<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 7, 1999
REGISTRATION NO. 333-82213
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
BLUESTONE SOFTWARE, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<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:
<TABLE>
<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. / /
------------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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
Dated September 7, 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.
<TABLE>
<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
<PAGE>
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;
2
<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
<TABLE>
<S> <C>
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 $4.17 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
<PAGE>
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............................................................. $ (1.35) $ (0.68)
--------- ---------
--------- ---------
Shares used in computing pro forma basic and diluted net loss per
share.................................................................. 8,628 10,929
</TABLE>
<TABLE>
<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>
4
<PAGE>
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.
WE HAVE HAD RECENT LOSSES AND MAY INCUR FUTURE LOSSES THAT MAY DEPRESS OUR STOCK
PRICE.
We have incurred significant net losses since 1996, including losses of
approximately $3.8 million and $11.6 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 INTERNET USAGE OR THE LACK OF ACCEPTANCE OF
COMMERCE CONDUCTED VIA THE INTERNET COULD BE DETRIMENTAL TO OUR FUTURE OPERATING
RESULTS.
Our products enhance companies' ability to transact business and conduct
operations utilizing the Internet. Therefore, our future sales and any future
profits are substantially dependent upon the widespread acceptance and use of
the Internet as an effective medium of commerce by 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.
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
5
<PAGE>
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 PRODUCTS AND IF THE MARKET FOR THESE PRODUCTS DOES
NOT CONTINUE TO GROW, OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED.
Software license revenues from our Sapphire/Web software were $3.4 million
or 42% of total revenues in 1998 and $4.7 million or 72% of total revenues in
the first six months of 1999. We expect to continue to be dependent upon the
Sapphire/Web software products in the future, and any 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.
IF THE MARKET'S ACCEPTANCE AND ADOPTION OF JAVA AND XML SERVER TECHNOLOGIES DOES
NOT CONTINUE, OUR FUTURE RESULTS MAY SUFFER.
Our Sapphire/Web product is 100% Pure JAVA. JAVA is a programming language
developed by Sun Microsystems. Therefore, the continued acceptance of our
products in the marketplace depends on JAVA's acceptance as a standard
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 INCREASING CONSOLIDATION IN OUR INDUSTRY COULD CREATE
STRONGER COMPETITORS AND HARM OUR BUSINESS.
The market for our products is intensely competitive, highly fragmented,
characterized by rapid technological change and significantly affected by new
product introductions. Recent acquisitions of several of our 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,
6
<PAGE>
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.
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 CONCENTRATED AND THE LOSS OF ONE OF OUR LARGEST CUSTOMERS
COULD CAUSE OUR REVENUES TO DROP QUICKLY AND UNEXPECTEDLY.
Our top ten customers for the year ended December 31, 1998 and the six
months ended June 30, 1999 in the aggregate accounted for approximately 39% and
66%, respectively, of our revenues. Hewlett-Packard accounted for more than 10%
of our revenues for the year ended December 31, 1998 and 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 PRODUCTS AND SERVICES IN THE FACE OF OUR INDUSTRY'S
RAPIDLY EVOLVING TECHNOLOGY, OUR FUTURE RESULTS MAY BE ADVERSELY AFFECTED.
Due to the recent emergence of the Internet and the Web as a forum for
conducting business, the market for Web application server systems in which we
participate is subject to rapid technological change, changing customer needs,
frequent new product introductions and evolving 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.
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 PUBLICLY, AND AFTER THIS OFFERING ITS MARKET PRICE MAY
FLUCTUATE WIDELY.
Prior to this offering, there has been no public market for our common
stock. The market price of our common stock could fluctuate substantially due
to:
- quarterly fluctuations in operating results;
7
<PAGE>
- 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 OPERATING RESULTS MAY ADVERSELY AFFECT THE
TRADING PRICE OF OUR COMMON STOCK.
Quarterly fluctuations in operating results may be caused by:
- changes in the growth rate of Internet usage;
- fluctuations in the demand for our products and 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.
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 EFFECTIVELY OR WE MAY NOT SUCCEED.
We are a growing company. Our ability to manage our growth will depend in
large part on our ability to generally 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.
8
<PAGE>
THE DEVELOPMENT OF INTERNATIONAL OPERATIONS WILL CAUSE US TO FACE ADDITIONAL
RISKS.
We expect to expand our international operations and international sales and
marketing efforts, initially, by opening regional sales and support offices in
Europe and 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 ONGOING SALES THROUGH A LIMITED NUMBER OF INDIRECT
CHANNELS MAY RESULT IN LOWER REVENUES.
We derive over 75% of our license revenues through a limited number of
independent software vendors, systems integrators, distributors and resellers.
Although we intend to increase our marketing and direct sales efforts, 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.
IF WE LOSE OUR KEY PERSONNEL, OR FAIL TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, THE SUCCESS AND GROWTH OF OUR BUSINESS MAY SUFFER.
A significant portion of our senior management team has been in place for a
relatively short period of time. Our success will depend to a significant extent
on their ability to gain the trust and confidence of our other 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 SALES CYCLES OF OUR SAPPHIRE/WEB PRODUCT COULD CAUSE
SIGNIFICANT FLUCTUATION IN OUR QUARTERLY RESULTS.
Our Sapphire/Web software is generally used for mission-critical or
enterprise-wide purposes and involves a significant commitment of resources by
our customers. A customer's decision to license our Sapphire/Web software
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
9
<PAGE>
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 SUCCESSFULLY OUR SAPPHIRE/WEB SOFTWARE COULD RESULT IN
DISSATISFIED CUSTOMERS AND DECREASED SALES.
Implementation of our Sapphire/Web software often involves a significant
commitment of financial and other resources by our customers. The customer's
implementation cycle can be lengthy due to the size and complexity of their
systems 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.
WE MAY REQUIRE FUTURE ADDITIONAL FUNDING TO STAY IN BUSINESS.
Over time, we may require additional financing for our operations.
Additionally, we periodically review other 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 REDUCE THE DEMAND AND UTILITY OF OUR PRODUCTS.
Concurrency restrictions can limit Internet deployment and use capacity. The
boundaries of our Sapphire/Web software 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 PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD IMPAIR OUR
ABILITY TO COMPETE EFFECTIVELY.
Our success and ability to compete are substantially dependent on our
internally developed technologies and trademarks, which we protect through a
combination of copyright, trademark and trade secret laws, 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.
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
10
<PAGE>
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 MAINTAIN THIRD PARTY LICENSES COULD HARM OUR BUSINESS.
We have in the past and may in the future, resell, under license, certain
third party software that enables our 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 PRODUCT LIABILITY CLAIMS AND OUR PRODUCTS'
REPUTATIONS MAY SUFFER.
Many of our installations involve projects that are critical to the
operations of our customers' businesses and provide benefits that may be
difficult to quantify. 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.
YEAR 2000 PROBLEMS MAY DISRUPT OUR BUSINESS.
Many currently installed computer systems and software 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;
11
<PAGE>
- 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.
OUR EXECUTIVE OFFICERS AND DIRECTORS AND THEIR AFFILIATES WILL OWN A LARGE
PERCENTAGE OF OUR VOTING STOCK AND WILL HAVE THE ABILITY TO MAKE DECISIONS THAT
COULD ADVERSELY AFFECT OUR STOCK PRICE.
Following the completion of this offering, our executive officers, directors
and their affiliates will beneficially own approximately 65% of the outstanding
shares of common stock, or 62% if the underwriters' over allotment option is
exercised in full. As a result, these stockholders will be able to control all
matters requiring stockholder approval and, thereby, our management and affairs.
Matters that 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 WILL INCUR IMMEDIATE DILUTION PER SHARE OF THE COMMON
STOCK BASED ON ITS BOOK VALUE AFTER THE OFFERING.
The anticipated initial public offering price is substantially higher than
the book value of our common stock. At the initial offering price of $12.00 per
share, the book value of the common stock after the offering will 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 DELAWARE LAW CONTAIN PROVISIONS THAT COULD DISCOURAGE
A TAKEOVER EVEN IF BENEFICIAL TO STOCKHOLDERS.
At the time we complete this offering, our charter and our bylaws, in
conjunction with Delaware law, will contain provisions that could make it more
difficult for a third party to obtain control of Bluestone even if doing so
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.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
The market price of our common stock could decline as a result of sales by
our existing stockholders or the 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
12
<PAGE>
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.
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.
13
<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>
14
<PAGE>
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.
15
<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...................... $ (1.35) $ (0.68)
--------- ---------
--------- ---------
Shares used in computing pro forma basic and
diluted net loss per share...................... 8,628 10,929
</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>
16
<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. 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
17
<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.
18
<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.
19
<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
20
<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
21
<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.
22
<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>
23
<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.
24
<PAGE>
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
25
<PAGE>
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.
26
<PAGE>
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.
27
<PAGE>
BUSINESS
OUR COMPANY
We believe 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. This
belief is based on our product performance and what we believe to be our
relative share of the fragmented market for application server software. 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., an independent research organization, 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
28
<PAGE>
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.
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, an independent research organization, 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
29
<PAGE>
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 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
30
<PAGE>
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 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/
31
<PAGE>
Developer's ability to incorporate new technology, tools and development
approaches allows increased productivity and faster deployment of Web
applications.
SAPPHIRE/DEVELOPER ENTERPRISE EDITION. Sapphire/Developer Enterprise
Edition is a bundle of software products which includes the Sapphire/Developer
Enterprise Deployment Kit and Sapphire/ Developer. Sapphire/Enterprise
Deployment Kit 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. Sapphire/Universal Business Server 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. Sapphire/Universal Business Server delivers scalability and
consistent availability to mission-critical, enterprise-class Web applications.
SAPPHIRE/APPLICATION MANAGER. Sapphire/Application Manager 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. Sapphire/Application Manager
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. Sapphire/Integration Modules provide a
solution for integrating a company's existing information assets without the
need for extensive and costly re-engineering of applications and infrastructure.
Sapphire/Integration Modules 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 Sapphire/Integration Modules 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
32
<PAGE>
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.
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.
33
<PAGE>
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
34
<PAGE>
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
35
<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/Universal Business Server 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.
36
<PAGE>
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.
37
<PAGE>
TRADEMARKS AND COPYRIGHTS
Bluestone-Registered Trademark- and Sapphire/Web-Registered Trademark- are
registered trademarks of Bluestone Software, Inc. Sapphire/ Universal Business
Server-TM-, Sapphire/Enterprise Deployment Kit-TM-, Sapphire/Application
Manager-TM-, Sapphire/Integration Modules-TM-, 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.
38
<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
39
<PAGE>
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.
40
<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
41
<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.................. 155,330 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
42
<PAGE>
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>
43
<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--Transactions in Connection with the
Spin-Off--Issuance of Series A Preferred Stock and 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.
44
<PAGE>
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 officers 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. Accordingly, options to purchase 52,650 shares of common stock
were granted in May 1999 and options to purchase 60,259 shares were 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. On August 20, 1999, we increased our authorized shares of
common stock and shares reserved under the option plan by 343,750. The following
table summarizes the option holdings of our chairman and executive officers as
of August 31, 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............................. 257,878 649,438
S. Craig Huke............................... 2,679 76,500
Robert W. Bickel............................ 171,664 52,663
John H. Capobianco.......................... 70,965 168,304
Joseph K. Krivickas......................... 6,123 156,250
Mel Baiada.................................. 12,320 --
</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
45
<PAGE>
options are 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.
The option plan provides for the grant of either incentive stock options or
non-qualified stock options, except that consultants of Bluestone who are not
also employees are not entitled to receive incentive stock options under the
option plan. Exercise prices for incentive stock options 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 incentive stock options 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 non-qualified stock options 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 incentive stock options 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 incentive stock options
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 incentive stock
options 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 non-qualified stock options.
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
46
<PAGE>
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.
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.
47
<PAGE>
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 Bluestone Consulting, Inc. in
Delaware and entered into a contribution and distribution agreement dated April
17, 1997 with Bluestone Consulting, Inc. Under the contribution and distribution
agreement, we contributed to Bluestone Consulting, Inc. those assets and
liabilities that constituted the services business in exchange for all of the
stock of Bluestone Consulting, Inc. We then distributed all of the stock of
Bluestone Consulting, Inc. to Mel Baiada. At the time of the distribution, both
Bluestone and Bluestone Consulting, Inc. were "S" corporations for federal
income tax purposes.
Our distribution of assets and liabilities was determined based upon our
internal evaluations of the relative value of the constituent entities and
discussions with third party investors that were proposing an investment in our
preferred stock about the composition and value of the separate companies after
the spin-off. We determined that the constituent entities were approximately
equal in value. Accordingly, we distributed all non-cash assets and liabilities
attributable to the services business to Bluestone Consulting, Inc. The
remaining cash and equivalent assets were divided to equalize the asset
distribution. As described below, the corporate debt outstanding prior to the
spin-off was also allocated equally.
TRANSACTIONS IN CONNECTION WITH THE SPIN-OFF
MARK BAIADA CONVERTIBLE SUBORDINATED NOTE
To achieve an equal distribution of debt between us and Bluestone
Consulting, Inc. 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. Bluestone Consulting, Inc.
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) Bluestone
Consulting, Inc.'s issuance to him of a promissory note in the principal amount
of $107,495. The promissory notes were allocated between Bluestone Consulting,
Inc. and us as part of the negotiated distribution of net assets in the
spin-off. Bluestone Consulting, the former New Jersey corporation,
48
<PAGE>
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 BLUESTONE CONSULTING, INC.
To achieve an equal distribution of debt between Bluestone Consulting, Inc.
and us as part of the spin-off, we issued a subordinated promissory note dated
April 17, 1997 to Bluestone Consulting, Inc. 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 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 Bluestone Consulting, Inc. Under this license
agreement, we granted Bluestone Consulting, Inc. 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 Bluestone Consulting,
Inc. We have the right to terminate the license agreement upon:
- certain events of default by Bluestone Consulting, Inc.; or
- a change in control of Bluestone Consulting, Inc., subject to Bluestone
Consulting, Inc.'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.
49
<PAGE>
TAX ALLOCATION AND INDEMNITY AGREEMENT
As a result of the spin-off, we, Bluestone Consulting, Inc. and Mel Baiada
needed to decide how our taxes, and the taxes of Bluestone Consulting, Inc.
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 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 Bluestone
Consulting, Inc. based on the reasonable determination of the boards of
directors Bluestone Consulting, Inc. 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 BLUESTONE CONSULTING, INC.
We are a party to a reseller agreement with Bluestone Consulting, Inc.,
dated January 1, 1998. Under the reseller agreement, Bluestone Consulting, Inc.
is a non-exclusive reseller of our products in the United States and Canada.
Bluestone Consulting, Inc. 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 BLUESTONE CONSULTING, INC.
As part of the spin-off, we entered into a sublease agreement with Bluestone
Consulting, Inc., effective as of April 30, 1997. Bluestone Consulting, Inc.
subleases approximately 7,780 square feet of our Mount Laurel facility.
Bluestone Consulting, Inc. 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 Bluestone Consulting, Inc. sublease. The rental
charges to Bluestone Consulting, Inc. were determined on a pro-rata square
footage basis at the same rate and under the same terms that we have with our
landlord. Bluestone Consulting, Inc. also pays us 19% of all taxes, common area
costs, utility costs and other services paid for by us under our lease. The
Bluestone Consulting, Inc. sublease expires when our lease expires or is
terminated for any reason, including our default under our lease.
50
<PAGE>
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 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
warrants to purchase 137,609 shares of common stock 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.
51
<PAGE>
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 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.
52
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of August 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 13,304,887 shares of common stock
outstanding prior to the offering and 17,304,887 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).................................................................. 2,813,332 21.1% 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).......................................................... 257,878 1.9% 1.5%
Enrico J. Ballezzi (5).......................................................... 87,377 * *
Robert W. Bickel (5)............................................................ 171,664 1.3% 1.0%
John H. Capobianco (5).......................................................... 70,965 * *
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)............... 11,749,416 82.7% 64.5%
</TABLE>
- ------------------------
* Represents less than 1% of the outstanding shares of Common Stock.
