, duties,
and shipping charges. Prices are net of taxes, and Reseller shall be responsible
for payment of all applicable local sales, use, withholding, value added, and
goods and services taxes. In such jurisdictions where Bluestone is not
registered to collect use, sales, or similar taxes, Reseller shall ensure their
payment, and provide upon request to Bluestone evidence of same.
Reseller agrees to pay Bluestone within 30 days of invoice date. Bluestone
reserves the right to change the terms of payment if: (1) Reseller fails to make
a payment to Bluestone when due; or (2) in Bluestone's reasonable judgement
there has been material adverse change in Reseller's
<PAGE>
credit position. If Reseller chooses to pay using an international bank
transfer, Reseller must notify Bluestone by fax, on the day of the transfer
indicating the transfer amount, and how it should be applied to outstanding
invoices. Any bank charges for bank transfers shall be to Reseller's account.
3. EVALUATION, ORDERING AND RECORDS Reseller may provide to
end-users the Product in its time limited form for evaluation purposes. Reseller
may retrieve evaluation passwords from Bluestone Reseller website or similar
means.
Reseller will fax or send a Purchase Order to Bluestone specifying customer name
and address, and Product order code. Bluestone will, upon acceptance of the
order, immediately provide reseller with a permanent password. Bluestone will
normally ship the appropriate Media and Manual Kit. Reseller may ship from their
inventory and indicate this intention on their purchase order, and receive a
credit therefore from the purchase price. Reseller must ensure that every
customer receives an original and current Media and Manual Kit.
4. PROPRIETARY RIGHTS All title to, copyright in, and
ownership interest in the Products and all Bluestone trademarks shall at all
times remain with Bluestone. Reseller shall ensure that all Bluestone copyright
and trademark notices are prominently displayed on all related materials.
Reseller acknowledges that the Products are proprietary to Bluestone and
Reseller shall not take any action, such as reverse assembly or reverse
engineering, to derive a source code equivalent for any product software, or
copy or reproduce the functionality thereof, nor shall Reseller attempt in any
way to make the Product software operational by the end-user without obtaining
from Bluestone a permanent Password specifically for that end-user. Reseller
shall have no right to any software source code, nor rights to translation of
derivative works.
Reseller may not use, sell or otherwise permit the use of the Products except
pursuant to and as limited by the terms of this Agreement. Without limitation,
Reseller shall not copy, in whole or in part, the Product software, the Media
and Manual Kit or the marketing materials.
Reseller shall, during the term of this Agreement, use Bluestone trademarks
(registered or unregistered) solely in connection with the promotion of the
Products and Bluestone hereby grants to Reseller, during the term of this
Agreement, a nonexclusive nontransferable right to use such marks solely for the
purposes of promoting the Products as authorized herein. Reseller shall
accompany each use of a Bluestone trademark with a conspicuous notation that the
Marks are owned by Bluestone and any other proprietary legend that Bluestone
determines reasonably necessary to protect its rights therein.
Bluestone will defend, at its expense, any action brought against Reseller to
the extent that it is based on a claim that the sale or use of Products, within
the scope of this Agreement, infringes any patent, trade secret or copyright.
Bluestone will indemnify Reseller from any costs, damages and fees finally
awarded against Reseller which are attributable to such claim, provided that
Reseller notifies Bluestone promptly in writing of the claim and provides
Bluestone with
<PAGE>
information, reasonable assistance and sole authority to deliver or settle the
claim. Reseller shall have no authority to settle any claim on behalf of
Bluestone.
Should the Products become or, in Bluestone's opinion, are likely to become the
subject of a claim or infringement of patent, trade secret or copyright,
Bluestone may (1) procure for Reseller and Reseller's end-users, at no cost to
Reseller or Reseller's end-users, the right to continue to use the Product, or
(2) replace or modify the Product, to make such non-infringing, provided that
substantially the same function is performed by the replacement or modified
software, or if (1) or (2) are not commercially reasonable, terminate the
license to use such Product software, and, upon proof of removal, grant Reseller
a credit as depreciated on a stright-line five (5) year basis from date of
purchase.
Bluestone shall have no liability for any claim of copyright, trade secret or
patent infringement based on (1) the use of other than the latest Product
release from Bluestone, if such infringement could have been avoided by the such
use; or (2) the use or combination of Product with software, hardware, or other
materials not provided by Bluestone.
5. WARRANTIES & LIMITATION OF LIABILITY Except as provided in
this sub-section and in the limited warranty to end-users as set forth in the
End-User License Agreement, Bluestone makes no warranty or representation to
Reseller or any third parties concerning the Product, or operation thereof.
Bluestone disclaims any and all implied warranties including that of
merchantability and fitness for a particular purpose.
Bluestone liability for any damages in any action relating to the use of Product
or arising out of this agreement shall not exceed the purchase price paid by
Reseller to Bluestone for the Product at issue. In no event shall Bluestone be
liable for indirect, special, incidental or consequential damages arising out of
the use of Product or under this agreement regardless of the form of action,
even if advised of the possibility of such damages.
6. TERMINATION This Agreement may be terminated at any time
without recourse or compensation for such termination: (a) by Bluestone, if
Reseller has not purchased from Bluestone, in the most recently completed
Agreement quarter, Product in value equal the quarterly Quota; and (b) by either
party if the other party becomes insolvent or is declared bankrupt, or on 30
days notice providing an opportunity to cure, of the other party has materially
breached its obligations, hereunder; (c) by either party for any reason by
giving the other party at least sixty (60) days written notice.
7. MISCELLANEOUS Reseller agrees to maintain electronic mail
(email) access to the internet, for routine communication with Bluestone.
Reseller is an independent contractor, and is not the agent or representative of
Bluestone for any purpose.
<PAGE>
Reseller may not assign, pledge, or otherwise transfer this Agreement or any of
its rights or obligations to any party.
This Agreement, contains the full, complete and exclusive understanding of the
parties and supersedes any prior agreement. Modifications shall be in writing
and signed by both parties. Any contrary provision in any purchase order or
similar document shall be of no effect.
Any Notice, request or consent made under this Agreement shall be in writing,
and sent by registered mail or telegram shall, subject to proof of mailing, be
deemed to have been received by the party to whom it was sent at the time at
which the record of the person delivering the same indicates it was so
delivered. Any notice, demand or other communication sent by facsimile
communication shall be deemed, in the absence of proof to the contrary, to have
been received by the party to whom it was sent on the date of dispatch.
This contract and any disputes relating to it shall be governed by the laws of
New Jersey. Reseller agrees to attorn to the courts of New Jersey, with respect
to any such disputes.
Reseller: BCI Bluestone Software, Inc.
1000 Briggs Road 1000 Briggs Road
Mt. Laurel, NJ 08054 Mt. Laurel, NJ 08054
Phone: ________________ Phone: (609) 727-4600
Fax: __________________ Fax: (609) 778-8125
Signed: /s/ Thomas Bernetich Signed: /s/ Shiela Potter
-------------------- ------------------
Thomas Bernetich Shiela Potter
- ---------------------------- --------------------------
Area Director Na Channels Mgr.
- ---------------------------- --------------------------
Date: February 9, 1998 Date: February 9, 1998
---------------------- ----------------------
<PAGE>
Exhibit 10.18
SUBLEASE AGREEMENT
THIS SUBLEASE AGREEMENT ("Sublease"), effective as of April 30, 1997,
is made by and between BLUESTONE SOFTWARE, INC., a Delaware corporation
("Sublandlord"), and BLUESTONE CONSULTING, INC., a Delaware corporation
("Subtenant").
BACKGROUND
A. Briggs Properties Partnership ("Prime Landlord"), as lessor, and
Sublandlord, as lessee, entered into a Lease dated September 27, 1993, as
amended by a First Addendum to Lease dated December 1, 1993, a Second Addendum
to Lease dated December 15, 1994, a Third Addendum to Lease dated June 1, 1995,
and a Fourth Addendum to Lease dated May 16, 1996 (collectively, "Prime Lease").
Pursuant to the Prime Lease, Prime Landlord leased to Sublandlord approximately
34,746 square feet of space ("Demised Premises") in the building located at 1000
Briggs Road, Mt. Laurel, New Jersey 08054 ("Building"), for a term expiring at
midnight on the 30 day of November, 2003.
B. Subtenant desires to sublease from Sublandlord, and Sublandlord
desires to sublease to Subtenant, a portion of the Demised Premises in
accordance with the terms and conditions of this Sublease.
NOW, THEREFORE, in consideration of the rents herein provided and of
the covenants and agreements herein contained, and intending to be legally bound
hereby, Sublandlord and Subtenant hereby covenant and agree as follows:
1. SUBLEASED PREMISES. Sublandlord hereby subleases to Subtenant and
Subtenant hereby rents from Sublandlord a portion of the Demised Premises
("Subleased Premises") containing approximately ___________ square feet, as
described more particularly on EXHIBIT A attached hereto and made a part hereof.
2. TERM OF SUBLEASE.
(a) The term of this Sublease ("Term") shall commence on April
30, 1997 ("Commencement Date"), and shall expire on the earlier of (i) the date
on which the Prime Lease shall terminate for any reason or (ii) at 11:59 P.M. on
the scheduled termination date of the Lease ("Expiration Date").
(b) Under no circumstances shall the Term of this Sublease extend
beyond the expiration, surrender or termination of the Prime Lease, whether the
Prime Lease expires by its own terms, is terminated for Sublandlord's default,
is surrendered by agreement of Prime Landlord and Sublandlord, or is terminated
for any other reason.
<PAGE>
(c) Sublandlord shall attempt to obtain Prime Landlord's consent
to this Sublease. Sublandlord shall incur no liability if Sublandlord does not
obtain Prime Landlord's consent to this Sublease.
3. USE. The Subleased Premises shall be occupied only by Subtenant and
used solely for the purpose of general office use and the sale of computer
software, training and counseling, and related activities.
4. RENT.
(a) Subtenant shall pay to Sublandlord, at a place designated by
Sublandlord, base rent in the annual amount of One Hundred Thousans Seven
Hundred Three Dollars ($107,703), to be paid in equal monthly installments, in
advance, on the first day of every calendar month during the Term hereof,
without deduction, abatement or set off (except as otherwise provided in this
Sublease). If the Term of this Sublease shall commence or end on a day other
than the first day of the month, the monthly rent installment due for such month
shall pro rated based on the number of rental days of such calendar month. If
any payment of base rent is received by Sublandlord more than five (5) days
after payment is due, Subtenant shall pay to Sublandlord a late payment charge
equal to five percent (5%) of such late payment.
(b) Subtenant also shall pay Subtenant's Proportionate Share
(defined below) of "Taxes" (as such term is defined in Article IV of the Prime
Lease) for the Subleased Premises as "Taxes" are determined by the Prime
Landlord in accordance with the Prime Lease and charged to Sublandlord. The
amount payable by Subtenant to Sublandlord for Taxes shall be deemed "additional
rent" and paid within fifteen (15) days after each such tax billing is received
by Subtenant from Sublandlord.
(c) Subtenant also shall pay Subtenant's Proportionate Share of
the "common area maintenance costs" (as such term is defined in Article XI of
the Prime Lease) for the Subleased Premises as such "common area maintenance
costs" are determined by Prime Landlord in accordance with the Prime Lease and
charged to Sublandlord. The amount payable by Subtenant to Sublandlord shall be
deemed "additional rent" and shall be paid within fifteen (15) days after each
such billing is received by Subtenant from Sublandlord.
(d) Subtenant shall pay Subtenant's Proportionate Share of
utility costs and other services rendered or furnished to the Subleased Premises
during the Term of this Sublease such as trash disposal and janitorial services,
provided Subtenant's use is no more intensive than that of Sublandlord. Where
Subtenant shall require utilities or services beyond that provided by the Prime
Lease (including other than during normal business hours established by the
Prime Lease), Subtenant shall pay any additional charge incurred by Sublandlord
therefor. If, however, any utilities are separately metered and billed to the
Subleased Premises, Subtenant shall pay all of such charges directly to the
utility provider. The amount payable by Subtenant to
<PAGE>
Sublandlord shall be additional rent and shall be paid within fifteen (15) days
after each such billing is received by Subtenant from Sublandlord.
(e) "Subtenant's Proportionate Share" shall be 28% which has been
determined by dividing the Subleased Premises by the Demised Premises (9,500 /
34,746 = .28) and multiplying such figure by 100%.
5. CONDITION OF THE SUBLEASED PREMISES. Subtenant acknowledges and
represents to Sublandlord that (a) Subtenant has thoroughly inspected and
examined the Subleased Premises, (b) Subtenant is fully familiar with the
physical conditions and state of repair of the Subleased Premises, (c) Subtenant
hereby accepts the Subleased Premises in their "as is" condition as of the date
hereof and that Sublandlord shall have no obligation to perform any work in
connection with this Sublease, and (d) neither Sublandlord nor any agent of
Sublandlord has made any representation or warranty with respect to the
Subleased Premises or the Building including without limitation, any
representation or warranty with respect to the suitability or fitness of the
Subleased Premises or the Building for the conduct of Subtenant's business.
6. PRIME LEASE.
a. COPY OF PRIME LEASE. Sublandlord represents that the copy of
the Prime Lease attached hereto as EXHIBIT B is a true, complete and correct
copy of the Prime Lease.
b. SUBORDINATION. This Sublease and all the rights of Subtenant
hereunder are expressly subject and subordinate to the Prime Lease and all
leases and mortgages to which the Prime Lease is subordinate. In the event of
the foreclosure of any underlying mortgage against which Sublandlord has
nondisturbance protection, Subtenant shall enjoy the same nondisturbance
protection as Sublandlord.
c. INCORPORATION BY REFERENCE. Except as otherwise provided in
this Section 6 or elsewhere in this Sublease, all of the terms, covenants,
conditions and definitions of the Prime Lease (except such as by their nature or
purport do not relate to the Subleased Premises or are inapplicable or
inappropriate to the subleasing of the Subleased Premises pursuant to this
Sublease or are inconsistent with any of the provisions of this Sublease) are
hereby incorporated in and made part of this Sublease with the same force and
effect as though set forth at length herein. The foregoing incorporation by
reference is subject to the provisions of this Section 6, including the
following:
(i) References in the Prime Lease to "Lessor" (other than in
provisions of the Prime Lease which impose or relate to obligations of Prime
Landlord to repair or restore, or to perform or furnish utilities, work or
services with respect to, the Demised Premises or the Building) shall be deemed
to refer to Sublandlord under this Sublease unless the context requires that
such reference be deemed to refer to both Prime Landlord and Sublandlord;
<PAGE>
(ii) References in the Prime Lease to "Lessee" (other than
in provisions of the Prime Lease which grant to the lessee thereunder an
expansion option, right of first refusal or option to renew) shall be deemed to
refer to Subtenant under this Sublease;
(iii) Reference in the Prime Lease to "the Lease" or "this
Lease" shall be deemed to refer to this Sublease;
(iv) Reference in the Prime Lease to specific terms or
provisions of the Prime Lease shall be deemed to be to the provisions of the
Prime Lease incorporated herein;
(v) References in the Prime Lease to the "term" of the Prime
Lease shall be deemed to refer to the Term of this Sublease;
(vi) References in the Prime Lease to "minimum rent" or
"additional rent" or "rental" or "rent" shall be deemed to refer to the rent
payable under this Sublease, but the provisions of the Prime Lease
notwithstanding, the only rent to be paid by Subtenant is as provided in Section
4 of this Sublease;
(vii) Whenever a provision of the Prime Lease incorporated
herein by reference obliges Sublandlord to perform some act for the benefit of
Prime Landlord, including by way of example providing insurance or indemnity or
making repairs or permitting access, such provisions as incorporated herein
shall oblige Subtenant to perform such act to the extent applicable to the
Subleased Premises for the benefit of Prime Landlord and Sublandlord. Whenever a
provision of the Prime Lease incorporated herein by reference affords the Prime
Landlord some right against Sublandlord, such provision as incorporated herein
shall afford Prime Landlord and Sublandlord such right against Subtenant;
(viii) Whenever a provision of the Prime Lease incorporated
herein by reference requires or refers to Prime Landlord's consent and approval,
such provision as incorporated herein shall be deemed to require or refer to
both Prime Landlord's and Sublandlord's consent and approval. In such a case,
Subtenant shall submit its request for consent or approval to Sublandlord and
Sublandlord shall immediately submit such request for consent or approval to
Prime Landlord. Sublandlord shall notify Subtenant of Sublandlord's
determination to grant or deny its consent or approval within the time period,
if any, set forth in the Prime Lease.
(ix) Whenever pursuant to a provision of the Prime Lease
incorporated herein by reference Sublandlord is required to take some action by
a date certain or within a certain time period, Subtenant shall take such action
not less than three (3) days prior to the date or time for Sublandlord's
performance provided that in any instance, other than scheduled or regularly
recurring obligations, Subtenant shall have had at least five (5) days prior
written notice of the date and time performance is required. Immediately upon
receipt or delivery
<PAGE>
thereof, as the case may be, Sublandlord shall provide Subtenant with copies of
any default notices under the Prime Lease given by Sublandlord or received by
Sublandlord. Immediately upon receipt thereof, Sublandlord also shall provide
Subtenant with copies of any other notices under the Prime Lease relating to the
Subleased Premises received by Sublandlord.
(d) PROTECTION OF PRIME LEASE. Subtenant shall not do or cause to
be done or suffer or permit any act or thing which would constitute a default
under the Prime Lease or cause the Prime Lease or the rights of Sublandlord as
lessee thereunder to be terminated or which would cause Sublandlord to become
liable for any damages, costs, claims or penalties or would increase the minimum
rent or additional rent or other charges or obligations of Sublandlord as lessee
under the Prime Lease, or would adversely affect or reduce any of Sublandlord's
rights or benefits under the Prime Lease. Sublandlord agrees that it shall not
do or cause to be done, or suffer or permit to be done, any act or thing which
would constitute a default under the Prime Lease or cause the Prime Lease to be
terminated.
(e) INDEMNIFICATION.
(i) Subtenant shall indemnify, defend and hold harmless
Sublandlord from and against any and all claims, actions, liabilities, losses,
damages, costs, and expenses, including, without limitation, reasonable fees for
legal counsel (collectively, "Claims") arising (A) from the use or occupancy by
Subtenant of the Subleased Premises or the Building or any business conducted
therein by Subtenant, or (B) from any condition created by or any negligence or
willful misconduct of Subtenant or its employees, agents, contractors, visitors
or licensees, in or about the Subleased Premises or any other part of the
Building, or (C) from Subtenant's failure to perform any of the obligations
imposed on it hereunder (through incorporation of the Prime Lease or otherwise),
or (D) from a termination of the Prime Lease resulting from a default by
Subtenant under this Sublease.
(ii) Sublandlord shall indemnify, defend and hold harmless
Subtenant from and against any and all Claims arising (A) from the negligence or
willful misconduct of Sublandlord, its employees, agents, contractors, visitors
or licensees in or about the Subleased Premises or (B) Sublandlord's failure to
perform any of the obligations imposed on it under the Prime Lease.
(f) LIMITATION ON PRIME LANDLORD'S OBLIGATION. Notwithstanding
anything contained in this Sublease (including any provisions of the Prime Lease
which are incorporated by reference into this Sublease), Subtenant acknowledges
and agrees that except as specifically provided below Sublandlord shall have no
obligation, liability or responsibility whatsoever to Subtenant to provide or
perform any work, service, utility, repair, alteration, restoration or other
obligation as such items pertain to the Subleased Premises which Prime Landlord
is obliged to provide or perform pursuant to the provisions of the Prime Lease.
If Prime Landlord shall default or delay in providing or performing any such
work, service, utility, repair, alteration, restoration or other obligation as
such items pertain to the Subleased Premises,
<PAGE>
Sublandlord's only obligations to Subtenant on account thereof shall be (i) to
permit Subtenant, at its expense, to prosecute an action against Prime Landlord
for damages or specific performance for Subtenant's benefit in Sublandlord's
name, and (ii) to make a good faith effort and to reasonably cooperate with
Subtenant (at Subtenant's expense) in attempting to cause Prime Landlord to
provide or perform such service or obligation. Any condition resulting from such
default or delay by Prime Landlord shall not constitute an eviction, actual or
constructive, of Subtenant. No such default or delay shall excuse Subtenant from
the performance or observance of any of its obligations to be performed or
observed under this Sublease or shall entitle Subtenant to terminate this
Sublease or to any reduction in or abatement of the minimum rent or other
charges provided for in this Sublease; provided, however, if Sublandlord is
entitled to a reduction or abatement in the rent due under the Prime Lease, then
Subtenant shall be entitled to a pro-rata share of such reduction or abatement
based on Subtenant's Proportionate Share or, if less than all of the Subleased
Premises are affected, Subtenant shall be entitled to an abatement, deduction,
or set off based on the ratio of the square footage of the area of the Subleased
Premises affected by such default or delay to the square footage of the
Premises. In furtherance of the foregoing, to the extent permitted by law,
Subtenant does hereby waive any cause of action and any right to bring an action
against Sublandlord by reason of any act or omission of Prime Landlord under the
Prime Lease. If Subtenant shall undertake any action against Prime Landlord
pursuant to clause (i) of the second sentence of this Section 6(e), then (i) all
papers, pleadings and other aspects of such action shall be subject to
Sublandlord's approval, not to be unreasonably withheld, and (ii) Sublandlord
may participate in such action.
(g) SUBLANDLORD'S OBLIGATIONS UNDER THE PRIME LEASE. Sublandlord
agrees that it shall pay all amounts due and perform all obligations required of
it under the Prime Lease in a timely manner. Sublandlord agrees that it shall
not amend, modify, terminate, or otherwise change the Prime Lease in any manner
which materially and adversely affects Subtenant or this Sublease without first
obtaining the approval of Subtenant, which approval shall not be unreasonably
withheld, delayed or conditioned. The parties agree that a denial of Subtenant's
consent shall not be unreasonable if the change in the Prime Lease results in
the imposition of an increased monetary burden on Subtenant.
7. NOTICES. All statements and notices to be given under this Sublease
and the Prime Lease shall be in writing and given either (i) in person, (ii) by
certified mail, return receipt requested, postage paid, or (iii) overnight
deliver by Express Mail, Federal Express or other nationally recognized carrier,
fee prepaid, addressed in each case to the proper party at the following
address:
To Prime Landlord: Briggs Property Partnership
1629 Locust Street
Philadelphia, PA 19103
<PAGE>
To Sublandlord: Bluestone Software, Inc.
1000 Briggs Road
Mt. Laurel, NJ 08054
Attn: R. Ballezzi, CFO
To Subtenant: Bluestone Consulting, Inc.
1000 Briggs Road
Mt. Laurel, NJ 08054
Attn: T. Ballezzi, COO
Any party may inform the other in the manner provided for the giving of notices
of any change in address. Notices so given shall be deemed given and received on
the earlier of actual receipt or the first business day where delivery is
attempted.
8. ASSIGNMENT AND SUBLETTING. Subtenant shall not assign, mortgage or
encumber this Sublease or sublet all or any part of the Subleased Premises, or
permit the Subleased Premises to be used by others not in the employ of
Subtenant, without the prior written consent of the Sublandlord and the Prime
Landlord under the Prime Lease. For purposes of this Sublease, a change in the
control or ownership of Subtenant shall be deemed an assignment. If consent is
granted, Subtenant shall remain liable for the performance of all of the terms
and conditions on the part of the Subtenant to be performed hereunder.
9. ALTERATIONS. Subtenant shall not make any additions, alterations,
changes or improvements to the Subleased Premises without the prior written
consent of Sublandlord and, where necessary in Sublandlord's opinion, Prime
Landlord.
10. BROKERS. Sublandlord and Subtenant each warrants and represents to
the other that it had no dealing with any broker or finder concerning the
subletting of the Subleased Premises. Each party hereto agrees to indemnify and
hold the other party harmless from any and all liabilities and expenses,
including, without limitation, reasonable attorneys' fees, arising out of claims
against the other party by any broker, consultant, finder or like agent claiming
to have brought about this Sublease based upon the alleged acts of the
indemnifying party. This Section 10 shall survive the expiration or termination
of this Sublease.