(1) Includes 722,466 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 63,209 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 63,362 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.
53
<PAGE>
(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 37,555 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 71,826 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 12,675 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 1,374 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.
54
<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 August 31, 1999.
(6) Mr. Kilroy intends to grant the underwriters the right to purchase 50,000
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 634,579 shares of our common stock issuable upon the exercise of
stock options which are currently exercisable and which are exercisable
within 60 days after August 31, 1999.
55
<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
56
<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
57
<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 our 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."
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Based on the number of shares outstanding on June 30, 1999, upon
completion of this offering we will have outstanding an aggregate of 17,302,473
shares of our common stock, excluding any exercises 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 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 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.
59
<PAGE>
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.
60
<PAGE>
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. 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 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
61
<PAGE>
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.
62
<PAGE>
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.
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.
63
<PAGE>
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 September , 1999.)
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' 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 3.07-9.60 6,502,145 5.35
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-$9.60 $ 10,743,909 $ 4.03
----------- ------------- ------------- -----
----------- ------------- ------------- -----
</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>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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...................... 13
Use of Proceeds................................. 13
Dividend Policy................................. 13
Capitalization.................................. 14
Dilution........................................ 15
Selected Financial Data......................... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 17
Business........................................ 28
Management...................................... 39
Certain Transactions............................ 48
Principal and Selling Stockholders.............. 53
Description of Securities....................... 56
Shares Eligible For Future Sale................. 59
Plan of Distribution............................ 61
Legal Matters................................... 63
Experts......................................... 63
Where You Can Find More Information............. 63
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................................... 300,000
Miscellaneous..................................................... 43,354
---------
Total Expenses.................................................... $ 900,000
---------
---------
</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 Amended and Restated Certificate of Incorporation of Bluestone (to be effective upon
completion of offering).
3.4 Form of Amended and Restated Bylaws of Bluestone (to be effective upon completion of offering).
3.5** Certificate of Amendment of the Third Amended and Restated Certificate of Incorporation of Bluestone
dated August 20, 1999.
3.6 Form of Certificate of Amendment of the Third Amended and Restated Certificate of Incorporation of
Bluestone.
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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
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.
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.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
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.
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+ Form of Senior Management Compensation Policy 1999.
10.40+ Form of Executive Management Compensation Policy 1999.
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).
</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
II-5
<PAGE>
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 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 7th day of September, 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 September 7, 1999
P. Melan Baiada
President and Chief
/s/ P. KEVIN KILROY Executive Officer and
- ------------------------------ Director (Principal September 7, 1999
P. Kevin Kilroy Executive Officer)
Senior Vice President Chief
/s/ S. CRAIG HUKE Financial Officer
- ------------------------------ (Principal Financial and September 7, 1999
S. Craig Huke Accounting Officer)
*/s/ GREGORY M. CASE Director
- ------------------------------ September 7, 1999
Gregory M. Case
*/s/ WILLIAM C. HULLEY Director
- ------------------------------ September 7, 1999
William C. Hulley
*/s/ ANTON SIMUNOVIC Director
- ------------------------------ September 7, 1999
Anton Simunovic
*/s/ ANDREW J. FILIPOWSKI Director
- ------------------------------ September 7, 1999
Andrew J. Filipowski
*/s/ PAUL E. BLONDIN Director
- ------------------------------ September 7, 1999
Paul E. Blondin
</TABLE>
/s/ P. KEVIN KILROY
------------------------------
P. Kevin Kilroy
*By: ATTORNEY-IN-FACT
II-7
<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>
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 Amended and Restated Certificate of Incorporation of Bluestone (to be effective upon
completion of offering).
3.4 Form of Amended and Restated Bylaws of Bluestone (to be effective upon completion of offering).
3.5** Certificate of Amendment of the Third Amended and Restated Certificate of Incorporation dated August
20, 1999.
3.6 Form of Certificate of Amendment of the Third Amended and Restated Certificate of Incorporation of
Bluestone.
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
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.
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>
<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+ Form of Senior Management Compensation Policy 1999.
10.40+ Form of Executive Management Compensation Policy 1999.
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).
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
+ Management contract or compensatory plan.
<PAGE>
Exhibit 1.1
4,600,000 Shares
Bluestone Software, Inc.
Common Stock
($.001 Par Value)
UNDERWRITING AGREEMENT
, 1999
------------
Deutsche Bank Securities Inc.
SoundView Technology Group, Inc.
C.E. Unterberg, Towbin
Legg Mason Wood Walker, Inc.
As Representatives of the Several Underwriters
c/o Deutsche Bank Securities Inc.
One South Street
Baltimore, MD 21202
Gentlemen:
Bluestone Software, Inc. a Delaware corporation (the
"Company"), proposes to sell to the several underwriters (the "Underwriters")
named in Schedule I hereto for whom you are acting as representatives (the
"Representatives") an aggregate of 4,000,000 shares of the Company's Common
Stock, $ .001 par value (the "Firm Shares"). The respective amounts of the Firm
Shares to be so purchased by the several Underwriters are set forth opposite
their names in Schedule I hereto. The Company and certain shareholders of the
Company (the "Selling Shareholders") also propose to sell at the Underwriters'
option, an aggregate of up to 600,000 additional shares of the Company's Common
Stock (the "Option Shares") as set forth below. The maximum number of Option
Shares to be sold by the Company and the Selling Shareholders is set forth
opposite their respective names in Schedule II hereto. The Company and the
Selling Shareholders are sometimes referred to herein collectively as the
"Sellers."
As the Representatives, you have advised the Company and the
Selling Shareholders (a) that you are authorized to enter into this Agreement on
behalf of the several Underwriters, and (b) that the several Underwriters are
willing, acting severally and not jointly, to purchase the number of Firm Shares
set forth opposite their respective names in Schedule I, plus their pro rata
portion of the Option Shares, should you elect to exercise the over-allotment
option in whole or in part for the accounts of the several Underwriters. The
Firm Shares and the Option Shares (to the extent the aforementioned option is
exercised) are herein collectively called the "Shares."
<PAGE>
In consideration of the mutual agreements contained herein and
of the interests of the parties in the transactions contemplated hereby, the
parties hereto agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each of the
Underwriters as follows:
(a) A registration statement on Form S-1 (File
No.333-82213) with respect to the Shares has been prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended (the
"Act"), and the Rules and Regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder and has been
filed with the Commission. The Company has complied with the conditions for the
use of Form S-1. Copies of such registration statement, including any amendments
thereto, the preliminary prospectuses (meeting the requirements of the Rules and
Regulations) contained therein and the exhibits, financial statements and
schedules, as finally amended and revised, have heretofore been delivered by the
Company to you. Such registration statement, together with any registration
statement filed by the Company pursuant to Rule 462(b) of the Act, herein
referred to as the "Registration Statement," which shall be deemed to include
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, has become effective under the Act and no
post-effective amendment to the Registration Statement has been filed as of the
date of this Agreement. "Prospectus" means (a) the form of prospectus first
filed with the Commission pursuant to Rule 424(b) or (b) the last preliminary
prospectus included in the Registration Statement filed prior to the time it
becomes effective or filed pursuant to Rule 424(a) under the Act that is
delivered by the Company to the Underwriters for delivery to purchasers of the
Shares, together with the term sheet or abbreviated term sheet filed with the
Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus
included in the Registration Statement prior to the time it becomes effective is
herein referred to as a "Preliminary Prospectus. "Any reference herein to the
Registration Statement, any Preliminary Prospectus or to the Prospectus shall be
deemed to refer to and include any documents incorporated by reference therein,
and, in the case of any reference herein to any Prospectus, also shall be deemed
to include any documents incorporated by reference therein, and any supplements
or amendments thereto, filed with the Commission after the date of filing of the
Prospectus under Rules 424(b) or 430A, and prior to the termination of the
offering of the Shares by the Underwriters.
(b) The Company has been duly organized and is
validly existing as a corporation in good standing under the laws of the State
of Delaware, with corporate power and authority to own or lease its properties
and conduct its business as described in the Registration Statement. The Company
has no direct or indirect subsidiaries and is duly qualified to transact
business in all jurisdictions in which the conduct of its business requires such
qualification, except where the failure to so qualify or be in good standing
would not result in a material adverse effect on the earnings, business,
management, properties, assets, rights, operations,
-2-
<PAGE>
condition (financial or otherwise), or prospects of the Company, or a material
adverse effect on the ability of the Company to consummate the transactions
contemplated hereby (a "Material Adverse Effect").
(c) The outstanding shares of Common Stock of the
Company, including all shares to be sold by the Selling Shareholders, have been
duly authorized and validly issued and are fully paid and non-assessable; the
portion of the Shares to be issued and sold by the Company have been duly
authorized and, when issued and paid for as contemplated herein, will be validly
issued, fully paid and non-assessable; and no preemptive rights of stockholders
exist with respect to any of the Shares or the issue and sale thereof. Neither
the filing of the Registration Statement nor the offering or sale of the Shares
as contemplated by this Agreement gives rise to any rights, other than those
which have been waived or satisfied, for or relating to the registration of any
shares of Common Stock, except as set forth in the Registration Statement.
(d) The information set forth under the caption
"Capitalization" in the Prospectus is true and correct in all material respects.
All of the Shares conform to the description thereof contained in the
Registration Statement in all material respects. The form of certificates for
the Shares conforms to the requirements of the corporate law of the jurisdiction
of the Company's incorporation. Except as described in or contemplated by the
Registration Statement, there are no outstanding securities of the Company
convertible or exchangeable into or evidencing the right to purchase or
subscribe for any shares of capital stock of the Company and there are no
outstanding or authorized options, warrants or rights of any character
obligating the Company to issue any shares of its capital stock or any
securities convertible or exchangeable into or evidnecing the right to
purchase or subscribe for any shares of such stock.
(e) The Commission has not issued an order preventing
or suspending the use of any Prospectus relating to the proposed offering of the
Shares nor instituted proceedings for that purpose. The Registration Statement
contains, and the Prospectus and any amendments or supplements thereto will
contain, all statements which are required to be stated therein by, and will
conform to, the requirements of the Act and the Rules and Regulations in all
material respects. The Registration Statement and any amendment thereto do not
contain, and will not contain, any untrue statement of a material fact and do
not omit, and will not omit, to state any material fact required to be stated
therein or necessary to make the statements therein not misleading. The
Prospectus and any amendments and supplements thereto do not contain, and will
not contain, any untrue statement of material fact; and do not omit, and will
not omit, to state any material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading; PROVIDED, HOWEVER, that the Company makes no
representations or warranties as to information contained in or omitted from the
Registration Statement or the Prospectus, or any such amendment or supplement,
in reliance upon, and in conformity with, written information furnished to the
Company by or on behalf of any Underwriter through the Representatives,
specifically for use in the preparation thereof.
(f) The financial statements of the Company, together
with related notes and schedules as set forth in the Registration Statement,
present fairly the financial position and the results of operations and cash
flows of the Company, at the indicated dates and for the indicated periods. Such
financial statements and related schedules have been prepared in accordance with
generally accepted principles of accounting, consistently applied throughout the
-3-
<PAGE>
periods involved, except as disclosed therein, and all adjustments necessary for
a fair presentation of results for such periods have been made. The summary
financial and statistical data included in the Registration Statement presents
fairly the information shown therein and such data has been compiled on a basis
consistent with the financial statements presented therein and the books and
records of the Company. The pro forma financial information included in the
Registration Statement and the Prospectus present fairly the information shown
therein, have been prepared in accordance with the Commission's rules and
guidelines with respect to pro forma financial statements, have been properly
compiled on the pro forma bases described therein, and, in the opinion of the
Company, the assumptions used in the preparation thereof are reasonable and
the adjustments used therein are appropriate to give effect to the
transactions or circumstances referred to therein.
(g) Arthur Andersen LLP, who have certified certain
of the financial statements filed with the Commission as part of the
Registration Statement, are independent public accountants as required by the
Act and the Rules and Regulations.
(h) There is no action, suit, claim investigation or
proceeding pending or, to the knowledge of the Company, threatened against the
Company before any court, administrative agency, self-regulatory body or
otherwise which if determined adversely to the Company might result in any
material adverse change in the earnings, business, management, properties,
assets, rights, operations, or condition (financial or otherwise) of the Company
or prevent the consummation of the transactions contemplated hereby, except as
set forth in the Registration Statement.
(i) The Company has good and valid title to all of
the properties and assets reflected in the financial statements (or as described
in the Registration Statement) hereinabove described, subject to no lien,
mortgage, pledge, charge or encumbrance of any kind except those reflected in
such financial statements and the related notes thereto (or as described in the
Registration Statement) or which are not material in amount. The Company
occupies its leased properties under valid and binding leases conforming in all
material respects to the description thereof set forth in the Registration
Statement.
(j) The Company has filed all federal, State, local
and foreign income tax returns which have been required to be filed or timely
filed for extension of the filing of such returns and have paid all taxes
indicated by said returns and all assessments received by them to the extent
that such taxes have become due. All tax liabilities have been adequately
provided for in the financial statements of the Company, and the Company does
not know of any actual or proposed additional material tax assessments relating
to any of its historical periods.
(k) Since the respective dates as of which
information is given in the Registration Statement, as it may be amended or
supplemented, there has not been any material adverse change or any development
involving a prospective material adverse change in or affecting the earnings,
business, management, properties, assets, rights, operations, or condition
(financial or otherwise), of the Company, whether or not occurring in the
ordinary course of business, and there has not been any material transaction
entered into or any material transaction
-4-
<PAGE>
that is probable of being entered into by the Company other than transactions in
the ordinary course of business and changes and transactions described in the
Registration Statement, as it may be amended or supplemented. The Company has no
material contingent obligations which are not disclosed in the Company's
financial statements which are included in the Registration Statement.
(l) The Company is not or with the giving of notice
or lapse of time or both, will not be, in violation of or in default under its
Charter or By-Laws or under any agreement, lease, contract, indenture or other
instrument or obligation to which it is a party or by which it, or any of its
properties, is bound and which default would have a Material Adverse Effect upon
the condition (financial or otherwise) of the Company or the business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company. The execution and delivery of this
Agreement and the consummation of the transactions herein contemplated and the
fulfillment of the terms hereof will not conflict with or result in a material
breach of any of the terms or provisions of or constitute a material default
under, any indenture, mortgage, deed of trust or other agreement or instrument
to which the Company is a party, or of the Charter or By-Laws of the Company or
any order, rule or regulation applicable to the Company of any court or of any
regulatory body or administrative agency or other governmental body having
jurisdiction.
(m) Each approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory, administrative or
other governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and the consummation of the transactions herein
contemplated (except such additional steps as may be required by the Commission,
the National Association of Securities Dealers, Inc. (the "NASD") or such
additional steps as may be necessary to qualify the Shares for public offering
by the Underwriters under state securities or Blue Sky laws) has been obtained
or made and is in full force and effect.
(n) The Company holds all material approvals,
licenses, certificates and permits from governmental authorities or
self-regulatory body which are necessary to the conduct of its businesses; and,
to the Company's knowledge, the Company has not infringed any patents, patent
rights, trade names, trademarks or copyrights, which infringement is material to
the business of the Company. The Company knows of no material infringement by
others of patents, patent rights, trade names, trademarks or copyrights owned by
or licensed to the Company.
(o) Neither the Company, nor to the Company's
knowledge, any of its affiliates, has taken or may take, directly or indirectly,
any action designed to cause or result in, or which has constituted or which
might reasonably be expected to constitute, the stabilization or manipulation of
the price of the shares of Common Stock to facilitate the sale or resale of the
Shares. The Company acknowledges that the Underwriters may engage in passive
market
-5-
<PAGE>
making transactions in the Shares on The NASDAQ Stock Market in accordance with
Regulation M under the Exchange Act.