11. SURRENDER OF SUBLEASED PREMISES. At the expiration or earlier
termination of the Term, Subtenant shall quit and surrender the Subleased
Premises broom clean, in as good condition as it was at the beginning of the
Term, reasonable wear and tear excepted, and shall, to the extent not
inconsistent with any specific provision of this Sublease, comply with all terms
and conditions of the Prime Lease regarding surrender of the Subleased Premises.
Without limiting the generality of the foregoing, Subtenant, on or before the
expiration or termination of this Sublease, shall (a) remove all of Subtenant's
personal property and repair any damage caused by such removal, and (b) remove
all trash and broom-sweep the Subleased Premises. If any personal property of
Subtenant shall remain in the Subleased Premises after the termination of
<PAGE>
this Sublease, at the election of Sublandlord, (a) it shall be deemed to have
been abandoned by Subtenant and may be retained by Sublandlord as its own
property, or (b) such property may be removed and disposed of by Sublandlord at
the expense of Subtenant. Subtenant's obligation to observe or perform under
this Section 12 shall survive the expiration or termination of this Sublease.
12. HOLDOVER. If Subtenant shall unlawfully hold possession of the
Subleased Premises after the end of the Term of this Sublease, Subtenant shall
pay to Sublandlord the greater of (i) any amounts owed by Sublandlord to Prime
Landlord as a result of Subtenant's holding over or (ii) monthly holdover rent
equal to one hundred fifty percent (150%) of the base rent payable in the last
month of the Term, plus additional rent at its regular rate. The rights and
remedies of Sublandlord under this Section 12 shall be Sublandlord's exclusive
remedies in the event of any holdover by Subtenant (provided, however, that such
remedies shall not vitiate Sublandlord's rights to compel Subtenant's removal
from the Subleased Premises upon the expiration or other termination of the
Term).
13. DEFAULT. If Subtenant defaults under the terms of this Sublease or
the terms of the Prime Lease incorporated herein by reference, and such default
continues beyond any applicable grace or cure periods, if any, provided under
the Prime Lease except to the extent modified hereby, Sublandlord shall be
entitled to exercise any remedies available to a landlord under New Jersey law,
including without limitation, those remedies set forth in the Prime Lease.
Notwithstanding the terms of the Prime Lease, if Subtenant shall fail to pay any
installment of rent (including additional rent) required under this Sublease
within five (5) days after notice of nonpayment, Sublandlord shall have all
rights described in the preceding sentence. If Subtenant shall fail to provide
insurance as required under the terms of this Sublease, or to perform any other
obligation required under the terms of this Sublease within twenty (20) days
after notice of nonperformance, Sublandlord shall have the right to perform such
obligation and Subtenant shall reimburse Sublandlord for all costs and expenses
related to such performance, as additional rent, promptly upon receipt of any
invoice therefor.
14. MISCELLANEOUS.
a. QUIET ENJOYMENT. Provided Subtenant complies with its
covenants, duties and obligations hereunder, Sublandlord shall not disturb
Subtenant's quiet enjoyment of the Subleased Premises. The foregoing shall not,
however, be deemed to limit Section 2 of this Sublease.
b. LIMITATION OF LIABILITY. The term "Sublandlord" shall refer
only to the owner from time to time of the lessee's interest in the Prime Lease
so that if Sublandlord shall assign its interest in the Prime Lease, the
assignor shall be entirely freed from all obligations, covenants and duties
hereunder thereafter accruing, provided that the assignee assumes the liability
of Sublandlord for all such obligations, covenants and duties hereunder
thereafter accruing.
<PAGE>
c. ENTIRE AGREEMENT. This Sublease (i) contains the entire
agreement of the parties; (ii) supersedes all prior or other negotiations,
representations, understandings and agreements of, by or between the parties,
which shall be deemed fully merged herein; (iii) shall be construed and governed
by the laws of the State of New Jersey is located; and (iv) may not be changed
or terminated orally.
d. COUNTERPARTS. This Sublease may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
shall constitute one and the same instrument.
e. PROVISIONS BINDING. This Sublease shall be binding upon and
inure to the benefit of the parties hereto and their respective permitted
successors and assigns.
f. INVALIDITY OF PARTICULAR PROVISIONS. If any term or provision
of this Sublease or the application thereof to any person or circumstance shall,
to any extent, be invalid or unenforceable, the remainder of the Sublease, or
the application of such term or provision to persons or circumstances other than
those as to which it is held invalid or unenforceable, shall not be affected
thereby, and each term and provision of this Sublease shall be valid and be
enforced to the fullest extent permitted by law.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Sublease as of the day and year first above written.
SUBLANDLORD:
BLUESTONE SOFTWARE, INC.,
a Delaware corporation
By: /s/ Mel Baiada
----------------------------------
Mel Baida, President
SUBTENANT:
BLUESTONE CONSULTING, INC.,
a Delaware corporation
By: /s/ Mel Baiada
----------------------------------
Mel Baida, President
<PAGE>
Exhibit 10.19
- --------------------------------------------------------------------------------
LESSOR LEASE NUMBER
KING COMMERCIAL CORP.
10820 Sunset Office Dr., Suite 208 307360001
St. Louis, MO 63127
TEL (314) 965-9800 , FAX (314) 965-4321
- --------------------------------------------------------------------------------
FULL LEGAL NAME AND ADDRESS OF LESSEE SUPPLIER OF EQUIPMENT (COMPLETE ADDRESS)
Bluestone Software, Inc. Clarify, Inc.
1000 Briggs Road 2125 O'Nel Drive
Mount Laurel, NJ 08054 San Jose, CA 95131
JOINTLY AND SEVERALLY RESPONSIBLE
- --------------------------------------------------------------------------------
QUANTITY DESCRIPTION, MODEL#, CATALOG #, SERIAL # OR OTHER IDENTIFICATION
- --------------------------------------------------------------------------------
E See Exhibit "A" Attached Hereto And Made A Part Hereof.
Q
U L
I E
P A
M S
E E
N D
T
<TABLE>
<S> <C> <C> <C> <C> <C>
- ------------------ --------------------------------------------------------------------------------------------------------------
EQUIPMENT STREET ADDRESS________________________________________________________________________________________________
LOCATION
IF CITY____________ COUNTY___________ STATE____________ ZIP_______
DIFFERENT
- ----------------------------------------------------------------------------------------------------------------------------------
-----------------------
TERMS AMOUNT OF EACH MONTHLY /X/ TERM OF LEASE NO. OF SECURITY
PAYMENT (PLUS OTHER/SPECIFY /_/ (NO. OF PAYMENTS DEPOSIT
SALES TAX, IF MONTHS) 36 $5,589.70
APPLICABLE) 36
$1,906.98
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
TERMS AND CONDITIONS OF LEASE
1. LEASE. Lessee hereby leases from Lessor, and Lessor leases to Lessee, the
personal property described above, together with any replacement parts,
additions, repairs or accessories now or hereafter incorporated or affixed to it
(hereinafter referred to as the "Equipment").
2. ACCEPTANCE OF EQUIPMENT. Lessee agrees to inspect the Equipment and to
execute an Acknowledgment and Acceptance of Equipment by Lessee notice, as
provided by Lessor, after the Equipment has been delivered and after Lessee is
satisfied that the Equipment is satisfactory in every respect. Lessee hereby
authorized Lessor to insert in this Lease serial numbers or other identifying
data with respect to the Equipment.
3. DISCLAIMER OF WARRANTS AND CLAIMS; LIMITATION OF REMEDIES. THERE ARE NO
WARRANTIES BY OR ON BEHALF OF LESSOR. Lessee acknowledges and agrees by his
signature below as follows:
(a) LESSOR MAKES NO WARRANTIES EITHER EXPRESS OR IMPLIED AS TO THE CONDITION
OF THE EQUIPMENT, ITS MERCHANTABILITY, ITS FITNESS OR SUITABILITY FOR ANY
PARTICULAR PURPOSE, ITS DESIGN, ITS CAPACITY, ITS QUALITY, OR WITH
RESPECT TO ANY CHARACTERISTICS OF THE EQUIPMENT.
(b) Lessee has fully inspected the Equipment which it has requested Lessor to
acquire and lease to Lessee, and the Equipment is in good condition and to
Lessee's complete satisfaction;
(c) Lessee leases the Equipment "as is" and with all faults;
(d) Lessee specifically acknowledges that the Equipment is leased to Lessee
solely for commercial or business purposes and not for personal, family,
household, or agricultural purposes;
(e) If the Equipment is not properly installed, does not operate as represented
or warranted by the supplier or manufacturer, or is unsatisfactory for any
reason, regardless of cause or consequence, Lessee's only remedy, if any,
shall be against the supplier or manufacturer of the Equipment and not
against Lessor;
(f) Provided Lessee is not in default under this Lease, Lessor assigns to
Lessee any warranties made by the supplier or the manufacturer of the
Equipment;
(g) LESSEE SHALL HAVE NO REMEDY FOR CONSEQUENTIAL OR INCIDENTAL DAMAGES AGAINST
LESSOR; and
(h) NO DEFECT, DAMAGE, OR UNFITNESS OF THE EQUIPMENT FOR ANY PURPOSE SHALL
RELIEVE LESSEE OF THE OBLIGATION TO PAY RENT OR RELIEVE LESSEE OF ANY OTHER
OBLIGATION UNDER THIS LEASE.
Initials
PMB
The parties have specifically negotiated and agreed to the foregoing paragraph.
<PAGE>
4. STATUTORY FINANCE LEASE. Lessee agrees and acknowledges that is in the
intent of both parties to this Lease that it qualify as a statutory finance
lease under Article 2A of the Uniform Commercial Code. Lessee acknowledges and
agrees that Lessee has selected both: (1) the Equipment; and (2) the supplier
from whom Lessor is to purchase the Equipment. Lessee acknowledges that Lessor
has not participated in any way in Lessee's selection of the Equipment or of the
supplier, and Lessor has not selected, manufactured, or supplied the Equipment.
LESSEE IS ADVISED THAT IT MAY HAVE RIGHTS UNDER THE CONTRACT EVIDENCING THE
LESSOR'S PURCHASE OF THE EQUIPMENT FROM THE SUPPLIER CHOSEN BY LESSEE AND THAT
LESSEE SHOULD CONTACT THE SUPPLIER OF THE EQUIPMENT FOR A DESCRIPTION OF SUCH
RIGHTS.
5. ASSIGNMENT BY LESSEE PROHIBITED. WITHOUT LESSOR'S PRIOR WRITTEN CONSENT,
LESSEE SHALL NOT ASSIGN THIS LEASE OR SUBLEASE THE EQUIPMENT OR ANY INTEREST
THEREIN OR PLEDGE OR TRANSFER THIS LEASE, OR OTHERWISE DISPOSE OF THE EQUIPMENT
COVERED HEREBY.
6. COMMENCEMENT; RENTAL PAYMENTS; INTERIM RENTALS. This Lease shall commence
upon the written acceptance hereof by Lessor and shall end upon full performance
and observance by Lessee of each and every term, condition and covenant set
forth in this Lease, any Schedules hereto and any extensions hereof. Rental
payments shall be in the amounts and frequency as set forth on the face of this
Lease or any Schedules hereto. In addition to regular rentals, Lessee shall pay
to Lessor interim rent for the use of the Equipment prior to the due date of the
first payment. Interim rent shall be in an amount equal to 1/30th of the monthly
rental, multiplied by the number of days elapsing between the date on which the
Equipment is accepted by Lessee and the commencement date of this Lease,
together with the number of days elapsing between commencement of the Lease and
the due date of the first payment. The payment of interim rent shall be due and
payable upon Lessee's receipt of invoice from Lessor. The rental period under
the Lease shall terminate following the last day of the terms stated on the face
hereof or in any Schedule hereto unless such Lease or Schedule has been extended
or otherwise modified. Lessor shall have no obligation to execute and deliver to
Lessor an Acknowledgment and Acceptance of Equipment by Lessee acknowledging its
acceptance of the Equipment within thirty (30) days after it is delivered to
Lessee, with respect to the Lease or any Schedule hereto.
THIS LEASE IS NOT CANCELABLE OR TERMINABLE BY LESSEE.
SEE REVERSE SIDE FOR ADDITIONAL TERMS AND CONDITIONS WHICH ARE A PART OF THIS
LEASE.
LESSEE UNDERSTANDS AND ACKNOWLEDGES THAT NO BROKER OR SUPPLIER, NOR ANY
SALESMAN, BROKER, OR AGENT OF ANY BROKER OR SUPPLIER, IS AN AGENT OF LESSOR, NO
BROKER OR SUPPLIER, NOR ANY SALESMAN, BROKER OR AGENT OF ANY BROKER OR SUPPLIER
IS AUTHORIZED TO WAIVE OR ALTER ANY TERM OR CONDITION OF THIS LEASE, AND NO
REPRESENTATION AS TO THE EQUIPMENT OR ANY OTHER MATTER BY THE BROKER OR
SUPPLIER, NOR ANY SALESMAN, BROKER OR AGENT OF ANY BROKER OR SUPPLIER SHALL IN
ANY WAY AFFECT LESSEE'S DUTY TO PAY THE RENTALS AND TO PERFORM LESSEE'S
OBLIGATIONS SET FORTH IN THIS LEASE.
7. CHOICE OF LAW. This Lease shall not be effective until signed by Lessor at
its principal office listed above. This Lease shall be considered to have been
made in the state of Lessor's principal place of business noted above and shall
be interpreted in accordance with the laws and regulations of the state of
Lessor's principal place of business.
Lessee agrees to jurisdiction in the state of Lessor's principal place of
business listed above in any action, suit or proceeding regarding this Lease,
and concedes that it, and each of them, transacted business in the state of
Lessor's principal place of business listed above by entering into this
Lease. In the event of any legal action with regard to this Lease or the
equipment covered hereby, Lessee agrees that venue may be laid in the County
of Lessor's principal place of business.
<TABLE>
<S> <C> <C> <C>
LESSEE: Bluestone Software, Inc. LESSOR: KING COMMERCIAL CORP.
/s/ Paul M. Baiada DATE: 9/3/97 /s/ King Commercial Corp. signature DATE: 9/5/97
- ----------------------------------------------------------------------------------------------------------------
DATE:
- -------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
LESSOR LEASE NUMBER
KING COMMERCIAL CORP.
10820 Sunset Office Dr., Suite 208 307360002
St. Louis, MO 63127
TEL (314) 965-9800 , FAX (314) 965-4321
- --------------------------------------------------------------------------------
FULL LEGAL NAME AND ADDRESS OF LESSEE SUPPLIER OF EQUIPMENT (COMPLETE ADDRESS)
Bluestone Software, Inc. Clarify, Inc.
1000 Briggs Road 2125 O'Nel Drive
Mount Laurel, NJ 08054 San Jose, CA 95131
JOINTLY AND SEVERALLY RESPONSIBLE
- --------------------------------------------------------------------------------
QUANTITY DESCRIPTION, MODEL#, CATALOG #, SERIAL # OR OTHER IDENTIFICATION
- --------------------------------------------------------------------------------
E See Exhibit "A" Attached Hereto And Made A Part Hereof.
Q
U L
I E
P A
M S
E E
N D
T
<TABLE>
<S> <C> <C> <C> <C> <C>
- ------------------ --------------------------------------------------------------------------------------------------------------
EQUIPMENT STREET ADDRESS________________________________________________________________________________________________
LOCATION
IF CITY____________ COUNTY_________ STATE____________ ZIP________
DIFFERENT
- ---------------------------------------------------------------------------------------------------------------------------------
TERMS AMOUNT OF EACH MONTHLY /X/ TERM OF LEASE NO. OF SECURITY
PAYMENT (PLUS OTHER/SPECIFY /_/ (NO. OF PAYMENTS DEPOSIT
SALES TAX, IF MONTHS) 36 $7,500.00
APPLICABLE) 36
$2,558.70
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
TERMS AND CONDITIONS OF LEASE
1. LEASE. Lessee hereby leases from Lessor, and Lessor leases to Lessee, the
personal property described above, together with any replacement parts,
additions, repairs or accessories now or hereafter incorporated or affixed to it
(hereinafter referred to as the "Equipment").
2. ACCEPTANCE OF EQUIPMENT. Lessee agrees to inspect the Equipment and to
execute an Acknowledgment and Acceptance of Equipment by Lessee notice, as
provided by Lessor, after the Equipment has been delivered and after Lessee is
satisfied that the Equipment is satisfactory in every respect. Lessee hereby
authorized Lessor to insert in this Lease serial numbers or other identifying
data with respect to the Equipment.
3. DISCLAIMER OF WARRANTS AND CLAIMS; LIMITATION OF REMEDIES. THERE ARE NO
WARRANTIES BY OR ON BEHALF OF LESSOR. Lessee acknowledges and agrees by his
signature below as follows:
(a) LESSOR MAKES NO WARRANTIES EITHER EXPRESS OR IMPLIED AS TO THE CONDITION OF
THE EQUIPMENT, ITS MERCHANTABILITY, ITS FITNESS OR SUITABILITY FOR ANY
PARTICULAR PURPOSE, ITS DESIGN, ITS CAPACITY, ITS QUALITY, OR WITH RESPECT TO
ANY CHARACTERISTICS OF THE EQUIPMENT.
(b) Lessee has fully inspected the Equipment which it has requested Lessor to
acquire and lease to Lessee, and the Equipment is in good condition and to
Lessee's complete satisfaction;
(c) Lessee leases the Equipment "as is" and with all faults;
(d) Lessee specifically acknowledges that the Equipment is leased to Lessee
solely for commercial or business purposes and not for personal, family,
household, or agricultural purposes;
(e) If the Equipment is not properly installed, does not operate as represented
or warranted by the supplier or manufacturer, or is unsatisfactory for any
reason, regardless of cause or consequence, Lessee's only remedy, if any, shall
be against the supplier or manufacturer of the Equipment and not against Lessor;
(f) Provided Lessee is not in default under this Lease, Lessor assigns to
Lessee any warranties made by the supplier or the manufacturer of the Equipment;
(g) LESSEE SHALL HAVE NO REMEDY FOR CONSEQUENTIAL OR INCIDENTAL DAMAGES AGAINST
LESSOR; and
(h) NO DEFECT, DAMAGE, OR UNFITNESS OF THE EQUIPMENT FOR ANY PURPOSE
SHALL RELIEVE LESSEE OF THE OBLIGATION TO PAY RENT OR RELIEVE LESSEE OF ANY
OTHER OBLIGATION UNDER THIS LEASE.
Initials
PMB
The parties have specifically negotiated and agreed to the foregoing paragraph.
<PAGE>
4. STATUTORY FINANCE LEASE. Lessee agrees and acknowledges that is in the
intent of both parties to this Lease that it qualify as a statutory finance
lease under Article 2A of the Uniform Commercial Code. Lessee acknowledges and
agrees that Lessee has selected both: (1) the Equipment; and (2) the supplier
from whom Lessor is to purchase the Equipment. Lessee acknowledges that Lessor
has not participated in any way in Lessee's selection of the Equipment or of the
supplier, and Lessor has not selected, manufactured, or supplied the Equipment.
LESSEE IS ADVISED THAT IT MAY HAVE RIGHTS UNDER THE CONTRACT EVIDENCING
THE LESSOR'S PURCHASE OF THE EQUIPMENT FROM THE SUPPLIER CHOSEN BY LESSEE AND
THAT LESSEE SHOULD CONTACT THE SUPPLIER OF THE EQUIPMENT FOR A DESCRIPTION OF
SUCH RIGHTS.
5. ASSIGNMENT BY LESSEE PROHIBITED. WITHOUT LESSOR'S PRIOR WRITTEN CONSENT,
LESSEE SHALL NOT ASSIGN THIS LEASE OR SUBLEASE THE EQUIPMENT OR ANY INTEREST
THEREIN OR PLEDGE OR TRANSFER THIS LEASE, OR OTHERWISE DISPOSE OF THE EQUIPMENT
COVERED HEREBY.
6. COMMENCEMENT; RENTAL PAYMENTS; INTERIM RENTALS. This Lease shall commence
upon the written acceptance hereof by Lessor and shall end upon full performance
and observance by Lessee of each and every term, condition and covenant set
forth in this Lease, any Schedules hereto and any extensions hereof. Rental
payments shall be in the amounts and frequency as set forth on the face of this
Lease or any Schedules hereto. In addition to regular rentals, Lessee shall pay
to Lessor interim rent for the use of the Equipment prior to the due date of the
first payment. Interim rent shall be in an amount equal to 1/30th of the monthly
rental, multiplied by the number of days elapsing between the date on which the
Equipment is accepted by Lessee and the commencement date of this Lease,
together with the number of days elapsing between commencement of the Lease and
the due date of the first payment. The payment of interim rent shall be due and
payable upon Lessee's receipt of invoice from Lessor. The rental period under
the Lease shall terminate following the last day of the terms stated on the face
hereof or in any Schedule hereto unless such Lease or Schedule has been extended
or otherwise modified. Lessor shall have no obligation to execute and deliver to
Lessor an Acknowledgment and Acceptance of Equipment by Lessee acknowledging its
acceptance of the Equipment within thirty (30) days after it is delivered to
Lessee, with respect to the Lease or any Schedule hereto.
THIS LEASE IS NOT CANCELABLE OR TERMINABLE BY LESSEE.
SEE REVERSE SIDE FOR ADDITIONAL TERMS AND CONDITIONS WHICH ARE A PART OF THIS
LEASE.
LESSEE UNDERSTANDS AND ACKNOWLEDGES THAT NO BROKER OR SUPPLIER, NOR ANY
SALESMAN, BROKER, OR AGENT OF ANY BROKER OR SUPPLIER, IS AN AGENT OF LESSOR, NO
BROKER OR SUPPLIER, NOR ANY SALESMAN, BROKER OR AGENT OF ANY BROKER OR SUPPLIER
IS AUTHORIZED TO WAIVE OR ALTER ANY TERM OR CONDITION OF THIS LEASE, AND NO
REPRESENTATION AS TO THE EQUIPMENT OR ANY OTHER MATTER BY THE BROKER OR
SUPPLIER, NOR ANY SALESMAN, BROKER OR AGENT OF ANY BROKER OR SUPPLIER SHALL IN
ANY WAY AFFECT LESSEE'S DUTY TO PAY THE RENTALS AND TO PERFORM LESSEE'S
OBLIGATIONS SET FORTH IN THIS LEASE.
7. CHOICE OF LAW. This Lease shall not be effective until signed by Lessor at
its principal office listed above. This Lease shall be considered to have been
made in the state of Lessor's principal place of business noted above and shall
be interpreted in accordance with the laws and regulations of the state of
Lessor's principal place of business.
Lessee agrees to jurisdiction in the state of Lessor's principal place of
business listed above in any action, suit or proceeding regarding this
Lease, and concedes that it, and each of them, transacted business in the state
of Lessor's principal place of business listed above by
entering into this Lease. In the event of any legal action with regard to this
Lease or the equipment covered hereby, Lessee agrees that venue may be laid in
the County of Lessor's principal place of business.
<TABLE>
<S> <C> <C>
LESSEE: Bluestone Software, Inc. LESSOR: KING COMMERCIAL CORP.
/s/ Paul M. Baiada DATE: 9/3/97 /s/ King Commercial Corp. signature DATE: 9/5/97
- ---------------------------------------------------------------------------------------------------------------------------------
DATE:
- ----------------------------------------------------------------------
</TABLE>
<PAGE>
THESE SECURITIES HAVE BEEN ISSUED PURSUANT TO EXEMPTIONS FOR NONPUBLIC OFFERINGS
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
AND APPLICABLE STATE SECURITIES LAWS, AND, ACCORDINGLY, THESE SECURITIES MAY NOT
BE RESOLD OR OTHERWISE DISPOSED OF UNLESS, IN THE OPINION OF COUNSEL FOR OR
SATISFACTORY TO THE ISSUER, REGISTRATION UNDER THE APPLICABLE FEDERAL OR STATE
SECURITIES LAWS IS NOT REQUIRED OR COMPLIANCE IS MADE WITH SUCH REGISTRATION
REQUIREMENTS.