(p) The Company is not an "investment company" within
the meaning of such term under the Investment Company Act of 1940 and the rules
and regulations of the Commission thereunder.
(q) The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(r) The Company carries, or is covered by, insurance
in such amounts and covering such risks as is adequate for the conduct of their
respective businesses and the value of their respective properties and as is
customary for companies engaged in similar industries.
(s) The Company is in compliance in all material
respects with all presently applicable provisions of the Employee Retirement
Income Security Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for
which the Company would have any liability; the Company has not incurred and
does not expect to incur liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or
4971 of the Internal Revenue Code of 1986, as amended, including the regulations
and published interpretations thereunder (the "Code"); and each "pension plan"
for which the Company would have any liability that is intended to be qualified
under Section 401(a) of the Code is so qualified in all material respects and,
to the Company's knowledge, nothing has occurred, whether by action or by
failure to act, which would cause the loss of such qualification.
(t) No labor dispute with the employees of the
Company exists or, to the knowledge of the Company, is imminent, and the Company
is not aware of any existing or imminent labor disturbance by the employees of
any of its principal suppliers, customers or vendors, which, in any case, may
reasonably be expected to result in a Material Adverse Effect.
(u) There are no contracts or documents which are
required to be described in the Registration Statement or the Prospectus or to
be filed as exhibits thereto which have not been so described and filed as
required.
-6-
<PAGE>
(v) Except as disclosed in the Prospectus, there has
been no storage, disposal, generation, manufacture, refinement, transportation,
handling or treatment of toxic wastes, hazardous waste or hazardous substances
(collectively, "Hazardous Materials") by the Company (or, to the knowledge of
the Company, any of the Company's predecessors in interest) at, upon or from any
of the property now owned or leased by the Company in violation of any
applicable law, ordinance, rule, regulation, order, judgment, decree or permit
or which would require remedial action under any applicable law, ordinance,
rule, regulation, order, judgment, decree or permit, except for any violation or
remedial action which would not have, or could not be reasonably likely to have,
singly or in the aggregate with all such violations and remedial actions, a
Material Adverse Effect; there has been no material spill, discharge, leak,
emission, injection, escape, dumping or release of any kind onto such property
or into the environment surrounding such property of any Hazardous Materials due
to or caused by the Company (or, to the knowledge of the Company, any of the
Company's predecessors in interest), except for any such spill, discharge, leak,
emission, injection, escape, dumping or release which would not have or would
not be reasonably likely to have, singly or in the aggregate with all other such
spills, discharges, leaks, emissions, injections, escapes, dumpings and
releases, a Material Adverse Effect. The terms "hazardous wastes," "toxic
wastes" and "hazardous substances" shall have the meanings specified in any
applicable local, State or Federal laws or regulations with respect to
environmental protection. The Company is in compliance with any and all
applicable federal, state and local laws and regulations relating to the
protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants except where the failure to so
comply would not have a Material Adverse Effect.
(w) Except for Anton Simunovic of General Electric
Capital Corporation, to the Company's knowledge, there are no affiliations or
associations between any member of the NASD and any of the Company's officers,
directors or 5% or greater security holders.
(x) Other than as disclosed in the Prospectus, there
are no contracts, agreements or understandings between the Company and any
person granting such person the right (other than rights which have been waived
or satisfied) to require the Company to file a registration statement under the
Act with respect to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in the securities
registered pursuant to the Registration Statement or in any securities being
registered pursuant to any other registration statement filed by the Company
under the Act.
(y) The Company has not been advised, and has no
reason to believe, that it is not conducting business in compliance with all
applicable laws, rules and regulations, of the jurisdictions in which it is
conducting business including; without limitation, all applicable local, state
and Federal laws and regulations, except where the failure to so comply would
not have a Material Adverse Effect.
-7-
<PAGE>
2. REPRESENTATIONS AND WARRANTIES OF THE SELLING
SHAREHOLDERS.
Each of the Selling Shareholders severally represents and
warrants as follows:
(a) Such Selling Shareholder now has and at the
Option Closing Date (as such dates is hereinafter defined) will have good and
valid title to the Option Shares to be sold by such Selling Shareholder, free
and clear of any liens, encumbrances, equities and claims, and full right, power
and authority to effect the sale and delivery of such Option Shares; and upon
the delivery of, against payment for, such Option Shares pursuant to this
Agreement, the Underwriters will acquire good and valid title thereto, free and
clear of any liens, encumbrances, equities and claims.
(b) Such Selling Shareholder has full right, power
and authority to execute and deliver this Agreement, the Power of Attorney, and
the Custodian Agreement referred to below and to perform its obligations under
such Agreements. The execution and delivery of this Agreement and the
consummation by such Selling Shareholder of the transactions herein contemplated
and the fulfillment by such Selling Shareholder of the terms hereof will not
require any consent, approval, authorization, or other order of any court,
regulatory body, administrative agency or other governmental body (except as may
be required under the Act, state securities laws or Blue Sky laws) and will not
result in a breach of any of the terms and provisions of, or constitute a
default under, organizational documents of such Selling Shareholder, if not an
individual or any indenture, mortgage, deed of trust or other agreement or
instrument to which such Selling Shareholder is a party, or of any order, rule
or regulation applicable to such Selling Shareholder of any court or of any
regulatory body or administrative agency or other governmental body having
jurisdiction.
(c) Such Selling Shareholder has not taken and will
not take, directly or indirectly, any action designed to, or which has
constituted, or which might reasonably be expected to cause or result in the
stabilization or manipulation of the price of the Common Stock of the Company
and, other than as permitted by the Act, the Selling Shareholder will not
distribute any prospectus or other offering material in connection with the
offering of the Shares.
(d) Without having undertaken to determine
independently the accuracy or completeness of either the representations and
warranties of the Company contained herein or the information contained in the
Registration Statement, such Selling Shareholder has no reason to believe that
the representations and warranties of the Company contained in Section 1 are not
true and correct, is familiar with the Registration Statement and has no
knowledge of any material fact, condition or information not disclosed in the
Registration Statement which has adversely affected or may adversely affect the
business of the Company; and the sale of the Option Shares by such Selling
Shareholder pursuant hereto is not prompted by any information concerning the
Company which is not set forth in the Registration Statement or the documents
incorporated by reference therein. The information pertaining to such Selling
Shareholder under
-8-
<PAGE>
the caption "Principal and Selling Stockholders" in the Prospectus is complete
and accurate in all material respects.
3. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES.
(a) On the basis of the representations, warranties
and covenants herein contained, and subject to the conditions herein set forth,
the Company agrees to sell to the Underwriters and each Underwriter agrees,
severally and not jointly, to purchase, at a price of $____ per share, the
number of Firm Shares set forth opposite the name of each Underwriter in
Schedule I hereof, subject to adjustments in accordance with Section 11 hereof.
(b) Payment for the Firm Shares to be sold hereunder
is to be in certified or official bank check or other next day funds payable to
the order of an account designated by the Company for the Shares to be sold by
it against delivery of certificates therefor to the Representatives for the
several accounts of the Underwriters. Such payment and delivery are to be made
to the order of the Company at the offices of Willkie Farr & Gallagher, 787
Seventh Avenue, New York, NY at 10:00 a.m., New York City time, on the third
business day after the date of this Agreement or at such other time and date not
later than five business days thereafter as you and the Company shall agree
upon, such time and date being herein referred to as the "Closing Date." (As
used herein, "business day" means a day on which the New York Stock Exchange is
open for trading and on which banks in New York are open for business and are
not permitted by law or executive order to be closed.) The certificates for the
Firm Shares will be delivered in such denominations and in such registrations as
the Representatives request in writing not later than the second full business
day prior to the Closing Date, and will be made available for inspection by the
Representatives at least one business day prior to the Closing Date.
(c) In addition, on the basis of the representations
and warranties herein contained and subject to the term and conditions herein
set forth, the Company and the Selling Shareholders hereby grant an option to
the several Underwriters to purchase the Option Shares at the price per share as
set forth in the first paragraph of this Section 3. The option granted hereby
may be exercised in whole or in part by giving written notice (i) at any time
before the Closing Date and (ii) from time to time thereafter within 30 days
after the date of this Agreement, by you, as Representatives of the several
Underwriters, to the Company, the Attorney-in-Fact and the Custodian setting
forth the number of Option Shares as to which the several Underwriters are
exercising the option, the names and denominations in which the Option Shares
are to be registered and the time and date at which such certificates are to be
delivered. If the option granted hereby is exercised in part, the respective
number of Option Shares to be sold by the Company and each of the Selling
Shareholders listed in Schedule II hereto shall be determined on a pro rata
basis in accordance with the percentages set forth opposite their names on
Schedule II hereto, adjusted by you in such manner as to avoid fractional
shares. The time and date at which certificates for Option Shares are to be
delivered shall be determined by the Representatives but shall not be earlier
than three nor later than 10 full business days after the
-9-
<PAGE>
exercise of such option, nor in any event prior to the Closing Date (such time
and date being herein referred to as the "Option Closing Date"). If the date of
exercise of the option is three or more days before the Closing Date, the notice
of exercise shall set the Closing Date as the Option Closing Date. The number of
Option Shares to be purchased by each Underwriter shall be in the same
proportion to the total number of Option Shares being purchased as the number of
Firm Shares being purchased by such Underwriter bears to the total number of
Firm Shares purchased, adjusted by you in such manner as to avoid fractional
shares. The option with respect to the Option Shares granted hereunder may be
exercised only to cover overallotments in the sale of the Firm Shares by the
Underwriters. You, as Representatives of the several Underwriters, may cancel
such option at any time prior to its expiration by giving written notice of such
cancellation to the Company and the Attorney-in-Fact. To the extent, if any,
that the option is exercised, payment for the Option Shares shall be made on the
Option Closing Date is to be in certified or official bank check or other next
day funds payable to the order of "Stock Trans, Inc. as Custodian" for the
shares to be sold by the Selling Shareholders, in each case against delivery of
certificates therefor at the offices of Willkie Farr & Gallagher.
(d) If on the Option Closing Date any Selling
Shareholder fails to sell the Option Shares which such Selling Shareholder has
agreed to sell on such date as set forth in SCHEDULE II hereto, the Company
agrees that it will sell or arrange for the sale of that number of shares of
Common Stock to the Underwriters which represents the Option Shares which such
Selling Shareholder has failed to so sell, as set forth in Schedule II hereto,
or such lesser number as may be requested by the Representatives.
(e) Certificates in negotiable form for the total
number of the Shares to be sold hereunder by the Selling Shareholders have been
placed in custody with Stock Trans, Inc. as custodian (the "Custodian") pursuant
to the Custodian Agreement executed by each Selling Shareholder for delivery of
any Option Shares to be sold hereunder by the Selling Shareholders. Each of the
Selling Shareholders specifically agrees that any Option Shares represented by
the certificates held in custody for the Selling Shareholders under the
Custodian Agreement are subject to the interests of the Underwriters hereunder,
that the arrangements made by the Selling Shareholders for such custody are to
that extent irrevocable, and that the obligations of the Selling Shareholders
hereunder shall not be terminable by any act or deed of the Selling Shareholders
(or by any other person, firm or corporation including the Company, the
Custodian or the Underwriters) or by operation of law (including the death of an
individual Selling Shareholder or the dissolution of a corporate Selling
Shareholder) or by the occurrence of any other event or events, except as set
forth in the Custodian Agreement. If any such event should occur prior to the
delivery to the Underwriters of the Option Shares hereunder, certificates for
the Option Shares shall be delivered by the Custodian in accordance with the
terms and conditions of this Agreement as if such event has not occurred. The
Custodian is authorized to receive and acknowledge receipt of the proceeds of
sale of the Shares held by it against delivery of such Shares.
-10-
<PAGE>
4. OFFERING BY THE UNDERWRITERS.
It is understood that the several Underwriters are to make a
public offering of the Firm Shares as soon as the Representatives deem it
advisable to do so. The Firm Shares are to be initially offered to the public at
the initial public offering price set forth in the Prospectus. The
Representatives may from time to time thereafter change the public offering
price and other selling terms. To the extent, if at all, that any Option Shares
are purchased pursuant to Section 3 hereof, the Underwriters will offer them to
the public on the foregoing terms.
It is further understood that you will act as the
Representatives for the Underwriters in the offering and sale of the Shares in
accordance with a Master Agreement Among Underwriters entered into by you and
the several other Underwriters.
5. COVENANTS OF THE COMPANY.
The Company covenants and agrees with the several Underwriters
that:
(a) The Company will (i) use its best efforts to
cause the Registration Statement to become effective or, if the procedure in
Rule 430A of the Rules and Regulations is followed, to prepare and timely file
with the Commission under Rule 424(b) of the Rules and Regulations a Prospectus
in a form approved by the Representatives containing information previously
omitted at the time of effectiveness of the Registration Statement in reliance
on Rule 430A of the Rules and Regulations, (ii) not file any amendment to the
Registration Statement or supplement to the Prospectus (or document incorporated
by reference therein) of which the Representatives shall not previously have
been advised and furnished with a copy or to which the Representatives shall
have reasonably objected in writing or which is not in compliance with the Rules
and Regulations and (iii) file on a timely basis all reports and any definitive
proxy or information statements required to be filed by the Company with the
Commission subsequent to the date of the Prospectus and prior to the termination
of the offering of the Shares by the Underwriters.
(b) The Company will advise the Representatives
promptly (i) when the Registration Statement or any post-effective amendment
thereto shall have become effective, (ii) of receipt of any comments from the
Commission, (iii) of any request of the Commission for amendment of the
Registration Statement or for supplement to the Prospectus or for any additional
information and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the use of the
Prospectus or of the institution of any proceedings for that purpose. The
Company will use its best efforts to prevent the issuance of any such stop order
preventing or suspending the use of the Prospectus and to obtain as soon as
possible the lifting thereof, if issued.
(c) The Company will cooperate with the
Representatives in endeavoring to qualify the Shares for sale under the
securities laws of such jurisdictions as the
-11-
<PAGE>
Representatives may reasonably have designated in writing and will make such
applications, file such documents, and furnish such information as may be
reasonably required for that purpose, provided the Company shall not be required
to qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction where it is not now so qualified or required to file
such a consent. The Company will, from time to time, prepare and file such
statements, reports, and other documents, as are or may be required to continue
such qualifications in effect for so long a period as the Representatives may
reasonably request for distribution of the Shares.
(d) The Company will deliver to, or upon the order
of, the Representatives, from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company will
deliver to, or upon the order of, the Representatives during the period when
delivery of a Prospectus is required under the Act, as many copies of the
Prospectus in final form or as thereafter amended or supplemented, as the
Representatives may reasonably request. The Company will deliver to the
Representatives at or before the Closing Date, four signed copies of the
Registration Statement and all amendments thereto including all exhibits filed
therewith, and will deliver to the Representatives such number of copies of the
Registration Statement (including such number of copies of the exhibits filed
therewith that may reasonably be requested), including documents incorporated by
reference therein, if any, and of all amendments thereto, as the Representatives
may reasonably request.
(e) The Company will comply with the Act and the
Rules and Regulations, and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations of the Commission thereunder, so
as to permit the completion of the distribution of the Shares as contemplated in
this Agreement and the Prospectus. If during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, any event shall
occur as a result of which, in the judgment of the Company or in the reasonable
opinion of the Representatives, it becomes necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances existing at the time the Prospectus is delivered to a purchaser,
not misleading, or, if it is necessary at any time to amend or supplement the
Prospectus to comply with any law, the Company promptly will either (i) prepare
and file with the Commission an appropriate amendment to the Registration
Statement or supplement to the Prospectus or (ii) prepare and file with the
Commission an appropriate filing under the Exchange Act which shall be
incorporated by reference in the Prospectus so that the Prospectus as so amended
or supplemented will not, in the light of the circumstances when it is so
delivered, be misleading, or so that the Prospectus will comply with the law.