Void after 5:00 pm New York City Time, April 26, 2004
WARRANT TO PURCHASE 481,434 SHARES OF COMMON STOCK
OF
BLUESTONE SOFTWARE, INC.
This is to certify that, FOR VALUE RECEIVED, BT ALEX. BROWN
INCORPORATED or its registered assigns pursuant to Section (d) hereof
("Holder"), is entitled to purchase, subject to the provisions of this
Warrant, from Bluestone Software, Inc. a Delaware corporation (the
"Company"), 481,434 fully paid, validly issued and nonassessable shares of
Common Stock, par value $0.001 per share, of the Company ("Common Stock"), at
the exercise price of $2.72 per share until 5:00 pm New York City time on
April 26, 2004. The number of shares of Common Stock to be received upon the
exercise of this Warrant and the price to be paid for each share of Common
Stock may be adjusted from time to time as hereinafter set forth. The shares
of Common Stock deliverable upon such exercise, and as adjusted from time to
time, are hereinafter sometimes referred to as "Warrant Shares," and the
exercise price of a share of Common Stock as adjusted from time to time is
hereinafter sometimes referred to as the "Exercise Price."
(a) EXERCISE OF WARRANT. The Warrant may be exercised at any time,
or from time to time, until 5:00 pm New York City time on April 26, 2004 (the
"Expiration Date"), provided, however, that if such day is a day on which
banking institutions in the State of New York are authorized by law to close,
then on the next succeeding day which shall not be such a day. The Warrant
may be exercised by presentation and surrender hereof to the Company at its
principal office, or at the office of its stock transfer agent, if any, with
the Purchase Form annexed hereto duly executed (with signature guaranteed if
required by the Company or its stock transfer agent) and accompanied by
payment of the Exercise Price for the number of Warrant Shares specified in
such form and any applicable taxes. The purchase price for any Warrant Shares
purchased pursuant to the exercise of this Warrant shall be paid in full upon
such exercise in cash or by certified or bank check or pursuant to a cashless
exercise procedure whereby the Warrant Shares issued upon exercise of this
Warrant will be sold by the Holder or Holder's agent with Holder receiving
the difference between the Exercise Price and the sale price, in cash, and
the Company receiving the Exercise Price for the Warrant Shares, in cash, or
any combination of the foregoing methods of paying the Exercise Price. As
soon as practicable after each such exercise of the Warrants, but not later
than seven (7) business days from the date of such exercise, the Company
shall issue and deliver to the Holder a certificate or certificates for the
Warrant Shares issuable upon such exercise, registered in the name of the
Holder or the Holder's designee, except in the case of a cashless exercise.
If the Warrant should be exercised in part only, the Company shall, upon
surrender of the Warrant for cancellation, execute and deliver a new Warrant
evidencing the rights of the Holder thereof to purchase the balance of the
Warrant Shares purchasable thereunder. In the event of a cash exercise, upon
receipt by the
1
<PAGE>
Company of the Warrant at its office, or by the stock transfer agent of the
Company at its office, in proper form for exercise, together with the exercise
price thereof and taxes as aforesaid in cash or certified or bank check and the
investment letter described below, the Holder shall be deemed to be the holder
of record of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of the Company shall then be
closed or that certificates representing such shares of Common Stock shall not
then be physically delivered to the Holder. In order to assure the availability
of an exemption from registration under the federal or applicable state
securities laws, the Company may condition the exercise of the Warrant upon the
Holder delivering to the Company an investment letter in the form as customarily
used by the Company from time to time in connection with the exercise of
non-registered options and warrants which are issued by the Company. It is
further understood that certificates for the Warrant Shares, if any, to be
issued upon exercise of the Warrant may contain a restrictive legend in
accordance with Section (j) hereof.
(b) RESERVATION OF SHARES. The Company shall at all times reserve for
issuance and/or delivery upon exercise of this Warrant such number of shares of
its Common Stock as shall be required for issuance and delivery upon exercise of
the Warrants. If the Common Stock is or becomes listed on any national
securities exchange or the NASDAQ National Market System, the Company shall also
list such shares on such exchange subject to notice of issuance or maintain the
listing of its Common Stock on the NASDAQ system, as the case may be.
(c) FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of the Warrant. With respect
to any fraction of a share called for upon any exercise hereof, the Company
shall pay to the Holder an amount in cash equal to such fraction multiplied by
the current market value of a share, determined as follows:
(1) If the Common Stock is listed on a national
securities exchange or admitted to unlisted trading privileges
on such exchange or listed for trading on the NASDAQ National
Market System, the current market value shall be the last
reported sale price of the Common Stock on such exchange or
system on the last business day prior to the date of exercise
of this Warrant or if no such sale is made on such day, the
average closing bid and asked prices for such day on such
exchange or system;
(2) If the Common Stock is not so listed or admitted
to unlisted trading privileges, the current market value shall
be the mean of the last reported bid and asked prices reported
by the National Quotation Bureau, Inc., on the last business
day prior to the date of the exercise of this Warrant; or
(3) If the Common Stock is not so listed or admitted
to unlisted trading privileges and bid and asked prices are
not so reported, the current market value shall be an amount,
not less than the book value thereof as at the end of the most
recent fiscal year of the Company ending prior to the date of
the exercise of the Warrant,
2
<PAGE>
determined in such reasonable manner as may be prescribed by
the Board of Directors of the Company.
(d) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. The Warrant is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company or at the office of its stock transfer
agent, if any, for other Warrants of different denominations entitling the
Holder thereof to purchase in the aggregate the same number of shares of Common
Stock purchasable hereunder. Subject to Section (j) hereof, the Holder may
transfer or assign the Warrant, in whole or in part and from time to time. Upon
surrender of this Warrant to the Company at its principal office or at the
office of its stock transfer agent, if any, with the Assignment Form annexed
hereto duly executed (with signature guaranteed, if required by the Company or
its stock transfer agent) and funds sufficient to pay any transfer tax, the
Company shall, without charge, execute and deliver a new Warrant in the name of
the assignee or assignees named in such instrument of assignment and this
Warrant shall promptly be canceled. This Warrant may be divided by or combined
with other Warrants which carry the same rights upon presentation hereof at the
principal office of the Company or at the office of its stock transfer agent, if
any, together with a written notice specifying the names and denominations in
which new Warrants are to be issued and signed by the Holder hereof. The term
"Warrant" as used herein includes any Warrants into which this Warrant my be
divided or exchanged. Upon receipt by the Company of evidence satisfactory to it
of the loss, theft, destruction or mutilation of this Warrant, and in the case
of loss, theft or destruction, of reasonable satisfactory indemnification, and
upon surrender and cancellation of this Warrant, if mutilated, the Company will
execute and deliver a new Warrant of like tenor, date and amount. Any such new
Warrant executed and delivered shall constitute a binding contractual obligation
on the part of the Company.
(e) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a shareholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in the Warrant and
are not enforceable against the Company except to the extent set forth herein.
(f) ANTI-DILUTION PROVISIONS. So long as this Warrant shall be
outstanding, the Exercise Price in effect at any time and the number and kind of
securities purchasable upon the exercise of this Warrant shall be subject to
adjustment from time to time upon the happening of certain events as follows:
(1) SPECIAL DEFINITIONS. For purposes of this
Warrant, the following definitions apply:
(a) "Options" shall mean rights, options, or
warrants to subscribe for, purchase or otherwise
acquire either Common Stock or Convertible Securities
(defined below).
3
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(b) "Convertible Securities" shall mean any
evidences of indebtedness, shares (other than Common
Stock and Series A Convertible Preferred Stock, par
value $0.001 per share ("Series A Preferred Stock"),
Series B Convertible Preferred Stock, par value
$0.001 per share ("Series B Preferred Stock"), or
Series C Convertible Preferred Stock , par value
$0.001 per share ("Series C Preferred Stock" and
collectively, with the Series A Preferred Stock and
the Series B Preferred Stock, the "Preferred Stock)
or other securities convertible into or exchangeable
for Common Stock.
(c) "Additional Shares of Common Stock"
shall mean all shares of Common Stock issued (or
deemed to be issued as provided herein) by the
Company after the date hereof, as the case may be,
other than shares of Common Stock issued or issuable:
(i) upon conversion of shares of
Preferred Stock;
(ii) to officers, directors,
employees or consultants of the Corporation pursuant
to stock options granted pursuant to the
Corporation's stock option plan on terms approved by
the Board of Directors of the Company, but not
exceeding 9,429,049 shares of Common Stock (or such
greater number approved by the Board) (net of any
repurchases of such shares or cancellations or
expirations of options), subject to adjustment for
all subdivisions and combinations;
(iii) as a dividend or distribution
on Preferred Stock;
(iv) for which adjustment to the
conversion prices for the SeriesA Preferred Stock,
the Series B Preferred Stock or the Series C
Preferred Stock is made pursuant to the Certificate
of Incorporation of the Company;
(v) upon the conversion of the
convertible term note held by Mark Baiada in the
principal amount of $500,000, subject to adjustment
for all subdivisions and combinations;
(vi) to Silicon Valley Bank pursuant
to a warrant granted to it but not exceeding 31,250
shares of Common Stock, subject to adjustment for all
subdivisions and combinations; or
(vii) upon exercise or conversion of
warrants and convertible subordinated secured notes
to be issued to investors under the Convertible
Subordinated Secured Note and Warrant Purchase
Agreement by and among the Company and the investors
listed therein, or Common Stock
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issued or issuable upon the conversion of the Series
B Preferred Stock or the Series C Preferred Stock or
other convertible securities received by the
investors upon conversion of the convertible
subordinated secured notes.
(2) NO ADJUSTMENT OF EXERCISE PRICE. Any provision
herein to the contrary notwithstanding, no adjustment in the
Exercise Price shall be made in respect of: (i) any future
issuance of Options (or upon the issuance of Common Stock upon
the exercise of such Options) to employees of the Company
under the Amended and Restated Bluestone Software, Inc. 1996
Incentive and Non-Qualified Stock Option Plan; or (ii) the
issuance of Additional Shares of Common Stock (as defined
herein) unless the consideration per share (determined
pursuant to Section (f)(5) herein) for the Additional Shares
of Common Stock issued or deemed to be issued by the Company
is less than the Exercise Price in effect on the date of, and
immediately prior to, such issue.