(f) The Company will make generally available to its
security holders, as soon as it is practicable to do so, but in any event not
later than 15 months after the effective date of the Registration Statement, an
earnings statement (which need not be audited) in reasonable detail, covering a
period of at least 12 consecutive months beginning after the effective date of
the Registration Statement, which earnings statement shall satisfy the
requirements of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations and will advise you in writing when such statement has been so made
available.
-12-
<PAGE>
(g) Prior to the Closing Date, the Company will
furnish to the Representatives, as soon as they have been prepared by or are
available to the Company, a copy of any unaudited interim financial statements
of the Company for any period subsequent to the period covered by the most
recent financial statements appearing in the Registration Statement and the
Prospectus.
(h) The Company will, for a period of five years from
the Closing Date, deliver to the Representatives copies of annual reports and
copies of all other documents, reports and information furnished by the Company
to its stockholders or filed with any securities exchange pursuant to the
requirements of such exchange or with the Commission pursuant to the Act or the
Exchange Act.
(i) Except for issuances of shares of Common Stock
pursuant to (i) option or warrant exercises or the grant of options to
employees, directors, consultants and other eligible recipients under the
Company's option plans, or (ii) acquisitions by the Company in which shares of
its Common Stock are used, in whole or in part, as consideration, no offering,
sale, short sale or other disposition of any shares of Common Stock of the
Company or other securities convertible into or exchangeable or exercisable for
shares of Common Stock or derivative of Common Stock (or agreement for such)
will be made for a period of 180 days after the date of this Agreement, directly
or indirectly, by the Company otherwise than hereunder or with the prior written
consent of Deutsche Bank Securities Inc., nor shall the Company file any
registration statement with respect to the proposed sale of its Shares except
that the Company may file one or more registration statements on Form S-4
registering shares of common stock issued in acquisitions or on Form S-8
relating to shares issued pursuant to options and employee benefit plans.
(j) The Company will use its best efforts to list,
subject to notice of issuance, the Shares on The NASDAQ National Market.
(k) The Company has caused each officer and director
of the Company, and certain shareholders of the Company listed on Schedule III
hereto, to furnish to you, on or prior to the date of this agreement, a letter
or letters, in form and substance satisfactory to the Underwriters, pursuant to
which each such person shall agree not to offer, sell, sell short or otherwise
dispose of any shares of Common Stock of the Company or other capital stock of
the Company, or any other securities convertible, exchangeable or exercisable
for Common Shares or derivative of Common Shares owned by such person or request
the registration for the offer or sale of any of the foregoing (or as to which
such person has the right to direct the disposition of) for a period of 180 days
after the date of this Agreement, directly or indirectly, except with the prior
written consent of Deutsche Bank Securities Inc. ("Lockup Agreements").
(l) The Company shall apply the net proceeds of its
sale of the Shares as set forth in the Prospectus and shall file such reports
with the Commission with respect to the
-13-
<PAGE>
sale of the Shares and the application of the proceeds therefrom as may be
required in accordance with Rule 463 under the Act.
(m) The Company shall not invest, or otherwise use
the proceeds received by the Company from its sale of the Shares in such a
manner as would require the Company to register as an investment company under
the Investment Company Act of 1940, as amended (the "1940 Act").
(n) The Company will maintain a transfer agent and,
if necessary under the jurisdiction of incorporation of the Company, a registrar
for the Common Stock.
(o) The Company will not take, directly or
indirectly, any action designed to cause or result in, or that has constituted
or might reasonably be expected to constitute, the stabilization or manipulation
of the price of any securities of the Company.
6. COVENANTS OF THE SELLING SHAREHOLDERS.
Each of the Selling Shareholders covenants and agrees,
severally and not jointly, with the several Underwriters that:
(a) No offering, sale, short sale or other
disposition of any shares of Common Stock of the Company or other capital stock
of the Company or other securities convertible, exchangeable or exercisable for
Common Stock or derivative of Common Stock owned by the Selling Shareholder or
request the registration for the offer or sale of any of the foregoing (or as to
which the Selling Shareholder has the right to direct the disposition of) will
be made for a period of 180 days after the date of this Agreement, directly or
indirectly, by such Selling Shareholder otherwise than hereunder or with the
prior written consent of Deutsche Bank Securities Inc.
(b) In order to document the Underwriters' compliance
with the reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 and the Interest and Dividend Tax Compliance Act of
1983 with respect to the transactions herein contemplated, each of the Selling
Shareholders agrees to deliver to you prior to or at the Closing Date a properly
completed and executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department regulations in
lieu thereof).
(c) Such Selling Shareholder will not take, directly
or indirectly, any action designed to cause or result in, or that has
constituted or might reasonably be expected to constitute, the stabilization or
manipulation of the price of any securities of the Company.
-14-
<PAGE>
7. COSTS AND EXPENSES.
The Company will pay all costs, expenses and fees incident to
the performance of the obligations of the Sellers under this Agreement,
including the following: accounting fees of the Company; the fees and
disbursements of counsel for the Company; the cost of printing and delivering
to, or as requested by, the Underwriters copies of the Registration Statement,
Preliminary Prospectuses, the Prospectus, this Agreement, the Underwriters'
Selling Memorandum the Underwriters' Invitation Letter, the Listing Application,
the Blue Sky Survey and any supplements or amendments thereto; the filing fees
of the Commission; the filing fees and expenses (including reasonable legal fees
and disbursements) incident to securing any required review by the NASD of the
terms of the sale of the Shares; the listing Fee of the NASDAQ Stock Market; and
the expenses, including the reasonable fees and disbursements of counsel for the
Underwriters, incurred in connection with the qualification of the Shares under
State securities or Blue Sky laws. The Selling Shareholders have agreed with the
Company to reimburse the Company for a portion of such expenses in the event
Option Shares are purchased. To the extent, if at all, that any of the Selling
Shareholders engage legal counsel to represent them in connection with this
offering the fees and expenses of such counsel shall be borne by such Selling
Shareholder. Underwriting discounts and commissions related to the sale of
Shares by the Selling Shareholders shall be borne by the Selling Shareholders.
Any transfer taxes imposed on the sale of the Shares to the several Underwriters
will be paid by the Sellers pro rata based on the number of Shares sold by each
of such Sellers. The Sellers shall not, however, be required to pay for any of
the Underwriters' expenses (other than those related to qualification under NASD
regulation and State securities or Blue Sky laws) except that, if this Agreement
shall not be consummated because the conditions in Section 6 hereof are not
satisfied, or by reason of any failure, refusal or inability on the part of the
Company or the Selling Shareholders to perform any undertaking or satisfy any
condition of this Agreement or to comply with any of the terms hereof on their
part to be performed, unless such failure to satisfy said condition or to comply
with said terms be due to the default or omission of any Underwriter, then the
Company and each of the Selling Shareholders pro rata (based on the number of
Shares to be sold by the Company and such Selling Stockholder hereunder) shall
reimburse the several Underwriters for reasonable out-of-pocket expenses,
including fees and disbursements of counsel, reasonably incurred in connection
with investigating, marketing and proposing to market the Shares or in
contemplation of performing their obligations hereunder; PROVIDED, HOWEVER, that
the Company and the Selling Shareholders shall not in any event be liable to any
of the several Underwriters for damages on account of loss of anticipated
profits from the sale by them of the Shares.
8. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
The several obligations of the Underwriters to purchase the
Firm Shares on the Closing Date and the Option Shares, if any, on the Option
Closing Date are subject to the accuracy, as of the Closing Date or the Option
Closing Date, as the case may be, of the representations and warranties of the
Company and the Selling Shareholders contained herein,
-15-
<PAGE>
and to the performance by the Company and the Selling Shareholders of their
covenants and obligations hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective
amendments thereto shall have become effective and any and all filings required
by Rule 424 and Rule 430A of the Rules and Regulations shall have been made, and
any request of the Commission for additional information (to be included in the
Registration Statement or otherwise) shall have been disclosed to the
Representatives and complied with to their reasonable satisfaction. No stop
order suspending the effectiveness of the Registration Statement, as amended
from time to time, shall have been issued and no proceedings for that purpose
shall have been taken or, to the knowledge of the Company, shall be contemplated
by the Commission and no injunction restraining order, or order of any nature by
a Federal or state court of competent jurisdiction shall have been issued as of
the Closing Date which would prevent the issuance of the Shares.
(b) The Representatives shall have received on the
Closing Date or the Option Closing Date, as the case may be, the opinion of
Pepper Hamilton LLP, counsel for the Company, dated the Closing Date or the
Option Closing Date, as the case may be, addressed to the Underwriters (and
stating that it may be relied upon by counsel to the Underwriters) to the effect
that:
(i) The Company has been duly organized and is
validly existing as a corporation in good standing under the laws of the State
of Delaware, with corporate power and authority to own or lease its properties
and conduct its business as described in the Registration Statement; and the
Company is duly qualified to transact business in all jurisdictions in which the
conduct of their business requires such qualification, or in which the failure
to qualify would have a materially adverse effect upon the business of the
Company.
(ii) The Company has authorized and outstanding
capital stock as set forth (under the caption "Capitalization") in the
Prospectus; the authorized shares of the Company's Common Stock have been duly
authorized; the outstanding shares of the Company's Common Stock, including the
Shares to be sold by the Selling Shareholders, have been duly authorized and
validly issued and are fully paid and non-assessable; all of the Shares conform
to the description thereof contained in the Prospectus in all material respects;
the certificates for the Shares, assuming they are in the form filed with the
Commission, are in due and proper form; the shares of Common Stock, including
the Option Shares, if any, to be sold by the Company pursuant to this Agreement
have been duly authorized and will be validly issued, fully paid and
non-assessable when issued and paid for as contemplated by this Agreement; and
to its knowledge no preemptive rights of stockholders exist with respect to any
of the Shares or the issue or sale thereof.
(iii) Except as described in or contemplated by
the Prospectus, to its knowledge there are no outstanding securities of the
Company convertible or exchangeable into or evidencing the right to purchase or
subscribe for any shares of capital stock of the
-16-
<PAGE>
Company and there are no outstanding or authorized options, warrants or rights
of any character obligating the Company to issue any shares of its capital stock
or any securities convertible or exchangeable into or evidencing the right to
purchase or subscribe for any shares of such stock; and except as described in
the Prospectus, to its knowledge no holder of any securities of the Company or
any other person has the right, contractual or otherwise, which has not been
satisfied or effectively waived, to cause the Company to sell or otherwise issue
to them, or to permit them to underwrite the sale of, any of the Shares or the
right to have any Common Shares or other securities of the Company included in
the Registration Statement or the right, as a result of the filing of the
Registration Statement, to require registration under the Act of any shares of
Common Stock or other securities of the Company.
(iv) They have been advised by the Commission
that the Registration Statement has become effective under the Act and, to its
best knowledge, no stop order proceedings with respect thereto have been
instituted or are pending or threatened under the Act.
(v) The Registration Statement, the Prospectus
and each amendment or supplement thereto and document incorporated by reference
therein comply as to form in all material respects with the requirements of the
Act or the Exchange Act, as applicable and the applicable rules and regulations
thereunder (except that such counsel need express no opinion as to the financial
information, including the financial statements, statistical information and
related schedules therein). The conditions for the use of Form S-1, set forth in
the General Instructions thereto, have been satisfied.
(vi) The statements under the captions
"Business-Properties, "Business-Legal Proceedings," and "Description of Capital
Stock" in the Prospectus, insofar as such statements constitute a summary of
documents referred to therein or matters of law, fairly summarize in all
material respects the information called for with respect to such documents and
matters.
(vii) Such counsel does not know of any contracts
or documents required to be filed as exhibits to the Registration Statement or
described in the Registration Statement or the Prospectus which are not so filed
or described as required, and such contracts and documents as are summarized in
the Registration Statement or the Prospectus are fairly summarized in all
material respects.
(viii) Such counsel knows of no material legal or
governmental proceedings pending or threatened against the Company except as set
forth in the Prospectus.
(ix) The execution and delivery of this Agreement
and the consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under, the Charter or
-17-
<PAGE>
bylaws of the Company, or any material agreement or instrument known to such
counsel to which the Company is a party or by which the Company may be bound.
(x) This Agreement has been duly authorized,
executed and delivered by the Company.
(xi) No approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory, administrative or
other governmental body is necessary in connection with the execution and
delivery of this Agreement and the consummation of the transactions herein
contemplated (other than as may be required by the NASD or as required by state
securities and Blue Sky laws as to which such counsel need express no opinion)
except such as have been obtained or made, specifying the same.
(xii) The Company is not, and will not become, as
a result of the consummation of the transactions contemplated by this Agreement,
and application of the net proceeds therefrom as described in the Prospectus,
required to register as an investment company under the 1940 Act.
(xiii) This Agreement has been duly authorized,
executed and delivered on behalf of the Selling Shareholders.
(xiv) Each Selling Shareholder has full legal
right, power and authority, and any approval required by law (other than as
required by State securities and Blue Sky laws as to which such counsel need
express no opinion), to sell, assign, transfer and deliver the portion of the
Shares to be sold by such Selling Shareholder.
(xv) The Custodian Agreement and the Power of
Attorney executed and delivered by each Selling Shareholder is valid and
binding.
(xvi) The Underwriters (assuming that they are
bona fide purchasers within the meaning of the Uniform Commercial Code) have
acquired good and marketable title to the Shares being sold by each Selling
Shareholder on the Closing Date, and the Option Closing Date, as the case may
be, free and clear of all liens, encumbrances, equities and claims.
In rendering such opinion Pepper Hamilton LLP may rely as to
matters of fact upon certificates of officers of the Company, and as to matters
governed by the laws of states other than Delaware or Federal laws on local
counsel in such jurisdictions, and as to the matters set forth in subparagraphs
(xiii), (xiv), (xv) and (xvi) on opinions of other counsel representing the
respective Selling Shareholders, provided that in each case Pepper Hamilton LLP
shall state that they believe that they and the Underwriters are justified in
relying on such other counsel. In addition to the matters set forth above, such
opinion shall also include a statement to the effect that nothing has come to
the attention of such counsel which leads them to believe that (i) the
-18-
<PAGE>
Registration Statement, at the time it became effective under the Act (but after
giving effect to any modifications incorporated therein pursuant to Rule 430A
under the Act) and as of the Closing Date or the Option Closing Date, as the
case may be, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, and (ii) the Prospectus, or any supplement
thereto, on the date it was filed pursuant to the Rules and Regulations and as
of the Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements, in the light of the circumstances
under which they are made, not misleading (except that such counsel need express
no view as to financial information, including the financial statements,
schedules and statistical information therein). With respect to such statement,
such counsel may state that their belief is based upon the procedures set forth
therein, including reliance upon certificates of officers of the Company, but is
without independent check and verification.
(c) The Representatives shall have received from
Willkie Farr & Gallagher, counsel for the Underwriters, an opinion dated the
Closing Date or the Option Closing Date, as the case may be, substantially to
the effect specified in subparagraphs (ii), (iii) and (iv)of Paragraph (b) of
this Section 6, and that the Company is a duly organized and validly existing
corporation under the laws of the State of Delaware and with respect to any
other matters that the Representatives may reasonably require. In rendering such
opinion Willkie Farr & Gallagher may rely as to all matters governed other than
by the laws of the State of New York or Federal laws on the opinion of counsel
referred to in Paragraph (b) of this Section 6. In addition to the matters set
forth above, such opinion shall also include a statement to the effect that
nothing has come to the attention of such counsel which leads them to believe
that (i) the Registration Statement, or any amendment thereto, as of the time it
became effective under the Act (but after giving effect to any modifications
incorporated therein pursuant to Rule 430A under the Act) as of the Closing Date
or the Option Closing Date, as the case may be, contained an untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, and (ii) the
Prospectus, or any supplement thereto, on the date it was filed pursuant to the
Rules and Regulations and as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or omitted to
state a material fact, necessary in order to make the statements, in the light
of the circumstances under which they are made, not misleading (except that such
counsel need express no view as to financial information, including the
financial statements, schedules and statistical information therein). With
respect to such statement, such counsel may state that their belief is based
upon the procedures set forth therein, but is without independent check and
verification.