(3) DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON
STOCK. In the event the Company at any time or from time to
time after the date hereof shall issue any Options or
Convertible Securities or shall fix a record date for the
determination of holders of any class of securities then
entitled to receive any such Options or Convertible
Securities, then the maximum number of shares (as set forth in
the instrument relating thereto without regard to any
provisions contained therein designed to protect against
dilution) of Common Stock issuable upon the exercise of such
Options or, in the case of Convertible Securities and Options
therefor, upon the conversion or exercise of such Convertible
Securities and Options therefor, and the conversion or
exchange of such Convertible Securities, shall be deemed to be
Additional Shares of Common Stock issued as of the time of
such issue, or in case such a record date shall have been
fixed, as of the close of business on such record date,
provided that in any such case in which Additional Shares of
Common Stock are deemed to be issued:
(A) no further adjustments in the
Exercise Price shall be made upon the
subsequent issue of Convertible Securities
or shares of Common Stock upon the exercise
of such Options or conversion or exchange of
such Convertible Securities;
(B) if such Options or Convertible
Securities by their terms provide, with the
passage of time or otherwise, for any
increase or decrease in the consideration
payable to the Company, or decrease or
increase in the number of shares of Common
Stock issuable, upon the exercise,
conversion or exchange thereof, the Exercise
Price computed upon the original issue
thereof (or upon the occurrence of a record
date with respect thereto), and any
subsequent adjustments based thereon, shall,
upon any such increase or decrease becoming
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<PAGE>
effective, be recomputed to reflect such
increase or decrease insofar as it affects
such Options or the rights of conversion or
exchange under such Convertible Securities
(provided, however, that no such adjustment
of the Exercise Price shall affect Common
Stock previously issued upon the exercise of
this Warrant);
(C) upon the expiration of any such
Options or any rights of conversion or
exchange under such Convertible Securities
which shall not have been exercised, the
Exercise Price computed upon the original
issue thereof (or upon the occurrence of a
record date with respect thereto), and any
subsequent adjustments based thereon, shall,
upon such expiration, be recomputed as if:
(1) in the case of
Convertible Securities or Options for Common
Stock, the only Additional Shares of Common
Stock issued were the shares of Common
Stock, if any, actually issued upon the
exercise of such Options or the conversion
or exchange of such Convertible Securities
and the consideration received therefor was
the consideration actually received by the
Company for the issue of all such Options,
whether or not exercised, plus the
consideration actually received by the
Company upon such exercise, or for the issue
of all such Convertible Securities which
were actually converted or exchanged, plus
the additional consideration, if any,
actually received by the Company upon such
conversion or exchange; and
(2) in the case of Options
for Convertible Securities, only the
Convertible Securities, if any, actually
issued upon the exercise thereof were issued
at the time of such Options, and the
consideration received by the Company for
the Additional Shares of Common Stock deemed
to have been then issued was the
consideration actually received by the
Company for the issue of all such Options,
whether or not exercised, plus the
consideration deemed to have been received
by the Company (determined pursuant to
Section (f)(5) herein) upon the issue of the
Convertible Securities with respect to which
such Options were actually exercised;
(D) no readjustment pursuant to
clause (B) or (C) above shall have the
effect of increasing the Exercise Price to
an amount which exceeds the lower of (a) the
Exercise Price on the original adjustment
date, or (b) the Exercise Price that would
have resulted from any issuance of
Additional Shares of Common Stock between
the original adjustment date and such
readjustment date; and
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<PAGE>
(E) in the case of any Options which
expire by their terms not more than 30 days
after the date of issue thereof, no
adjustment of the Exercise Price shall be
made until the expiration or exercise of all
such Options, whereupon such adjustment
shall be made in the same manner provided in
clause (C) above.
(4) ADJUSTMENT OF EXERCISE PRICE UPON ISSUANCE OF
ADDITIONAL SHARES OF COMMON STOCK. In the event the Company,
at any time after the date herein, shall issue Additional
Shares of Common Stock (including Additional Shares of Common
Stock deemed to be issued pursuant to Section (f)(5) herein)
without consideration or for a consideration per share less
than the Exercise Price in effect on the date of and
immediately prior to such issue, then and in such event, the
Exercise Price under the Warrant shall be reduced concurrently
with such issue, to a price (calculated to the nearest cent)
determined by multiplying such Exercise Price by a fraction,
the numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to such issue plus the
number of shares of Common Stock which the aggregate
consideration received by the Company for the total number of
Additional Shares of Common Stock so issued would purchase at
such Exercise Price in effect immediately prior to such
issuance, and the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to such
issue plus the number of such Additional Shares of Common
Stock so issued. For the purpose of the above calculation, the
number of shares of Common Stock outstanding immediately prior
to such issue shall be calculated as if all Warrants had been
exercised and all Convertible Securities had been fully
converted into shares of Common Stock immediately prior to
such issuance and any outstanding warrants, options or other
rights for the purchase of shares of stock or convertible
securities had been fully exercised immediately prior to such
issuance (and the resulting securities fully converted into
shares of Common Stock if so convertible) as of such date, but
not including in such calculation any additional shares of
Common Stock issuable with respect to this Warrant,
Convertible Securities, or outstanding options, warrants or
other rights for the purchase of shares of stock or
convertible securities, solely as a result of the adjustment
of the Exercise Price (or other conversion ratios) resulting
from the issuance of the Additional Shares of Common Stock
causing the adjustment in question.
(5) DETERMINATION OF CONSIDERATION. For purposes of
this Warrant, the consideration received by the Company for
the issue of any Additional Shares of Common Stock shall be
computed as follows:
(A) Cash and Property. Such consideration shall:
(1) insofar as it consists of cash, be
computed at the aggregate amount of cash
received by the Company,
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<PAGE>
excluding amounts paid or payable for
accrued interest or accrued dividends;
(2) insofar as it consists of property
other than cash, be computed at the fair
value thereof at the time of such issue, as
determined in good faith by the Board; and
(3) in the event Additional Shares of
Common Stock are issued together with the
other shares or securities or other assets
of the Company for consideration which
covers both types of securities, be the
proportion of such consideration so
received, computed as provided in
clauses (1) and (2) above, with respect to
the Additional Shares of Common Stock as
determined in good faith by the Board.
(B) Options and Convertible Securities. The
consideration per share received by the Company
for Additional Shares of Common Stock deemed to
have been issued pursuant to Section (f)(5)
herein, relating to Options and Convertible
Securities shall be determined by dividing:
(1) the total amount, if any, received or
receivable by the Company as consideration
for the issue of such Options or
Convertible Securities, plus the minimum
aggregate amount of additional
consideration (as set forth in the
instruments relating thereto, without
regard to any provision contained therein
designed to protect against dilution)
payable to the Company upon the exercise
of such Options or the conversion or
exchange of such Convertible Securities,
or in the case of Options for Convertible
Securities, the exercise of such Options
for Convertible Securities and the
conversion or exchange of such Convertible
Securities, by
(2) the maximum number of shares of Common
Stock (as set forth in the instruments
relating thereto, without regard to any
provision contained therein designed to
protect against the dilution) issuable
upon the exercise of such Options or
conversion or exchange of such Convertible
Securities.
(6) ADJUSTMENTS TO EXERCISE PRICE FOR STOCK DIVIDENDS
AND FOR COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the
event that the Company at any time or from time to time after
the date herein shall declare or pay, without consideration,
any dividend on the Common Stock payable in Common Stock or in
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<PAGE>
any right to acquire Common Stock for no consideration, or
shall effect a subdivision of the outstanding shares of Common
Stock into a greater number of shares of Common Stock (by
stock split, reclassification or otherwise than by payment of
a dividend in Common Stock or in any right to acquire Common
Stock), or in the event the outstanding shares of Common Stock
shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock,
then the Exercise Price in effect immediately prior to such
event shall, concurrently with the effectiveness of such
event, be proportionately decreased or increased, as
appropriate. In the event that this Company shall declare or
pay, without consideration, any dividend on the Common Stock
payable in any right to acquire Common Stock for no
consideration, then the Company shall be deemed to have made a
dividend payable in Common Stock in an amount of shares equal
to the maximum number of shares issuable upon exercise of such
rights to acquire Common Stock.
(7) ADJUSTMENTS FOR RECLASSIFICATION AND
REORGANIZATION. If the Common Stock issuable upon the exercise
of the Warrants shall be changed into the same or a different
number of shares of any other class or classes of stock,
whether by capital reorganization, reclassification or
otherwise, the Exercise Price then in effect shall,
concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted so that the
Warrants shall be exercised for, in lieu of the number of
shares of Common Stock which the holders would otherwise have
been entitled to receive, a number of shares of such other
class or classes of stock equivalent to the number of shares
of Common Stock that would have been subject to receipt by the
holders upon the exercise of the Warrant immediately before
that change.
(8) No adjustment in the Exercise Price shall be
required unless such adjustment would require an increase or
decrease of at least $.05 in such price; provided, however,
that any adjustments which by reason of this subsection (f)
(8) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment required to be
made hereunder.
(9) Whenever the Exercise Price is adjusted, as
herein provided, the Company shall promptly cause a notice
setting forth the adjusted Exercise Price and adjusted number
of Warrant Shares issuable upon exercise of each Warrant to be
mailed to the Holder, at its address appearing in the Warrant
Register, and shall cause a certified copy thereof to be
mailed to its transfer agent, if any.
(10) All calculations under this Section (f) shall be
made to the nearest cent or to the nearest Warrant Share, as
the case may be.
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<PAGE>
(11) In the event that at any time, as a result of an
adjustment made pursuant to this Section (f) above, the Holder
of this Warrant thereafter shall become entitled to receive
any shares of the Company, other than Common Stock, thereafter
the number of such other shares so receivable upon exercise of
this Warrant shall be subject to adjustment from time to time
in a manner and on terms as nearly equivalent as practicable
to the provisions with respect to the Common Stock contained
in subsection (A) above.
(12) Irrespective of any adjustments in the Exercise
Price or the number or kind of Warrant Shares purchasable upon
exercise of this Warrant, Warrants theretofore or thereafter
issued may continue to express the same price and number and
kind of shares as are stated in the similar Warrants initially
issuable pursuant to this Warrant.
(g) OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be
adjusted as required by the provisions of the foregoing Section, the Company
shall forthwith file in the custody of its Secretary or an Assistant Secretary
at its principal office and with its stock transfer agent, if any, an officer's
certificate showing the adjusted Exercise Price determined as herein provided,
setting forth in reasonable detail the facts requiring such adjustment,
including a statement of the number of additional shares of Common Stock, if
any, and such other facts as shall be necessary to show the reason for and the
manner of computing such adjustment. Each such officer's certificate shall be
made available at all reasonable times for inspection by the Holder or any
holder of a Warrant executed and/or delivered pursuant to Section (a) or Section
(d), and the Company shall, forthwith after each such adjustment, mail, by
certified mail, a copy of such certificate to the Holder or any such holder.
(h) NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be
outstanding, (i) if the Company shall pay any dividend or make any distribution
upon the Common Stock, or (ii) if the Company shall offer to the holders of
Common Stock for subscription or purchase by them any shares of any class or any
other rights, or (iii) if any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger of
the Company with or into another corporation, sale, lease or transfer of all or
substantially all of the property and assets of the Company to another
corporation, or voluntary or involuntary dissolution, liquidation or winding up
of the Company shall be effected, then in any such case, the Company shall cause
to be mailed by certified mail to the Holder or any holder of a Warrant executed
and/or delivered pursuant to Section (a) or Section (d), at least 15 days prior
to the date specified in (x) or (y) below, as the case may be, a notice
containing a brief description of the proposed action and stating the date on
which (x) a record is to be taken for the purpose of such dividend, distribution
or rights, or (y) such reclassification, reorganization, consolidation, merger,
conveyance, lease, dissolution, liquidation or winding up is to take place and
the date, if any is to be fixed, as of which the holders of Common Stock or
other securities shall receive cash or other property deliverable upon such
reclassification, reorganization, consolidation, merger, conveyance,
dissolution, liquidation or winding up.
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<PAGE>
(i) SECURITIES LAW COMPLIANCE
(1) The Holder of the Warrant, by acceptance hereof,
acknowledges that the Warrant and the shares of Common Stock
to be issued upon exercise hereof or conversion thereof are
being acquired solely for the Holder's own account and not as
a nominee for any other party, and for investment, and that
the Holder will not offer, sell, transfer, assign or otherwise
dispose of this Warrant or any shares of Common Stock to be
issued upon exercise hereof or conversion thereof except under
circumstances that will not result in a violation of the Act
or any state securities laws. Upon exercise of the Warrant,
the Holder shall, if requested by the Company, confirm in
writing, in a form satisfactory to the Company, that the
shares of Common Stock so purchased are being acquired solely
for the Holder's own account and not as a nominee for any
other party, for investment, and not with a view toward
distribution or resale.
(2) If appropriate, the Warrant and any Warrants
issued upon exercise or substitution or upon assignment or
transfer pursuant to Section (a) or Section (d), as the case
may be, and all shares of Common Stock issued upon exercise
hereof or conversion thereof shall be stamped or imprinted
with legends setting forth the restrictions on transfer
arising under applicable federal and state securities laws.
(j) REGISTRATION RIGHTS UNDER THE SECURITIES ACT OF 1933
(1) Commencing on the effective date of the first
registration statement for a public offering of securities of
the Company, the Company shall advise the Holder of the
Warrant or of the Warrant Shares or any then Holder of
Warrants or Warrant Shares (such persons being collectively
referred to herein as "Holders") by prompt written notice
prior to the filing of any registration statement or
post-effective amendment thereto ("Registration Statement")
under the Securities Act of 1933, as amended (the "Act"),
covering an underwritten public offering of equity securities
of the Company solely for cash in excess of $1,000,000 (other
than a Registration Statement initiated by a holder on Form
S-3, a registration relating solely to the sale of securities
to participants in a Company stock option, stock purchase or
similar plan or a SEC Rule 145 transaction, a registration on
any form which does not include substantially the same
information as would be required to be included in a
registration statement covering the sale of the Registrable
Securities (as defined in the Second Restated Investors'
Rights Agreement dated May 25, 1999, between the Company and
the investors signatory thereto) or a registration in which
the only Common Stock being registered in Common Stock
issuable upon conversion of debt securities that are also
being registered) and shall register in any such Registration
Statement the number of Warrant Shares that the Holder shall
notify the Company it desires to register and shall include in
any such Registration Statement such
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<PAGE>
information as may be required to permit a public offering of
such Warrant Shares by the Company's underwriter(s). The
Company shall supply prospectuses and other documents as the
Holder may reasonably request in order to facilitate the
public sale or other disposition of the Warrant Shares. The
Company shall bear the entire cost and expense of a
registration of securities initiated by it under this Section
(j)(1). The Holder shall, however, bear the fees of its own
counsel and any transfer taxes and underwriting discounts or
commissions applicable to the Warrant Shares sold by it. The
Company may include other securities in any such registration
statement. The Company shall do any and all other acts and
things which may be necessary or desirable to enable the
Holder to consummate the public sale or other disposition of
the Warrant Shares, and furnish indemnification in the manner
as set forth in Paragraph (2) (a) of this Section (j), but
shall not be required to qualify as a foreign corporation to
qualify the Warrant Shares for sale under the securities laws
of any state. The Holder shall furnish information and
indemnification as set forth in Paragraph (2) (b) of this
Section (j). All decisions as to whether and when to proceed
with any Registration Statement shall be made solely by the
Company.
Notwithstanding the foregoing paragraph, in the event
that there is an underwritten offering of the Company's
securities offered pursuant to said registration statement
pursuant to the immediately preceding Paragraph, the
underwriter(s) shall have the right to refuse to permit any
Warrant Shares, or to limit the amount of Warrant Shares, to
be sold by the Holder to such underwriter(s) as such
underwriter(s) may determine in its discretion, and the Holder
shall refrain from selling such remainder of its Warrant
Shares covered by such registration statement for a period not
exceeding 180 days following the effective date and shall also
refrain at any time when notified by the Company that an
amendment or supplement to the prospectus is required. The
Company shall not be obligated to keep any Registration
Statement effective for a total of more than 120 days or until
the distribution contemplated in the Registration Statement
has been completed, whichever occurs first.
2(a) Whenever pursuant to this Section (j) a
Registration Statement relating to the Warrant Shares is filed
under the Act, amended or supplemented, the Company will
indemnify and hold harmless each Holder of Warrant Shares
covered by such Registration Statement, amendment or
supplement (such Holder being hereinafter called the
"Distributing Holder"), and each person, if any who controls
(within the meaning of the Act) the Distributing Holder,
against any losses, claims, damages or liabilities, joint or
several, to which the Distributing Holder or any such
controlling person may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue
statement of any material fact contained in any such
Registration Statement or any preliminary prospectus or final
prospectus constituting a part thereof or any amendment or
supplement thereto, or
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<PAGE>
arise out of or are based upon the omission to state therein a
material fact required to be stated therein or necessary to
make the statements therein not misleading; and will reimburse
the Distributing Holder and each such controlling person for
any legal or other expenses reasonably incurred by the
Distributing Holder and each controlling person for any legal
or other expenses reasonable incurred by the Distributing
Holder or such controlling person or underwriter in connection
with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will
not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or
omission or alleged omission made in said Registration
Statement, preliminary prospectus, final prospectus or
amendment or supplement, in reliance upon and in conformity
with written information furnished by the Distributing Holder
or underwriter for use in the preparation thereof.
(b) The Distributing Holder will indemnify and hold
harmless the Company, each of its directors, each of its
officers who have signed said Registration Statement and such
amendments and supplements thereto, each person, if any, who
controls the Company (within the meaning of the Act) and the
Company's underwriter(s) and each person, if any, who controls
such underwriter(s) (within the meaning of the Act) against
any losses, claims, damages or liabilities to which the
Company or any such director, officer, underwriter or
controlling person may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or
liabilities arise out of or are based upon any untrue or
alleged untrue statement of any material fact contained in
said Registration Statement, preliminary prospectus, final
prospectus, or amendment or supplement, or arise out of or are
based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent that such
untrue statement or alleged untrue statement or omission or
alleged omission was made in said Registration Statement,
preliminary prospectus, final prospectus or amendment or
supplement, in reliance upon and in conformity with written
information furnished by such Distributing Holder for use in
the preparation thereof; and will reimburse the Company or
underwriter or any such director, officer or controlling
person for any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such
loss, claim, damage, liability or action.
(c) Promptly after receipt by an indemnified party
under this Paragraph 2 of notice of the commencement of any
action, such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party, give the
indemnifying party notice of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified
party otherwise than under this Paragraph 2.
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(d) In case any such action is brought against any
indemnified party, and it notifies an indemnifying party of
the commencement thereof, the indemnifying party will be
entitled to participate in, and, the extent that it may wish,
jointly with any other indemnifying party similarly notified
to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying
party will not be liable to such indemnified party under this
Paragraph 2 for any legal or other expenses subsequently
incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation.
(e) The Company's agreements with respect to Warrant
Shares in this Section (j) shall continue in effect regardless
of the exercise of the Warrant; provided, however, that the
Holder's rights under this Section (j) may not be assigned
without the prior written consent of the Company.
(k) RIGHT TO CONVERT WARRANT INTO COMMON STOCK.
(1) RIGHT TO CONVERT. The Holder shall have the right
to require the Company to convert this Warrant provided in
this Section (1), into common stock (the "Net Conversion
Right"). Upon exercise of the Net Conversion Right, the
Company shall deliver to the Holder (without payment by the
Holder of any Exercise Price or of any other cash or
consideration) that number of shares of Common Stock equal to
the quotient obtained by dividing (x) the value of this
Warrant at the time the Conversion Right is exercised
(determined by subtracting the aggregate Exercise Price in
effect immediately prior to the exercise of the Conversion
Right from the aggregate fair market value of the shares of
Common Stock issuable upon exercise of this Warrant
immediately prior to the exercise of the Conversion Right) by
(y) the fair market value of one share of Common Stock
immediately prior to the exercise of the Conversion Right.
(2) METHOD OF EXERCISE. The Net Conversion Right may
be exercised by the Holder by the surrender of this Warrant at
the principal office of the Company together with a written
statement specifying that the Holder thereby intends to
exercise the Net Conversion Right. Certificates for the shares
of Common Stock issuable upon exercise of the Net Conversion
Right shall be delivered to the Holder within five (5) days
following the Company's receipt of this Warrant together with
the aforesaid written statement.
(3) DETERMINATION OF FAIR MARKET VALUE. For purposes
of this Section (f), fair market value of a share of Common
Stock as of a particular date (the "Determination Date") shall
be determined in accordance with Section (c) of this Warrant.
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<PAGE>
(l) AMENDMENTS. Neither the Warrant nor any term hereof may be changed,
waived, discharged or terminated without the prior written consent of the
Holder.
(m) NO IMPAIRMENT. The Company will not avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Company, but will at all times in good faith assist in the
carrying out of all the provisions of this Warrant and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of any
Holder.
(n) GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of Delaware.
(o) NOTICES. All notices and other communications required or permitted
hereunder shall be in writing and shall be mailed by first class mail, postage
prepaid, addressed (a) if to the Holder, to BT Alex. Incorporated, One South
Street, Baltimore, Maryland 21202, Attention: Donald D. Notman, Jr., or (b) if
to the Company, to Bluestone Software, Inc., 1000 Briggs Road, Mount Laurel, New
Jersey 08054, Attention: President, or at such other address as to the Company
shall have furnished to the Holder in writing.
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IN WITNESS WHEREOF, Bluestone Software, Inc. has caused this Warrant to be
executed by its officer thereunto duly authorized.
Dated: May 25, 1999
BLUESTONE SOFTWARE, INC.
By: /s/ S. Craig Hoke
-------------------------------------
Name: S. Craig Hoke
-----------------------------------
Title: Chief Financial Officer
----------------------------------
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Exhibit 10.38
STOCK REPURCHASE AGREEMENT
THIS AGREEMENT is made on the 18th day of April, 1997 by and between
Bluestone Software, Inc., a Delaware corporation (the "Company"), and Mel Baiada
(the "Stockholder").
BACKGROUND
WHEREAS, the Stockholder is the holder of 9,000,000 shares (the "Base
Shares") of common stock, $.001 par value per share, of the Company ("Common
Stock");
WHEREAS, certain investors (the "Investors") and the Stockholder are
acquiring an aggregate of approximately $5,250,000 worth of shares of Series A
Convertible Preferred Stock, $.001 par value per share, of the Company
("Preferred Stock") pursuant to the terms of a Series A Preferred Stock Purchase
Agreement dated the date hereof among the Company, the Investors and the
Stockholder (the "Purchase Agreement"); and
WHEREAS, it is a condition to the obligations of the Investors under
the Purchase Agreement that this Agreement be executed by the parties hereto,
and the parties are willing to execute this Agreement;
TERMS
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings contained herein, and intending to be legally bound hereby, the
parties agree as follows:
Section 1. DEFINITIONS.
As used in this Agreement, the following terms shall have the
following respective meanings:
"CONTINGENT SHARES" as of any date shall mean the number of
shares of Common Stock that are held by the Stockholder and that are designated
as "Contingent Shares" on the table set forth in Exhibit A attached hereto;
provided that no additional Contingent Shares shall become Vested Shares after
the date upon which the Stockholder shall cease to be employed by the Company
and its subsidiaries. The numbers of Shares referred to in the preceding
sentence shall be appropriately adjusted in the event of any stock split, stock
dividend or the like affecting the number of issued and outstanding shares of
Common Stock.
"VESTED SHARES" as of any date shall mean the number of shares
of Common Stock that are held by the Stockholder, that were formerly Contingent
Shares and that are designated as "Vested Shares" under the table in Exhibit A;
provided that no additional Contingent Shares shall become Vested Shares after
the date upon which the Stockholder shall
<PAGE>
cease to be employed by the Company and its subsidiaries. The numbers of Vested
Shares referred to in the preceding sentence shall be appropriately adjusted in
the event of any stock split, stock dividend or the like affecting the number of
issued and outstanding shares of Common Stock.
"OTHER SHARES" shall mean any shares of the capital stock of
the Company that are held by the Stockholder and that are neither Contingent
Shares nor Vested Shares.
Section 2. PROHIBITED TRANSFERS. The Stockholder shall not sell,
assign, transfer, pledge, hypothecate, mortgage, encumber or otherwise dispose
of any or all of the Contingent Shares without the prior written consent of
Company in its sole discretion. The preceding sentence shall not restrict any
Vested Shares or Other Shares; provided that any transfer by the Stockholder of
Vested Shares or Other Shares shall be made subject to and in accordance with
the provisions of the Purchase Agreement, a certain Voting Agreement of even
date herewith among the Company and the Investors, the Stockholder and the other
stockholders listed therein (the "Voting Agreement"), and a certain First
Refusal and Co-Sale Agreement of even date herewith among the Company, the
Investors, the Stockholder and the other parties thereto (the "First Refusal
Agreement").