(d) The Representatives shall have received at or
prior to the Closing Date from Willkie Farr & Gallagher a memorandum or summary,
in form and substance satisfactory to the Representatives, with respect to the
qualification for offering and sale by the Underwriters of the Shares under the
State securities or Blue Sky laws of such jurisdictions as the Representatives
may reasonably have designated to the Company.
-19-
<PAGE>
(e) You shall have received, on each of the dates
hereof, the Closing Date and the Option Closing Date, as the case may be, a
letter dated the date hereof the Closing Date or the Option Closing Date, as the
case may be, in form and substance satisfactory to you, of Arthur Andersen LLP,
confirming that they are independent public accountants within the meaning of
the Act and the applicable published Rules and Regulations thereunder and
stating that in their opinion the financial statements and schedules examined by
them and included in the Registration Statement comply in form in all material
respects with the applicable accounting requirements of the Act and the related
published Rules and Regulations; and containing such other statements and
information as is ordinarily included in accountants' "comfort letters" to
Underwriters with respect to the financial statements and certain financial and
statistical information contained in the Registration Statement and Prospectus.
(f) The Representatives shall have received on the
Closing Date or the Option Closing Date, as the case may be, a certificate or
certificates of the Chief Executive Officer and the Chief Financial Officer of
the Company to the effect that, as of the Closing Date or the Option Closing
Date, as the case may be, each of them severally represents as follows:
(i) The Registration Statement has become
effective under the Act and no stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for such purpose have
been taken or are, to his knowledge, contemplated by the Commission;
(ii) The representations and warranties of the
Company contained in Section 1 hereof are true and correct as of the Closing
Date or the Option Closing Date, as the case may be;
(iii) All filings required to have been made
pursuant to Rules 424 or 430A under the Act have been made;
(iv) He or she has carefully examined the
Registration Statement and the Prospectus and, in his or her opinion, as of the
effective date of the Registration Statement, the statements contained in the
Registration Statement were true and correct, and such Registration Statement
and Prospectus did not omit to state a material fact required to be stated
therein or necessary in order to make the statements therein not misleading, and
since the effective date of the Registration Statement, no event has occurred
which should have been set forth in a supplement to or an amendment of the
Prospectus which has not been so set forth in such supplement or amendment; and
(v) Since the respective dates as of which
information is given in the Registration Statement and Prospectus, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the condition, financial or otherwise,
of the Company or the earnings, business, management, properties, assets,
-20-
<PAGE>
rights, operations, or condition (financial or otherwise) of the Company,
whether or not arising in the ordinary course of business.
(g) The Company shall have furnished to the
Representatives such further certificates and documents confirming the
representations and warranties, covenants and conditions contained herein and
related matters as the Representatives may reasonably have requested.
(h) The Firm Shares and Option Shares, if any, have
been approved for designation upon notice of issuance on the NASDAQ National
Market.
(i) The Lockup Agreements described in Section 5 are
in full force and effect.
The opinions and certificates mentioned in this Agreement
shall be deemed to be in compliance with the provisions hereof only if they are
in all material respects reasonably satisfactory to the Representatives and to
counsel for the Underwriters.
If any of the conditions hereinabove provided for in this
Section 8 shall not have been fulfilled when and as required by this Agreement
to be fulfilled, the obligations of the Underwriters hereunder may be terminated
by the Representatives by notifying the Company and the Selling Shareholders of
such termination in writing or by telegram at or prior to the Closing Date or
the Option Closing Date, as the case may be.
In such event, the Company, the Selling Shareholders and the
Underwriters shall not be under any obligation to each other (except to the
extent provided in Sections 7 and 10 hereof).
9. CONDITIONS OF THE OBLIGATIONS OF THE SELLERS.
The obligations of the Sellers to sell and deliver the portion
of the Shares required to be delivered as and when specified in this Agreement
are subject to the conditions that at the Closing Date or the Option Closing
Date, as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
10. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless
each Underwriter and each person, if any, who controls any Underwriter within
the meaning of the Act, against any losses, claims, damages or liabilities to
which such Underwriter or any such controlling person may become subject under
the Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) arise out of or are based upon
-21-
<PAGE>
(i) any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, (ii) the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading 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
the Registration Statement, any Preliminary Prospectus, the Prospectus, or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof. This indemnity obligation will
be in addition to any liability which the Company may otherwise have.
The Company agrees to reimburse each Underwriter and each such
controlling person upon demand for any legal or other out-of-pocket expenses
reasonably incurred by such Underwriter or such controlling person in connection
with investigating or defending any such loss, claim, damage or liability,
action or proceeding or in responding to a subpoena or governmental inquiry
related to the offering of the Shares, whether or not such Underwriter or
controlling person is a party to any action or proceeding. In the event that it
is finally judicially determined that the Underwriters were not entitled to
receive payments for legal and other expenses pursuant to this subparagraph, the
Underwriters will promptly return all sums that had been advanced pursuant
hereto.
(b) In the event that you exercise your option to
purchase Option Shares, the Selling Shareholders agree to indemnify the
Underwriters and each person, if any, who controls any Underwriter within the
meaning of the Act, against any losses, claims, damages or liabilities to which
such Underwriter or controlling person may become subject under the Act or
otherwise as a result of misrepresentations or untrue warranties of the Selling
Shareholders contained in Section 2 herein. In no event, however, shall the
liability of any Selling Shareholder for indemnification under this Section
10(b) exceed the proceeds received by such Selling Shareholder from the
Underwriters in the offering. This indemnity obligation will be in addition to
any liability which the Selling Shareholders may otherwise have.
(c) Each Underwriter severally and not jointly will
indemnify and hold harmless the Company, each of its directors, each of its
officers who have signed the Registration Statement, the Selling Shareholders
and each person, if any, who controls the Company or the Selling Shareholders
within the meaning of the Act, against any losses, claims, damages or
liabilities to which the Company or any such director, officer, Selling
Shareholder or controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) 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 the light of the
-22-
<PAGE>
circumstances under which they were made or (iii) any act or failure to act or
any alleged act or failure to act by any Underwriter in connection with, or
relating in any manner to, the Shares or the offering contemplated hereby, and
which is included as part of or referred to in any loss, claim, damage,
liability or action arising out of or based upon matters covered by clause (i)
or (ii) above; and will reimburse any legal or other expenses reasonably
incurred by the Company or any such director, officer, Selling Shareholder or
controlling person in connection with investigating or defending any such loss,
claim, damage, liability, action or proceeding; provided, however, that each
Underwriter will be liable in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or alleged
omission has been made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or such amendment or supplement, in reliance upon and
in conformity with written information furnished to the Company by or through
the Representatives specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which such Underwriter
may otherwise have.
(d) In case any proceeding (including any
governmental investigation) shall be instituted involving any person in respect
of which indemnity may be sought pursuant to this Section 10, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing. No
indemnification provided for in Section 10(a), (b) or (c) shall be available to
any party who shall fail to give notice as provided in this Section 10(d) if the
party to whom notice was not given was unaware of the proceeding to which such
notice would have related and was materially prejudiced by the failure to give
such notice, but the failure to give such notice shall not relieve the
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of the
provisions of Section 10(a), (b) or (c). In case any such proceeding shall be
brought against any indemnified party and it shall notify the indemnifying party
of the commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party and shall pay as
incurred the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel at its own expense. Notwithstanding the foregoing, the indemnifying
party shall pay as incurred (or within 30 days of presentation) the fees and
expenses of the counsel retained by the indemnified party in the event (i) the
indemnifying party and the indemnified party shall have mutually agreed to the
retention of such counsel, (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them or
(iii) the indemnifying party shall have failed to assume the defense and employ
counsel within a reasonable period of time after notice of commencement of the
action. It is understood that the indemnifying party shall not, in connection
with any proceeding or related proceedings in the same jurisdiction, be liable
for the reasonable fees and expenses of more than one separate firm for all such
indemnified parties. Such firm shall be designated in writing by you in the case
of parties indemnified pursuant to
-23-
<PAGE>
Section 10(a) and by the Company and the Selling Shareholders in the case of
parties indemnified pursuant to Section 10(c). The indemnifying party shall not
be liable for any settlement of any proceeding effected without its written
consent but if settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified party from
and against any loss or liability by reason of such settlement or judgment. In
addition, the indemnifying party will not, without the prior written consent of
the indemnified party, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified party is
an actual or potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.
(e) If the indemnification provided for in this
Section 10 is unavailable to or insufficient to hold harmless an indemnified
party under Section 10(a), (b) or (c) above in respect of any losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) referred
to therein, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) in such proportion as
is appropriate to reflect the relative benefits received by the Company and the
Selling Shareholders on the one hand and the Underwriters on the other from the
offering of the Shares. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law then each indemnifying
party shall contribute to such amount paid or payable by such indemnified party
in such proportion as is appropriate to reflect not only such relative benefits
but also the relative fault of the Company and the Selling Shareholders on the
one hand and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities, (or
actions or proceedings in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Selling Shareholders on the one hand and the Underwriters on the other shall be
deemed to be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Company and the Selling Shareholders
bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Selling Shareholders on the one hand or the
Underwriters on the other, and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or omission.
The Company, the Selling Shareholders and the Underwriters
agree that it would not be just and equitable if contributions pursuant to this
Section 10(e) were determined by pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this Section 10(e). The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) referred to
-24-
<PAGE>
above in this Section 10(e) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection 10(e), (i)
no Underwriter shall be required to contribute any amount in excess of the
underwriting discounts and commissions applicable to the Shares purchased by
such Underwriter (ii) no person guilty of fraudulent misrepresentation (within
the meaning of Section 11 (f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation, and (iii) no
Selling Shareholder shall be required to contribute any amount in excess of the
lesser of (A) that proportion of the total of such losses, claims, damages or
liabilities indemnified or contributed against that equals the proportion of the
Shares sold by such Selling Shareholder to the total Shares sold in the
offering, or (B) the proceeds received by such Selling Shareholder from the
Underwriters in the offering. The Underwriters' obligations in this Section
10(e) to contribute are several in proportion to their respective underwriting
obligations and not joint.
(f) In any proceeding relating to the Registration
Statement, any Preliminary Prospectus, the Prospectus or any supplement or
amendment thereto, each party against whom contribution may be sought under this
Section 10 hereby consents to the jurisdiction of any court having jurisdiction
over any other contributing party, agrees that process issuing from such court
may be served upon him or it by any other contributing party and consents to the
service of such process and agrees that any other contributing party may join
him or it as an additional defendant in any such proceeding in which such other
contributing party is a party.
(g) Any losses, claims, damages, liabilities or
expenses for which an indemnified party is entitled to indemnification or
contribution under this Section 10 shall be paid by the indemnifying party to
the indemnified party as such losses, claims, damages, liabilities or expenses
are incurred. The indemnity and contribution agreements of the Company, the
Selling Shareholders and the Underwriters contained in this Section 10 and the
representations and warranties of the Company and the Selling Shareholders set
forth in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any Underwriter or
any person controlling any Underwriter, the Company, its directors or officers
or any persons controlling the Company, (ii) acceptance of any Shares and
payment therefor hereunder and (iii) any termination of this Agreement. A
successor to any Underwriter, or to the Company, its directors or officers,
or any person controlling the Company, shall be entitled to the benefits of
the indemnity, contribution and reimbursement agreements contained in this
Section 10.
11. DEFAULT BY UNDERWRITERS.
If on the Closing Date or the Option Closing Date, as the case
may be, any Underwriter shall fail to purchase and pay for the portion of the
Shares which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the
-25-
<PAGE>
part of the Company or a Selling Shareholder), you, as Representatives of the
Underwriters, shall use your reasonable efforts to procure within 36 hours
thereafter one or more of the other Underwriters, or any others, to purchase
from the Company and the Selling Shareholders such amounts as may be agreed upon
and upon the terms set forth herein, the Firm Shares or Option Shares, as the
case may be, which the defaulting Underwriter or Underwriters failed to
purchase. If during such 36 hours you, as such Representatives, shall not have
procured such other Underwriters, or any others, to purchase the Firm Shares or
Option Shares, as the case may be, agreed to be purchased by the defaulting
Underwriter or Underwriters, then (a) if the aggregate number of shares with
respect to which such default shall occur does not exceed 10% of the Firm Shares
or Option Shares, as the case may be, covered hereby, the other Underwriters
shall be obligated, severally, in proportion to the respective numbers of Firm
Shares or Option Shares, as the case may be, which they are obligated to
purchase hereunder, to purchase the Firm Shares or Option Shares, as the case
may be, which such defaulting Underwriter or Underwriters failed to purchase, or
(b) if the aggregate number of shares of Firm Shares or Option Shares, as the
case may be, with respect to which such default shall occur exceeds 10% of the
Firm Shares or Option Shares, as the case may be, covered hereby, the Company
and the Selling Shareholders or you as the Representatives of the Underwriters
will have the right, by written notice given within the next 36-hour period to
the parties to this Agreement, to terminate this Agreement without liability on
the part of the non-defaulting Underwriters, the Company or of the Selling
Shareholders except to the extent provided in Section 10 hereof. In the event of
a default by any Underwriter or Underwriters, as set forth in this Section 11,
the Closing Date or Option Closing Date, as the case may be, may be postponed
for such period, not exceeding seven days, as you, as Representatives, may
determine in order that the required changes in the Registration Statement or in
the Prospectus or in any other documents or arrangements may be effected. The
term "Underwriter" includes any person substituted for a defaulting Underwriter.
Any action taken under this Section 11 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
12. NOTICES.
All communications hereunder shall be in writing and, except
as otherwise provided herein, will be mailed, delivered, telecopied or
telegraphed and confirmed as follows:
(a) if to the Underwriters, to:
Deutsche Bank Securities Inc.
One South Street
Baltimore, Maryland 21202
Attention: General Counsel
-26-
<PAGE>
with a copy to:
Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019
Attention: William J. Grant, Jr.
(b) if to the Company, to:
Bluestone Software, Inc.
1000 Briggs Road
Mount Laurel, New Jersey 08054
Attention: Chief Financial Officer
with a copy to:
Pepper Hamilton LLP
1235 Westlakes Drive
Suite 400
Berwyn, Pennsylvania 19312
Attention: William A. Scari, Jr.
13. TERMINATION.
This Agreement may be terminated by you by notice to the
Sellers as follows:
(a) at any time prior to the Closing Date if any of
the following has occurred: (i) since the respective dates as of which
information is given in the Registration Statement and the Prospectus, any
material adverse change or any development involving a prospective material
adverse change in or affecting the earnings, business, management,
properties, assets, rights, operations, or condition (financial or otherwise)
of the Company, whether or not arising in the ordinary course of business,
(ii) any outbreak or escalation of hostilities or declaration of war or
national emergency or other national or international calamity or crisis or
change in economic or political conditions if the effect of such outbreak,
escalation declaration, emergency, calamity, crisis or change on the
financial markets of the United States would, in your reasonable judgment,
make it impracticable to market the Shares or to enforce contracts for the
sale of the Shares, or (iii) suspension of trading in securities generally on
the New York Stock Exchange or the American Stock Exchange or limitation on
prices (other than limitations on hours or numbers of days of trading) for
securities on either such Exchange, (iv) the enactment, publication, decree
or other promulgation of any statute, regulation, rule or order of any court
or other governmental authority which in your opinion materially and
adversely affects or may materially and adversely affect the business or
operations of the Company, (v) declaration of a banking moratorium by United
States or New
-27-
<PAGE>
York State authorities, (vi) any downgrading in the rating of the Company's debt
securities by any "nationally recognized statistical rating organization" (as
defined for purposes of Rule 436(g) under the Exchange Act); (vii) the
suspension of trading of the Company's common stock by the Commission on the
NASDAQ Stock Market; or (viii) the taking of any action by any governmental body
or agency in respect of its monetary or fiscal affairs which in your reasonable
opinion has a material adverse effect on the securities markets in the United
States; or
(b) as provided in Sections 8 and 11 of this
Agreement.
14. SUCCESSORS.
This Agreement has been and is made solely for the benefit of
the Underwriters, the Company and the Selling Shareholders and their respective
successors, executors, administrators, heirs and assigns, and the officers,
directors and controlling persons referred to herein, and no other person will
have any right or obligation hereunder. No purchaser of any of the Shares from
any Underwriter shall be deemed a successor or assign merely because of such
purchase.
15. INFORMATION PROVIDED BY UNDERWRITERS.
The Company and the Underwriters acknowledge and agree that
the only information furnished or to be furnished by any Underwriter to the
Company for inclusion in any Prospectus or the Registration Statement consists
of the information set forth in the last paragraph on the front cover page
(insofar as such information relates to the Underwriters), legends required by
Item 502(d) of Regulation S-K under the Act and the information under the
caption "Underwriting" in the Prospectus.
16. MISCELLANEOUS.
(a) The reimbursement, indemnification and
contribution agreements contained in this Agreement and the representations,
warranties and covenants in this Agreement shall remain in full force and effect
regardless of (i) any termination of this Agreement, (ii) any investigation made
by or on behalf of any Underwriter or controlling person thereof or by or on
behalf of the Company or its directors or officers or the Selling Shareholders
and (iii) delivery of and payment for the Shares under this Agreement.
(b) This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(c) This Agreement shall be governed by, and
construed in accordance with the laws of the State of Delaware.
-28-
<PAGE>
If the foregoing letter is in accordance with your
understanding of our agreement, please sign and return to us the enclosed
duplicates hereof, whereupon it will become a binding agreement among the
Company and the several Underwriters in accordance with its terms.
Any person executing and delivering this Agreement as
Attorney-in-Fact for a Selling Shareholder represents by so doing that he has
been duly appointed as Attorney-in-Fact by such Selling Shareholder pursuant to
a validly existing and binding Power of Attorney which authorizes such
Attorney-in-Fact to take such action.
Very truly yours,
BLUESTONE SOFTWARE, INC.
By:
------------------------------------------
Melan Baiada
Kevin Kilroy
General Electric Capital Corporation
P/A Fund, L.P.
APA Excelsior IV, L.P.
APA Excelsior IV/Offshore, L.P.
Patricof Private Investment Club, L.P.
By:
------------------------------------------
Attorney-in-Fact
The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the date first above written.
DEUTSCHE BANK SECURITIES INC.
SOUNDVIEW TECHNOLOGY GROUP, INC.
C.E. UNTERBERG, TOWBIN
LEGG MASON WOOD WALKER, INC.
As Representatives of the several
Underwriters listed on Schedule I
By: DEUTSCHE BANK SECURITIES INC.
By:
------------------------------
Authorized Officer
-29-
<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
Underwriter Number of Firm Shares to be Purchased
- ---------------------------- -------------------------------------
Deutsche Banc Alex. Brown
SoundView Technology Group, Inc.
C.E. Unterberg Towbin
Legg Mason Wood Walker, Inc.
Total:
-30-
<PAGE>
SCHEDULE II
SCHEDULE OF OPTION SHARES
Maximum Number of Percentage of Total
Number of Name of Seller Option Shares Option Shares
- ------------------------------ --------------------- ------------------------
Total 100%
-31-
<PAGE>
SCHEDULE III
LOCK-UP AGREEMENTS
-32-
<PAGE>
Exhibit 3.3
BLUESTONE SOFTWARE, INC.
FORM OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
________________, 1999
<PAGE>
BLUESTONE SOFTWARE, INC.
FORM OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
Bluestone Software, Inc., a Delaware corporation (the "Corporation"),
does hereby certify that:
FIRST: The present name of the Corporation is "Bluestone Software,
Inc.," which is the name under which the Corporation was originally
incorporated. The date of filing of the original Certificate of Incorporation of
the Corporation with the Secretary of State of the State of Delaware was March
13, 1997.
SECOND: This Amended and Restated Certificate of Incorporation (this
"Certificate") amends and restates in its entirety the present Third Amended and
Restated Certificate of Incorporation of the Corporation, as amended. This
Certificate has been duly adopted and approved by the board of directors of the
Corporation and the stockholders of the Corporation in accordance with the
provisions of Section 141(f), 228 and 242 of the General Corporation Law of the
State of Delaware.
THIRD: This Certificate shall become effective immediately upon its
filing with the Secretary of State of the State of Delaware.
FOURTH: Upon the filing with the Secretary of State of the State of
Delaware of this Certificate, the Third Amended and Restated Certificate of
Incorporation of the Corporation, as amended, shall be amended and restated in
its entirety to read as set forth in Exhibit "A" hereto.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed by a duly authorized officer this ___ day of __________, 1999.
BLUESTONE SOFTWARE, INC.
By:
------------------------------------------
S. Craig Huke, Sr. Vice President
<PAGE>
EXHIBIT A
BLUESTONE SOFTWARE, INC.
FORM OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
ARTICLE I
NAME. The name of the corporation is Bluestone Software, Inc. (the
"Corporation").
ARTICLE II
REGISTERED OFFICE AND AGENT. The address of the registered office of
the Corporation in the State of Delaware is 1201 Market Street, Suite 1600,
Wilmington, DE 19801. The name of its registered agent at such address is PHS
Corporate Services, Inc.
ARTICLE III
PURPOSE. The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of Delaware.
ARTICLE IV
AUTHORIZED CAPITAL STOCK. The Corporation shall have the authority to
issue an aggregate of 54,900,000 shares of common stock, par value $.001 per
share ("Common Stock"), as more fully described below.
1. DIVIDEND RIGHTS. The holders of the Common Stock shall be
entitled to receive, when and as declared by the Board of Directors of the
Corporation (the "Board of Directors" or "Board"), out of any assets of the
Corporation legally available therefor, such dividends as may be declared from
time to time by the Board.
2. LIQUIDATION RIGHTS. Upon the liquidation, dissolution or
winding up of the Corporation, the holders of shares of Common Stock shall be
entitled to receive the remaining assets and funds of the Corporation available
for distribution to its stockholders ratably in proportion to the number of
shares of Common Stock held by such stockholders.
3. REDEMPTION. The Common Stock is not redeemable.
4. VOTING RIGHTS. The holder of each share of Common Stock
shall have the right to one vote, and shall be entitled to notice of any
stockholders' meeting in accordance with the bylaws of
<PAGE>
the Corporation (the "Bylaws"), and shall be entitled to vote upon such matters
and in such manner as may be provided by law.
5. SPECIAL MEETINGS. Special meetings of the stockholders, for
any purpose or purposes, unless otherwise prescribed by statute, may be called
only in accordance with the Bylaws.
6. ADVANCE NOTICE PROVISIONS. Advance notice of stockholder
nominations for the election of directors of the Corporation and of business to
be brought by stockholders before any meeting of stockholders of the Corporation
shall be given in the manner provided in the Bylaws.
ARTICLE V
BOARD OF DIRECTORS.
1. NUMBER; ELECTION. The Board of Directors of the Corporation
shall consist of such number of the directors as shall be fixed from time to
time by resolution of the Board of Directors. The Board of Directors shall be
divided into three classes, which shall be as nearly equal in number as
possible. Directors of each class shall serve for a term of three years and
until their successors shall have been elected and qualified. The three initial
classes of directors shall be comprised as follows:
(a) Class I shall be comprised of directors who shall serve
until the annual meeting of stockholders held in the first year following the
year in which the initial classes of directors were established and until their
successors shall have been elected and qualified.
(b) Class II shall be comprised of directors who shall
serve until the annual meeting of stockholders held in the second year following
the year in which the initial classes of directors were established and until
their successors shall have been elected and qualified.
(c) Class III shall be comprised of directors who shall
serve until the annual meeting of stockholders held in the third year following
the year in which the initial classes of directors were established and until
their successors shall have been elected and qualified.
2. TERM. After the initial term, at each annual meeting of
stockholders of the Corporation, directors of classes, the terms of which expire
at such annual meeting, shall be elected for terms of three years by a plurality
vote of all votes cast at such meeting. Notwithstanding the foregoing, a
director whose term shall expire at any annual meeting shall continue to serve
until such time as his successor shall have been duly elected and qualified
unless his or her position on the Board of Directors shall have been abolished
by action taken to reduce the size of the Board of Directors prior to said
meeting. Furthermore, any vacancy in directorship prior to the expiration of
such director's term caused by the death, removal or resignation of such
director or by an increase in the number of directors of the Corporation shall
be filled by a majority of the remaining directors.
3. INCREASE OR DECREASE IN NUMBER. Should the number of
directors of the Corporation be reduced, the directorship(s) eliminated shall be
allocated among classes as appropriate so that the number of directors in each
class is as specified in Section 1 of this Article V. The Board of Directors
shall designate, by the name of the incumbent(s), the position(s) to be
abolished. Notwithstanding the foregoing, no decrease in the number of directors
shall have the effect of shortening
2
<PAGE>
the term of any incumbent director. Should the number of directors of the
Corporation be increased, the additional directorships shall be allocated among
classes as appropriate so that the number of directors in each class is as
specified in Section 1 of this Article V. With respect to newly created or
eliminated directorships resulting from an increase or decrease, respectively,
in the number of directors, the Board shall determine and designate to which
class of directorships each director belongs, but in no case shall a decrease in
the number of directors shorten the term of an incumbent director.
4. VACANCIES. Vacancies and newly created directorships
resulting from any increase in the number of directors constituting the whole
Board may be filled only by the affirmative vote of a majority of the directors
then in office, although fewer than a quorum, or by a sole remaining director.
Whenever the holders of any class or classes of stock or series thereof are
entitled to elect one or more directors by the provisions of this Certificate,
vacancies and newly created directorships of such class or classes or series may
be filled by the affirmative vote of a majority of the directors elected by such
class or classes or series thereof then in office, or by a sole remaining
director so elected. Each director so chosen shall hold office until the next
election of directors of the class to which such director was appointed, and
until such director's successor is elected and qualified, or until the
director's earlier death, resignation or removal.
5. RESIGNATION OF DIRECTORS. A director may resign at any time
upon written notice to the Corporation, and the resignation shall take effect at
the time it specifies, without any need for acceptance by the Board. In the
event that one or more directors resigns from the Board, effective at a future
date, a majority of the directors then in office, including those who have so
resigned, shall have power to fill such vacancy or vacancies, with the vote
thereon to take effect when such resignation or resignations becomes effective.
6. REMOVAL OF DIRECTORS. No director of the Corporation may be
removed at any time unless for cause and by the affirmative vote of the holders
of a majority of the outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors, considered for this
purpose as one class, except as otherwise required by law.
ARTICLE VI
BYLAWS. In furtherance and not in limitation of the powers conferred by
statute, the Board shall have the power to adopt, amend, repeal or otherwise
alter the Bylaws of the Corporation without any action on the part of the
stockholders; provided, however, that the grant of such power to the Board shall
not divest the stockholders of nor limit their power, to adopt, amend, repeal or
otherwise alter the Bylaws.
ARTICLE VII
ELECTION OF DIRECTORS. Elections of directors need not be by written
ballot unless the Bylaws of the Corporation shall so provide.
3
<PAGE>
ARTICLE VIII
AMENDMENT AND REPEAL. The Corporation reserves the right to adopt,
repeal, rescind or amend in any respect any provisions contained in this
Certificate in the manner now or hereafter prescribed by applicable law, and all
rights conferred on stockholders herein are granted subject to this reservation.
ARTICLE IX
DIRECTOR LIABILITY. A director of the Corporation shall, to the full
extent permitted by the General Corporation Law of Delaware as it now exists or
as it may hereafter be amended, not be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Neither any amendment nor repeal of this Article IX, nor the adoption of any
provisions of this Certificate inconsistent with this Article IX, shall
eliminate or reduce the effect of this Article IX in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article IX,
would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
* * * * * *
4
<PAGE>
Exhibit 3.4
FORM OF
AMENDED AND RESTATED
BYLAWS OF
BLUESTONE SOFTWARE, INC.
ARTICLE 1
MEETING OF STOCKHOLDERS
Section 1.1. OFFICES. The Corporation may have an office or
offices at such places as the Board of Directors may from time to time
designate.
Section 1.2. ANNUAL MEETINGS. An annual meeting of
stockholders shall be held for the election of directors at such date, time and
place, either within or without the State of Delaware, as may be designated by
resolution of the Board of Directors from time to time. Any other proper
business may be transacted at the annual meeting.
1.2.1. The Corporation shall hold annual meetings
of stockholders on such date and at such time as shall be designated from time
to time by the Board of Directors, the Chairman of the Board of Directors, the
Chief Executive Officer or the President. At each annual meeting, the
stockholders shall elect, by a plurality vote, directors to succeed those whose
terms expire at the time of the annual meeting. The nomination of persons for
election to the Board and the proposal of any other business to be transacted at
an annual meeting may be made only (i) by or at the direction of the Board or
(ii) by any stockholder of record who gives notice in accordance with the
procedures set forth in Section 1.2.2 and who is a stockholder of record both on
the date of giving such notice and on the record date for the determination of
stockholders entitled to vote at such annual meeting. Only persons thereby
nominated shall be eligible to serve as directors and only business thereby
proposed shall be transacted at an annual meeting. The presiding officer of the
annual meeting shall determine whether a nomination or any proposal of business
complies or complied with this Section 1.2.
1.2.2. For nominations and other business to be
brought properly before an annual meeting by a stockholder pursuant to clause
(ii) of Section 1.2.1, the stockholder must deliver notice to the Secretary of
the Corporation at the principal executive offices of the Corporation in
accordance with this Section 1.2.2. The notice must be received by the Secretary
not less than 90 days nor more than 120 days prior to the first anniversary of
the preceding year's annual meeting; PROVIDED, HOWEVER, that in the event that
the date of the annual meeting is advanced by more than 30 days or delayed by
more than 60 days from such anniversary date, the stockholder must so deliver
the notice not earlier than the 120th day prior to such annual meeting and not
later than the close of business on the later of the 90th day prior to such
annual meeting or the tenth day following the day on which public announcement
of the date of such meeting is first made; PROVIDED FURTHER, HOWEVER, that in
the event that the number of directors to be elected to the Board is increased
and there is no public announcement naming all of the nominees for director or
specifying the size
<PAGE>
of the increased Board made by the Corporation at least 70 days prior to the
first anniversary of the preceding annual meeting, with respect to nominees for
any new position created by the increase, the stockholder must so deliver the
notice not later than the close of business on the tenth day following the day
on which such public announcement is first made. The stockholder's notice must
set forth: (i) as to each person whom the stockholder proposes to nominate for
election or reelection as a director, all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors pursuant to Section 14(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules and regulations thereunder (together
with such person's written consent to being named in the proxy statement as a
nominee and to serving as a director if elected), whether or not the Corporation
is then subject to Section 14(a) and such rules and regulations; (ii) as to any
other business that the stockholder proposes to transact at the meeting, a brief
description of the business desired to be brought before the meeting, the
reasons for conducting the business at the meeting and any material interest in
the business of the stockholder and of the beneficial owner, if any, on whose
behalf the proposal is made; and (iii) as to the stockholder giving the notice
and the beneficial owner, if any, on whose behalf the nomination or proposal is
made, the name and address of the stockholder, as they appear on the
Corporation's books, and of such beneficial owner, the class and number of
shares of the Corporation that are owned beneficially and of record by such
stockholder and such beneficial owner and a representation that the stockholder
intends to appear in person or by proxy at the annual meeting to bring such
business before the meeting. For purposes of this Section 1.2, a "public
announcement," means disclosure in a press release reported by the Dow Jones
News Service, Associated Press or comparable news service, in a document
publicly filed with the Securities and Exchange Commission pursuant to Section
13, 14 or 15(d) of the Exchange Act (or their successor provisions), or in a
notice of meeting or proxy statement mailed generally to the Corporation's
stockholders. In giving notice under this Section 1.2, a stockholder must also
comply with state law and the Exchange Act (and the rules and regulations
thereunder). Nothing in this Section 1.2 shall be deemed to affect the rights of
a stockholder to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 (or its successor provision) under the Exchange
Act.