Section 3. OPTION OF COMPANY UPON TERMINATION OF EMPLOYMENT.
a If the Stockholder ceases to be an employee of the Company and its
subsidiaries for any reason other than the death or disability of
the Stockholder, then the Company may, within sixty (60) days from
the date upon which the Stockholder shall so cease to be employed,
exercise the Company's option under this Section 3 to purchase
from the Stockholder all, but not less than all, of the Contingent
Shares as of the date upon which the Stockholder shall so cease to
be employed (the "Termination Date"). For the purposes of this
Agreement, "disability" shall have the meaning ascribed to such
term in the Executive Employment Agreement dated April __, 1997
between the Stockholder and the Company.
b The purchase price per share of the Contingent Shares for which
the Company exercises its option under this Section 3 (the "Option
Price") shall be the price per share that the Board of Directors
of the Company determines is the fair market value per share of
the Common Stock in connection with granting of stock options in
the Company to the employees of the Company on or about the date
hereof (such price being subject to equitable adjustment for any
stock split, stock dividend, combination of shares or the like and
based upon Common Stock).
c If the Company desires to exercise the Company's option to
purchase, then the Company shall do so by communicating in writing
the Company's election to purchase to the Stockholder, which
communication shall state the then current number of Contingent
Shares to be purchased by the Company and the aggregate
-2-
<PAGE>
Option Price and shall be given to the Stockholder in accordance
with Section 8(a) below within the 60-day period provided for in
Section 3(a). The sale of the Contingent Shares to be sold to the
Company pursuant to this Section 3 shall be made at the offices of
the Company on the 20th day following the date of the Company's
written election to purchase (or if such 20th day is not a
business day, then on the next succeeding business day). Such sale
shall be effected by the Stockholder's delivery to the Company of
a certificate or certificates evidencing the Contingent Shares to
be purchased by the Company, duly endorsed for transfer to the
Company, against payment to the Stockholder by the Company in cash
in an amount equal to (i) the Option Price, multiplied by (ii) the
number of Contingent Shares to be purchased by the Company (the
"Purchase Price").
d Any action requiring the consent or election by the Company under
this Agreement shall require the approval of a majority of the
Board of Directors of the Company.
Section 4. TERM.
a The rights of the Company under this Agreement and the correlative
obligations of the Stockholder with respect to the Company shall
terminate upon the first to occur of:
(i) the fourth (4th) anniversary of this Agreement, provided
that the Stockholder is employed by the Company or one of its subsidiaries on
such date; or
(ii) at such time as the Stockholder shall no longer be the
owner of any Contingent Shares.
Section 5. FAILURE TO DELIVER SHARES. If the Stockholder becomes
obligated to sell the Contingent Shares to the Company under this Agreement and
fails to deliver the Contingent Shares in accordance with the terms of this
Agreement, then the Company may, at the Company's option and in addition to all
other remedies the Company may have, send to the Stockholder the Purchase Price
for the Contingent Shares as is herein specified. Thereupon, the Company upon
written notice to the Stockholder (a) shall cancel on the Company's books the
certificate or certificates representing the Contingent Shares to be sold and
(b) shall issue to the Stockholder a certificate or certificates evidencing the
number of Vested Shares, if any, registered in the name of the Stockholder, and
thereupon all of the Stockholder's rights in and to such Contingent Shares shall
terminate.
Section 6. SPECIFIC ENFORCEMENT. The Stockholder expressly agrees
that the Investors and the Company will be irreparably damaged if this Agreement
is not specifically enforced. Upon a breach or threatened breach of the terms,
covenants and/or conditions of this Agreement by the Stockholder, the Investors
and the Company shall, in addition to all other remedies, each
-3-
<PAGE>
be entitled to a temporary or permanent injunction, without showing any actual
damage, and/or a decree for specific performance, in accordance with the
provisions hereof.
Section 7. ISSUANCE OF SHARE CERTIFICATES AT CLOSING; LEGEND
REQUIREMENTS; REISSUANCE OF SHARES.
a At the closing contemplated by the Purchase Agreement, the
Stockholder shall deliver to the Company for cancellation the
certificate evidencing the Base Shares, and in consideration
therefor, the Company shall issue to the Stockholder (i) a
certificate or certificates evidencing the Other Shares, and (ii)
a certificate or certificates evidencing the Contingent Shares, in
each case duly registered in the name of the Stockholder and duly
executed by the Company.
b Each certificate representing the Contingent Shares owned by the
Stockholder shall be endorsed with the following legend:
"THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN
STOCK RESTRICTION AGREEMENT BY AND AMONG THE REGISTERED HOLDER (OR
HIS PREDECESSOR IN INTEREST) AND BLUESTONE SOFTWARE, INC. A COPY
OF SUCH AGREEMENT IS ON THE FILE AT THE PRINCIPAL OFFICE OF THE
COMPANY."
c The Section 7(b) legend shall be removed by the Company: (i) with
respect to Vested Shares, at the request of the Stockholder from
time to time; and (ii) with respect to Contingent Shares, upon
termination of this Agreement in accordance with the provisions of
Section 4.
d From time to time as the Contingent Shares become Vested Shares,
the Stockholder may deliver to the Company any certificates
evidencing such Vested Shares, and the Company shall accept such
certificates for cancellation, and reissue certificates evidencing
such Vested Shares, in an amount adjusted to reflect the number of
such Vested Shares, and certificates representing the number of
Contingent Shares as of such date of issuance, in each case duly
registered in the name of the Stockholder and duly executed by the
Company.
Section 8. MISCELLANEOUS PROVISIONS.
a Unless otherwise provided, all notices, consents or other
communications required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been
duly given (i) when delivered personally, (ii) three (3) business
days after being mailed by first class mail, postage prepaid, or
(iii) one (1) business day after being sent by a reputable
overnight delivery service, postage
-4-
<PAGE>
or delivery charges prepaid, to the parties at their respective
addresses stated on the signature page of this Agreement. Notices
may also be given by prepaid telegram or facsimile and shall be
effective on the date transmitted if confirmed within 24 hours
thereafter by a signed original sent in the manner provided in the
preceding sentence. Any party may change its address for notice
and the address to which copies must be sent by giving notice of
the new addresses to the other parties in accordance with this
Section 8(a), except that any such change of address notice shall
not be effective unless and until received.
b SEVERABILITY. In the event one or more of the provisions of this
Agreement should, for any reason, be held to be invalid, illegal
or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provisions of this
Agreement, and this Agreement shall be construed and interpreted
in such manner as to be effective and valid under applicable law.
c WAIVER OR MODIFICATION. Any amendment or modification of this
Agreement shall be effective only if evidenced by a written
instrument executed by the Company and the Stockholder or their
assignees.
Section 9. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania
without regard to the principles of conflicts of law of any jurisdiction.
Section 10. ATTORNEYS' FEES. In the event of any dispute involving
the terms hereof, the prevailing parties shall be entitled to collect legal fees
and expenses from the other party to the dispute.
Section 11. FURTHER ASSURANCES. Each party agrees to act in
accordance herewith and not to take any action which is designed to avoid the
intention hereof.
Section 12. OWNERSHIP. The Stockholder represents and warrants that
he is the sole legal and beneficial owner of the shares of stock subject to this
Agreement and that no other person has any interest (other than a community
property interest) in such shares.
Section 13. ASSIGNMENT; SUCCESSORS AND ASSIGNS. This Agreement shall
not be assigned by either party hereto without the prior written consent of the
other party. This Agreement and the rights and obligations of the parties
hereunder shall inure to the benefit of, and be binding upon, their respective
successors, permitted assigns and legal representatives.
Section 14. ENTIRE AGREEMENT. This Agreement and the other
Transaction Agreements (as defined in the Purchase Agreement) constitute the
entire agreement with respect to the subject matter hereof among the parties,
and no party shall be liable or bound to any other party in any
-5-
<PAGE>
manner by any warranties, representations, or covenants except as specifically
set forth herein or therein.
Section 15. COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but which together
shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
MEL BAIADA
/s/ Mel Baiada
---------------------------------------------
(Signature)
BLUESTONE SOFTWARE, INC.
By: /s/ Mel Baiada
----------------------------------------
Name: Mel Baiada
------------------------------
Title: President
-----------------------------
-6-
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
QUARTER CALENDAR CONTINGENT VESTED
NUMBER QUARTER SHARES SHARES
- --------- ---------- ------------ --------
<S> <C> <C> <C>
1 2nd Quarter 1997 1,350,000 0
- --------------------------------------------------------------------------------
2 3rd Quarter 1997 1,265,625 84,375
- --------------------------------------------------------------------------------
3 4th Quarter 1997 1,181,250 168,750
- --------------------------------------------------------------------------------
4 1st Quarter 1998 1,096,875 253,125
- --------------------------------------------------------------------------------
5 2nd Quarter 1998 1,012,500 337,500
- --------------------------------------------------------------------------------
6 3rd Quarter 1998 928,125 421,875
- --------------------------------------------------------------------------------
7 4th Quarter 1998 843,750 506,250
- --------------------------------------------------------------------------------
8 1st Quarter 1999 759,375 590,625
- --------------------------------------------------------------------------------
9 2nd Quarter 1999 675,000 675,000
- --------------------------------------------------------------------------------
10 3rd Quarter 1999 590,625 759,375
- --------------------------------------------------------------------------------
11 4th Quarter 1999 506,250 843,750
- --------------------------------------------------------------------------------
12 1st Quarter 2000 421,875 928,125
- --------------------------------------------------------------------------------
13 2nd Quarter 2000 337,500 1,012,500
- --------------------------------------------------------------------------------
14 3rd Quarter 2000 253,125 1,096,875
- --------------------------------------------------------------------------------
15 4th Quarter 2000 168,750 1,181,250
- --------------------------------------------------------------------------------
16 1st Quarter 2001 84,375 1,265,625
- --------------------------------------------------------------------------------
17 2nd Quarter 2001 0 1,350,000
- --------------------------------------------------------------------------------
</TABLE>
-7-
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of
this registration statement.
/s/ Arthur Andersen LLP
Philadelphia, PA
August 16, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INTERNATIONAL DATA CORPORATION
Information as is will be used in the registration statement:
The increase of users and business activities on the Web has created a large and
growing market for Web application software as existing businesses and new
Web-based enterprises foster new revenue streams, significantly broaden
information deployment, enable inter-enterprise collaboration and strive to
reduce the cost of maintaining an ever-changing technology infrastructure. An
International Data Corporation report estimates that Internet-centric software,
which accounted for $4.0 billion in revenue in 1997, will approach $16.0 billion
in revenue by 2000 due to aggressive corporate adoption.
Consent:
Consent of International Data Corporation
I hereby consent to the inclusion in the registration statement of Bluestone
Software, Inc. of the information attributed to this company derived from our
reports (noted above in context) contained in such registration statement.
International Data Corporation
By: /s/ R. Paul Mason
- -------------------------------------------
Name: R. Paul Mason
Title: V.P. Information Software Research
Dated: August 19, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 DEC-31-1998
<CASH> 20,600,454 2,534,819
<SECURITIES> 0 0
<RECEIVABLES> 2,967,390 3,413,987
<ALLOWANCES> 210,314 44,473
<INVENTORY> 0 0
<CURRENT-ASSETS> 23,617,408 6,053,651
<PP&E> 2,897,821 2,734,202
<DEPRECIATION> 1,585,649 1,284,921
<TOTAL-ASSETS> 24,968,561 7,535,929
<CURRENT-LIABILITIES> 7,041,534 6,393,232
<BONDS> 0 0
40,453,151 17,414,551
654,169 875,642
<COMMON> 2,821 2,816
<OTHER-SE> (24,183,114) (18,150,312)
<TOTAL-LIABILITY-AND-EQUITY> 24,968,561 7,535,929
<SALES> 4,726,889 3,391,221
<TOTAL-REVENUES> 6,591,985 8,117,911
<CGS> 156,232 258,572
<TOTAL-COSTS> 2,622,892 5,335,001
<OTHER-EXPENSES> 10,150,300 14,308,272
<LOSS-PROVISION> 140,000 32,800
<INTEREST-EXPENSE> 1,147,676 46,520
<INCOME-PRETAX> (7,468,883) (11,604,682)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (7,468,883) (11,604,682)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,468,883) (11,604,682)
<EPS-BASIC> (2.65) (4.12)
<EPS-DILUTED> (2.65) (4.12)
</TABLE>