Section 1.3. SPECIAL MEETINGS. Special meetings of the
stockholders may be called at any time by the Chief Executive Officer or
President and shall be called by the President or Secretary on the request in
writing or by vote of a majority of the directors or at the request in writing
of stockholders of record owning seventy-five percent (75%) in amount of the
capital stock outstanding and entitled to vote.
1.3.1. Business transacted at any special meeting
of stockholders shall be limited to the purposes stated in the notice relating
to such meeting (or to the purposes for which the meeting is called if such
notice is waived or is not required as provided in the General Corporation Law
of the State of Delaware (the "Delaware General Corporation Law") or these
bylaws). In the case of a special meeting of stockholders called for the purpose
of electing directors, nominations may be made only (i) by or at the direction
of the Board or (ii) by any stockholder of
-2-
<PAGE>
record who delivers to the Secretary, no later than the tenth day following the
day on which public announcement of the special meeting is made, a notice that
complies with and is delivered in accordance with Section 1.2.2 above.
Section 1.4. LOCATION. All meetings of the stockholders shall
be held at such place or places, within or without the State of Delaware, as may
from time to time be fixed by the Board of Directors or as shall be specified
and fixed in the respective notices or waiver of notice thereof.
Section 1.5. NOTICE OF MEETINGS. Whenever stockholders are
required or permitted to take any action at a meeting, a written notice of the
meeting shall be given that shall state the place, date and hour of the meeting
and, in the case of a special meeting, the purpose or purposes for which the
meeting is called. Unless otherwise provided by law, the certificate of
incorporation or these bylaws, the written notice of any meeting shall be given
not less than ten (10) nor more than sixty (60) days before the date of the
meeting to each stockholder entitled to vote at such meeting. If mailed, such
notice shall be deemed to be given when deposited in the United States mail,
postage prepaid, directed to the stockholder at his address as it appears on the
records of the Corporation.
Section 1.6. WAIVERS OF NOTICE. Whenever the giving of any
notice is required by statute, the certificate of incorporation or these bylaws,
a waiver thereof, in writing and delivered to the Corporation, signed by the
person or persons entitled to said notice, whether before or after the event as
to which such notice is required, shall be deemed equivalent to notice.
Attendance of a stockholder at a meeting shall constitute a waiver of notice (1)
of such meeting, except when the stockholder at the beginning of the meeting
objects to holding the meeting or transacting business at the meeting and (2)
(if it is a special meeting) of consideration of a particular matter at the
meeting that is not within the purpose or purposes described in the meeting
notice, unless the stockholder objects to considering the matter at the
beginning of the meeting.
Section 1.7. ADJOURNMENTS. Any meeting of stockholders, annual
or special, may adjourn from time to time to reconvene at the same or some other
place, and notice need not be given of any such adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the Corporation may transact any business which
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, notice of the adjourned meeting shall be given
to each stockholder of record entitled to vote at the meeting.
Section 1.8. QUORUM. Except as otherwise provided by law, the
certificate of incorporation or these bylaws, at each meeting of stockholders
the presence in person or by proxy of the holders of a majority in voting power
of the outstanding shares of stock entitled to vote at the meeting shall be
necessary and sufficient to constitute a quorum. In the absence of a quorum, the
stockholders so present may, by a majority in voting power thereof, adjourn the
meeting from time to time in the manner provided in Section 1.7 of these bylaws
until a quorum shall attend. Shares
-3-
<PAGE>
of its own stock belonging to the Corporation or to another corporation, if a
majority of the shares entitled to vote in the election of directors of such
other corporation is held, directly or indirectly, by the Corporation, shall
neither be entitled to vote nor be counted for quorum purposes; PROVIDED,
HOWEVER, that the foregoing shall not limit the right of the Corporation or any
subsidiary of the Corporation to vote stock, including but not limited to its
own stock, held by it in a fiduciary capacity.
Section 1.9. ORGANIZATION. Meetings of stockholders shall be
presided over by the Chairman of the Board, if any, or in his absence by the
Vice Chairman of the Board, if any, or in his absence by the President, or in
his absence by a Vice President, or in the absence of the foregoing persons by a
chairman designated by the Board of Directors, or in the absence of such
designation by a chairman chosen at the meeting. The Secretary shall act as
secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
Section 1.10. VOTING; PROXIES. Except as otherwise provided by
or pursuant to the provisions of the certificate of incorporation, each
stockholder entitled to vote at any meeting of stockholders shall be entitled to
one vote for each share of stock held by such stockholder which has voting power
upon the matter in question. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for such
stockholder by proxy, but no such proxy shall be voted or acted upon after three
(3) years from its date, unless the proxy provides for a longer period. A proxy
shall be irrevocable if it states that it is irrevocable and if, and only as
long as, it is coupled with an interest sufficient in law to support an
irrevocable power. A stockholder may revoke any proxy which is not irrevocable
by attending the meeting and voting in person or by filing an instrument in
writing revoking the proxy or by delivering a proxy in accordance with
applicable law bearing a later date to the Secretary of the Corporation. Voting
at meetings of stockholders need not be by written ballot. At all meetings of
stockholders for the election of directors, a plurality of the votes cast shall
be sufficient to elect. All other elections and questions shall, unless
otherwise provided by the certificate of incorporation, these bylaws, the rules
or regulations of any stock exchange applicable to the Corporation, as otherwise
provided by law or pursuant to any regulation applicable to the Corporation, be
decided by the affirmative vote of the holders of a majority in voting power of
the shares of stock of the Corporation which are present in person or by proxy
and entitled to vote thereon.
Section 1.11. FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF
RECORD. In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or to express consent to corporate action in writing without a meeting, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is
-4-
<PAGE>
adopted by the Board of Directors, and which record date: (i) in the case of
determination of stockholders entitled to vote at any meeting of stockholders or
adjournment thereof, shall, unless otherwise required by law, not be more than
sixty (60) nor less than ten (10) days before the date of such meeting; (ii) in
the case of determination of stockholders entitled to express consent to
corporate action in writing without a meeting, shall not be more than ten (10)
days from the date upon which the resolution fixing the record date is adopted
by the Board of Directors; and (iii) in the case of any other action, shall not
be more than sixty (60) days prior to such other action. If no record date is
fixed: (a) the record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held; (b) the record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
of the Board of Directors is required by law, shall be the first date on which a
signed written consent setting forth the action taken or proposed to be taken is
delivered to the Corporation in accordance with applicable law, or, if prior
action by the Board of Directors is required by law, shall be at the close of
business on the day on which the Board of Directors adopts the resolution taking
such prior action; and (c) the record date for determining stockholders for any
other purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; PROVIDED, HOWEVER,
that the Board of Directors may fix a new record date for the adjourned meeting.
Section 1.12. LIST OF STOCKHOLDERS ENTITLED TO VOTE. The
Secretary shall prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each stock
holder and the number of shares registered in the name of each stockholder. Such
list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof and may be inspected by any stockholder who is
present. Upon the willful neglect or refusal of the directors to produce such a
list at any meeting for the election of directors, they shall be ineligible for
election to any office at such meeting. Except as otherwise provided by law, the
stock ledger shall be the only evidence as to who are the stockholders entitled
to examine the stock ledger, the list of stockholders or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
Section 1.13. ACTION BY WRITTEN CONSENT OF STOCKHOLDERS.
Unless otherwise restricted by the certificate of incorporation, any action
required or permitted to be taken at any annual or special meeting of the
stockholders may be taken without a meeting, without prior notice and without a
vote, if a consent or consents in writing, setting forth the action so taken,
shall be
-5-
<PAGE>
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted and
shall be delivered to the Corporation by delivery to its registered office in
the State of Delaware, its principal place of business, or an officer or agent
of the Corporation having custody of the book in which minutes of proceedings of
stockholders are recorded. Delivery made to the Corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
Prompt notice of the taking of the corporate action without a meeting by less
than unanimous written consent shall, to the extent required by law, be given to
those stockholders who have not consented in writing and who, if the action had
been taken at a meeting, would have been entitled to notice of the meeting if
the record date for such meeting had been the date that written consents signed
by a sufficient number of holders to take the action were delivered to the
Corporation.
Section 1.14. INSPECTORS OF ELECTION. The Corporation may, and
shall if required by law, in advance of any meeting of stockholders, appoint one
or more inspectors of election, who may be employees of the Corporation, to act
at the meeting or any adjournment thereof and to make a written report thereof.
The Corporation may designate one or more persons as alternate inspectors to
replace any inspector who fails to act. In the event that no inspector so
appointed or designated is able to act at a meeting of stockholders, the person
presiding at the meeting shall appoint one or more inspectors to act at the
meeting. Each inspector, before entering upon the discharge of his or her
duties, shall take and sign an oath to execute faithfully the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspector or inspectors so appointed or designated shall (i)
ascertain the number of shares of capital stock of the Corporation outstanding
and the voting power of each such share, (ii) determine the shares of capital
stock of the Corporation represented at the meeting and the validity of proxies
and ballots, (iii) count all votes and ballots, (iv) determine and retain for a
reasonable period a record of the disposition of any challenges made to any
determination by the inspectors, and (v) certify their determination of the
number of shares of capital stock of the Corporation represented at the meeting
and such inspectors' count of all votes and ballots. Such certification and
report shall specify such other information as may be required by law. In
determining the validity and counting of proxies and ballots cast at any meeting
of stockholders of the Corporation, the inspectors may consider such information
as is permitted by applicable law. No person who is a candidate for an office at
an election may serve as an inspector at such election.
Section 1.15. CONDUCT OF MEETINGS. The date and time of the
opening and the closing of the polls for each matter upon which the stockholders
will vote at a meeting shall be announced at the meeting by the person presiding
over the meeting. The Board of Directors may adopt by resolution such rules and
regulations for the conduct of the meeting of stockholders as it shall deem
appropriate. Except to the extent inconsistent with such rules and regulations
as adopted by the Board of Directors, the chairman of any meeting of
stockholders shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts as, in the judgment of such
-6-
<PAGE>
chairman, are appropriate for the proper conduct of the meeting. Such rules,
regulations or pro cedures, whether adopted by the Board of Directors or
prescribed by the chairman of the meeting, may include, without limitation, the
following: (i) the establishment of an agenda or order of business for the
meeting; (ii) rules and procedures for maintaining order at the meeting and the
safety of those present; (iii) limitations on attendance at or participation in
the meeting to stockholders of record of the Corporation, their duly authorized
and constituted proxies or such other persons as the chairman of the meeting
shall determine; (iv) restrictions on entry to the meeting after the time fixed
for the commencement thereof; and (v) limitations on the time allotted to
questions or comments by participants. Unless and to the extent determined by
the Board of Directors or the chairman of the meeting, meetings of stockholders
shall not be required to be held in accordance with the rules of parliamentary
procedure.
ARTICLE 2
BOARD OF DIRECTORS
Section 2.1. MANAGEMENT. The property and business of the
Corporation shall be managed by or under the direction of its Board of
Directors, consisting of one or more directors, as determined from time to time
by resolution of the Board of Directors.
Section 2.2. NUMBER AND TERM. Within the limits set forth in
the certificate of incorporation, the number of directors shall be determined by
resolution of the Board. Unless the certificate of incorporation provides
otherwise, the directorships (i.e., the particular seats on the Board) shall be
classified into three classes (designated as Class I, Class II and Class III) as
nearly equal in number as possible. Vacancies on the Board shall be filled in
accordance with the certificate of incorporation. Once elected or chosen
pursuant to the certificate of incorporation, a director shall hold office until
the director's successor is elected and qualified or until the director dies,
resigns or is removed; PROVIDED, HOWEVER, that if the Board decreases the number
of directors constituting the whole Board and designates a particular
directorship to be eliminated due to the decrease, a director in the eliminated
directorship shall cease to hold office after the next election of directors,
unless the director is nominated and elected to another directorship on the
Board.
Section 2.3. POWERS. The business and affairs of the
Corporation shall be managed by or under the direction of the Board, which may
exercise all such powers of the Corporation and do all such lawful acts and
things, subject to any limitation set forth in the certificate of incorporation
or as otherwise may be provided in the Delaware General Corporation Law.
Section 2.4. MEETINGS. After each annual election of
directors, the newly elected directors may meet for the purpose of organization,
the election of officers, and the transaction of other business, at such place
and time as shall be fixed by the stockholders at the annual meeting,
-7-
<PAGE>
and if a majority of the directors be present at such place and time, no prior
notice of such meeting shall be required to be given to the directors. The place
and time of such meeting may also be fixed by written consent of the directors.
Regular meetings of the directors may be held without notice at such time and at
such place as shall from time to time be determined by the Board of Directors.
Section 2.5. SPECIAL MEETINGS. Special meetings of the
directors may be called by the President on five (5) days notice in writing or
on two (2) days notice by telephone to each director and shall be called by the
President in like manner on the written request of two (2) directors. Special
meetings of the directors may be held within or without the State of Delaware at
such place as is indicated in the notice or waiver of notice thereof.
Section 2.6. PRESENCE AT MEETINGS. Members of the Board may
participate in a meeting of the Board by any communication by means of which all
participating directors can simultaneously hear each other during the meeting. A
director participating in a meeting by this means is deemed to be present in
person at the meeting.
Section 2.7. ACTION WITHOUT MEETING. Any action required or
permitted to be taken at any meeting of the Board may be taken without a meeting
if the action is taken by all members of the Board. The action must be evidenced
by one (1) or more written consents describing the action taken, signed by each
director, and delivered to the Corporation for inclusion in the minute book.
Section 2.8. QUORUM. A majority of the directors shall
constitute a quorum, but a smaller number may adjourn from time to time, without
further notice, until a quorum is secured.
Section 2.9. WAIVER OF NOTICE OF MEETING. A director may waive
any notice required by statute, the certificate of incorporation or these bylaws
before or after the date and time (i) stated in the notice or (ii) of the
meeting. Except as set forth below, the waiver must be in writing, signed by the
director entitled to the notice, and delivered to the Corporation for inclusion
in the minute book. Notwithstanding the foregoing, a director's attendance at or
participation in a meeting waives any required notice to the director of the
meeting unless the director at the beginning of the meeting objects to holding
the meeting or transacting business at the meeting and does not thereafter vote
for or assent to action taken at the meeting.
-8-
<PAGE>
ARTICLE 3
COMMITTEES
Section 3.1. COMMITTEES. The Board of Directors may, by
resolution or resolutions passed by a majority of the whole Board, designate an
executive committee and one or more other committees each to consist of two (2)
or more of the directors of the Corporation.
Section 3.2. POWER. The executive committee shall not have
authority to make, alter or amend the bylaws, but shall exercise all other
powers of the Board of Directors between the meetings of said Board, except the
power to fill vacancies in their own membership, which vacancies shall be filled
by the Board of Directors.
Section 3.3. MEETING. The executive committee and such other
committees shall meet at stated times or on notice to all by any of their own
number. They shall fix their own rules of procedure. A majority shall constitute
a quorum, but the affirmative vote of a majority of the whole committee shall be
necessary in every case.
Section 3.4. OTHER POWERS. Such other committees shall have
and may exercise the powers of the Board of Directors to the extent as provided
in such resolution or resolutions.
ARTICLE 4
OFFICERS
Section 4.1. EXECUTIVE OFFICERS. The officers of the
Corporation may be a President, one or more Vice Presidents, Secretary,
Treasurer, and such other officers as may from time to time be chosen by the
Board of Directors.
Section 4.2. TERM. The officers of the Corporation shall hold
office until their successors are chosen and qualify in their stead. Any officer
chosen or appointed by the Board of Directors may be removed either with or
without cause at any time by the affirmative vote of a majority of the whole
Board of Directors. If the office of any officer or officers becomes vacant for
any reason, the vacancy shall be filled by the affirmative vote of a majority of
the whole Board of Directors.
Section 4.3. DUTIES OF THE PRESIDENT.
4.3.1. The President shall be the Chief
Executive Officer of the Corporation. It shall be his duty to preside at all
meetings of the stockholders, to have general and
-9-
<PAGE>
active management of the business and the Corporation, to see that all orders
and resolutions of the Board of Directors are carried into effect and to execute
all contracts, agreements, deeds, bonds, mortgages and other obligations and
instruments, in the name of the Corporation, and to affix the corporate seal
thereto when authorized by the Board of Directors or the executive committee.
4.3.2. He shall have the general supervision and
direction of the other officers of the Corporation and shall see that their
duties are properly performed.
4.3.3. He shall be ex-officio a member of all
standing committees and shall have the general duties and powers of supervision
and management usually vested in the office of the President of a Corporation.
Section 4.4. VICE PRESIDENT. The Vice Presidents, in the order
designated by the Board of Directors, shall be vested with all powers and
required to perform all the duties of the President in his absence or disability
and shall perform such other duties as may be prescribed by the Board of
Directors.
Section 4.5. PRESIDENT PRO TEM. In the absence or disability
of the President and any Vice President, the Board may appoint from their own
number a president pro tem.
Section 4.6. SECRETARY. The Secretary shall attend all
meetings of the Corporation, the Board of Directors, the executive committee and
standing committees. He shall act as clerk thereof and shall record all of the
proceedings of such meetings in a book kept for that purpose. He shall give
proper notice of meetings of stockholders and directors and shall perform such
other duties as shall be assigned to him by the President or the Board of
Directors.
Section 4.7. TREASURER.
4.7.1. The Treasurer shall have custody of the
funds and securities of the Corporation and shall keep full and accurate
accounts of receipts and disbursements in books belonging to the Corporation and
shall deposit all moneys and other valuable effects in the name and to the
credit of the Corporation in such depositories as may be designated by the Board
of Directors.
4.7.2. He shall disburse the funds of the
Corporation as may be ordered by the Board, executive committee or President,
taking proper vouchers for such disbursements, and shall render to the President
and directors, whenever they may require it, an account of all his transactions
as treasurer, and of the financial condition of the Corporation, and at the
regular meeting of the Board next preceding the annual stockholders' meeting, a
like report for the preceding year.
-10-
<PAGE>
4.7.3. He shall keep an account of stock
registered and transferred in such manner and subject to such regulations as the
Board of Directors may prescribe.
4.7.4. He shall give the Corporation a bond, if
required by the Board of Directors, in such sum and in form and with security
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and the restoration to the Corporation, in case of his
death, resignation or removal from office, of all books, papers, vouchers, money
and other property of whatever kind in his possession, belonging to the
Corporation. He shall perform such other duties as the Board of Directors or
executive committee may from time to time prescribe or require.
Section 4.8. DUTIES OF OFFICERS MAY BE DELEGATED. In case of
the absence or disability of any officer of the Corporation or for any other
reason deemed sufficient by a majority of the Board, the Board of Directors may
delegate his powers or duties to any other officer or to any director for the
time being.
ARTICLE 5
STOCK
Section 5.1. CERTIFICATES OF STOCK. Certificates of stock
shall be signed by the President or a Vice President and either the treasurer,
assistant treasurer, secretary or assistant secretary. If a certificate of stock
be lost or destroyed, another may be issued in its stead upon proof of loss or
destruction and the giving of a satisfactory bond of indemnity in an amount
sufficient to indemnify the Corporation against any claim. A new certificate may
be issued without requiring bond when, in the judgment of the directors, it is
proper to do so.
Section 5.2. TRANSFER OF STOCK. Upon surrender to the
Corporation or the transfer agent of the Corporation of a certificate for shares
duly endorsed or accompanied by proper evidence of succession, assignation or
authority to transfer, it shall be the duty of the Corporation to issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction on its books.
Section 5.3. STOCKHOLDERS OF RECORD. The Corporation shall be
entitled to treat the holder of record of any share or shares of stock as the
holder in fact thereof and accordingly shall not be bound to recognize any
equitable or other claim to or interest in such share on the part of any other
person whether or not it shall have express or other notice thereof, save as
expressly provided by the laws of Delaware.
-11-
<PAGE>
ARTICLE 6
INDEMNIFICATION
Section 6.1. RIGHT TO INDEMNIFICATION. Each person who was or
is a party or is threatened to be made a party to or is involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative
("Proceeding"), including without limitation Proceedings by or in the right of
the Corporation to procure a judgment in its favor, by reason of the fact that
he or she or a person for whom he or she is the legal representative is or was a
director or officer, employee or agent of the Corporation or is or was serving
at the request of the Corporation as a director or officer, employee or agent of
another corporation, or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such Proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless by
the Corporation to the fullest extent authorized by the General Corporation Law
of the State of Delaware, as the same exists or may hereafter be amended (but,
in the case of any such amendment, only to the extent such amendment permits the
Corporation to provide broader indemnification rights than said law permitted
the Corporation to provide prior to such amendment) against all expenses,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered by such person in connection therewith. Such right shall be
a contract right and shall include the right to be paid by the Corporation for
expenses incurred in defending any such Proceeding in advance of its final
disposition; PROVIDED, HOWEVER, that the payment of such expenses incurred by a
director or officer of the Corporation in his or her capacity as a director or
officer (and not in any other capacity in which service was or is rendered by
such person while a director or officer, including, without limitation, service
to an employee benefit plan) in advance of the final disposition of such
Proceeding, shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such director or officer, to repay all amounts
so advanced if it should be determined ultimately that such director or officer
is not entitled to be indemnified under this section or otherwise.
Section 6.2. RIGHT OF CLAIMANT TO BRING SUIT. If a claim under
Section 6.1 is not paid in full by the Corporation within ninety (90) days after
a written claim has been received by the Corporation, the claimant may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim, and if successful in whole or in part, the claimant shall be
entitled to be paid also the expense of prosecuting such claim. It shall be a
defense to any such action (other than an action brought to enforce a claim for
expenses incurred in defending any Proceeding in advance of its final
disposition where the required undertaking has been tendered to the Corporation)
that the claimant has not met the standards of conduct which make it permissible
under the General Corporation Law of the State of Delaware for the Corporation
to indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
-12-
<PAGE>
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
General Corporation Law of the State of Delaware, nor an actual determination by
the Corporation (including its Board of Directors, independent legal counsel, or
its stockholders) that the claimant had not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that claimant
had not met the applicable standard of conduct.
Section 6.3. NON-EXCLUSIVITY OF RIGHTS. The rights conferred
by Sections 6.1 and 6.2 shall not be exclusive of any other right which such
person may have or hereafter acquire under any statute, provision of the
certificate of incorporation, bylaw, agreement, vote of stockholders or
disinterested directors or otherwise.
Section 6.4. INSURANCE. The Corporation may maintain
insurance, at its expense, to protect itself and any such director, officer,
employee or agent of the Corporation or another corporation, partnership, joint
venture, trust or other enterprise against any such expense, liability or loss,
whether or not the Corporation would have the power to indemnify such person
against such expense, liability or loss under the Delaware General Corporation
Law.
Section 6.5. OTHER SOURCES. The Corporation's obligation, if
any, to indemnify or to advance expenses to any indemnitee who was or is serving
at its request as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, enterprise or nonprofit entity shall be
reduced by any amount such indemnitee may collect as indemnification or
advancement of expenses from such other corporation, partnership, joint venture,
trust, enterprise or non-profit enterprise.
Section 6.6. AMENDMENT OR REPEAL. Any repeal or modification
of the foregoing provisions of this Article VI shall not adversely affect any
right or protection hereunder of any indemnitee in respect of any act or
omission occurring prior to the time of such repeal or modification.
Section 6.7. OTHER INDEMNIFICATION AND PREPAYMENT OF EXPENSES.
This Article VI shall not limit the right of the Corporation, to the extent and
in the manner permitted by law, to indemnify and to advance expenses to persons
other than indemnitees when and as authorized by appropriate corporate action.
-13-
<PAGE>
ARTICLE 7
MISCELLANEOUS
Section 7.1. FISCAL YEAR. The fiscal year of the Corporation
shall be determined by the Board of Directors.
Section 7.2. DIVIDENDS. Dividends upon the capital stock may
be declared by the Board of Directors at any regular or special meeting and may
be paid in cash or property or in shares of the capital stock. The directors may
set apart out of any of the funds of the Corporation available for dividends a
reserve or reserves for any proper purposes and may alter or abolish any such
reserve or reserves.
Section 7.3. CHECKS FOR MONEY. All checks, drafts or orders
for the payment of money shall be signed by the treasurer or by such other
officer or officers as the Board of Directors may from time to time designate.
No check shall be signed in blank.
Section 7.4. BOOKS AND RECORDS. The books, records and
accounts of the Corporation except as otherwise required by the laws of the
State of Delaware, may be kept within or without the State of Delaware, at such
place or places as may from time to time be designated by the bylaws or by
resolution of the directors.
Section 7.5. NOTICES. Except as otherwise specifically
provided herein or required by law, all notices required to be given to any
stockholder, director, officer, employee or agent shall be in writing and may in
every instance be effectively given by hand delivery to the recipient thereof,
by depositing such notice in the mails, postage paid, or by sending such notice
by facsimile transmission. Any such notice shall be addressed to such
stockholder, director, officer, employee or agent at his or her last known
address as the same appears on the books of the Corporation. The time when such
notice is received, if hand delivered, or dispatched, if delivered through the
mails or by facsimile transmission, shall be the time of the giving of the
notice.
Section 7.6. WAIVER OF NOTICE. A written waiver of any notice,
signed by a stockholder, director, officer, employee or agent, whether before or
after the time of the event for which notice is to be given, shall be deemed
equivalent to the notice required to be given to such stockholder, director,
officer, employee or agent. Neither the business nor the purpose of any meeting
need be specified in such a waiver.
DATED: September , 1999
-14-
<PAGE>
Exhibit 3.6
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:
SECTION 4.A.4(b) of the Certificate of Incorporation is amended and
restated in its entirety as follows:
"(b) AUTOMATIC CONVERSION. Each share of Series A
Preferred Stock shall automatically be converted into shares of Common
Stock at the Series A Conversion Price at the time in effect for such
Series A Preferred Stock, upon the earlier of (i) the date specified by
the affirmative vote or written consent of holders of at least 75% of
the then outstanding shares of Series A Preferred Stock, or (ii)
immediately upon the Corporation's sale of its Common Stock in a firm
commitment underwritten public offering pursuant to a registration
statement under the Securities Act of 1933, as amended (the "Securities
Act"), the gross public offering price of which is at least $3.44 per
share and $20,000,000 in the aggregate (a "Qualified Public Offering")
(except as provided below in Section B.4(c))."
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 S. Craig Huke, its Senior Vice President and Chief
Financial Officer, this _____ day of September, 1999.
BLUESTONE SOFTWARE, INC.
------------------------------
S. Craig Huke
Senior Vice President and
Chief Financial Officer
<PAGE>
STOCKTRANS, INC. Transfer Agent and
7 E Lancaster Avenue Registrar
Ardmore, PA 19003
SPECIMEN CERTIFICATE
COMMON STOCK [LOGO] BLUESTONE COMMON STOCK
Number SOFTWARE Shares
ENTERPRISE INTERACTION MANAGEMENT
- ------------ ------------
B [GRAPHIC: five stones arranged one on
top of the other; top stone colored blue]
- ------------ ------------
CUSIP No. 09623P 102
See Reverse for Certain Definitions
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
This certifies that is the owner of
------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON
- ----------------------------
STOCK, $.001 PAR VALUE PER SHARE, OF
BLUESTONE SOFTWARE, INC.
transferable on the books of the Corporation by the holders hereof, in person or
by duly authorized attorney, upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
---------------
[Corporate Seal]
of Bluestone Software, Inc.
- -------------------------- --------------------------
Vice President and Secretary President and Chief Executive Officer
<PAGE>
BLUESTONE SOFTWARE, INC.
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS A STATEMENT OF THE DESIGNATIONS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES
THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES
AND/OR RIGHTS. SUCH REQUEST MAY BE MADE TO THE SECRETARY OF THE CORPORATION OR
THE TRANSFER AGENT NAMED ON THE FACE HEREOF.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian . under
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of Uniform Gifts to Minors Act. .
survivorship and not as tenants in (State)
common UNIF TRANS MIN ACT - Custodian . under
(Cust) (Minor)
Uniform Transfers to Minors
Act . . . . . . . .
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, HEREBY SELL, ASSIGN AND TRANSFER UNTO
-----------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------
- -------------- -------------------------------------------------------------
(please print or typewrite name and address, including zip code, of assignee)
- -------------- -------------------------------------------------------------
Shares of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
------------------------ Attorney to
transfer the said stock on the books of the within named Corporation with full
power of substitution in the premises.
Dated:
--------------------
---------------------------
NOTICE: THE SIGNATURE TO
THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF
THE CERTIFICATE, IN EVERY
PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED
BY:
--------------------------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (Banks, Stockbrokers, Savings
and Loan Associations and Credit Unions) WITH MEMBERSHIP
IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM
PURSUANT TO S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE, IF IT IS LOST, STOLEN, MUTILATED OR
DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
<PAGE>
EXHIBIT 5.1
[LETTER HEAD OF PEPPER HAMILTON LLP]
September 7, 1999
Bluestone Software, Inc.
1000 Briggs Road
Mount Laurel, NJ 08054
Re: Registration Statement on Form S-1
(Registration No. 333-82213)
Ladies and Gentlemen:
We have acted as counsel to Bluestone Software, Inc., a Delaware
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended (the "Act"), of a public offering (the
"Offering") of up to 4,000,000 shares (the "Primary Shares") of the Company's
Common Stock, no par value (the "Common Stock"), and up to an additional 600,000
shares of Common Stock (the "Additional Shares" and, together with the Primary
Shares, the "Shares").
The opinion is delivered in accordance with the requirements of Item
601(b)(5) of Regulation S-K under the Act.
We have examined originals or copies, certified or otherwise identified
to our satisfaction, of (i) the Registration Statement on Form S-1 originally
filed under the Act with the Securities and Exchange Commission (the
"Commission") on July 2, 1999, Amendment No. 1 thereto filed on August 20, 1999
and Amendment No. 2 thereto filed on September 7, 1999 (as so amended the
"Registration Statement"); (ii) the form of underwriting agreement, filed as
Exhibit 1.1 to Amendment No. 2 to the Registration Statement (the "Underwriting
Agreement"), to be entered into by and among the Company, Deutsche Banc Alex.
Brown, Soundview Technology Group, C.E. Unterberg, Towbin and Legg Mason Wood
Walker, Incorporated; (iii) the Company's Certificate of Incorporation and
Bylaws, as in effect on the date hereof; (iv) the form of the Company's Amended
and Restated Certificate of Incorporation and Amended and Restated Bylaws, to
become effective upon closing of the Offering; (v) certain resolutions of the
Board of Directors of the Company relating to, among other things, the issuance
of the Shares; (vi) a specimen certificate representing the shares of Common
Stock; and (vii) such other documents relating to the Company and the proposed
issuance of the Shares as we have deemed necessary or appropriate as a basis for
the opinions set forth below.
<PAGE>
Bluestone Software, Inc.
September 7, 1999
Page 2
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as certified or photostatic copies and the authenticity of the
originals of such latter documents. As to any facts material to the opinions
expressed herein which were not independently established or verified, we have
relied upon statements and representations of officers and other representatives
of the Company and others. In addition, we have assumed the conformity of the
certificates representing the Shares to the form of the specimen thereof
examined by us and the due execution and delivery of such certificates.
Members of our firm are admitted to the Bar of the Commonwealth of
Pennsylvania, and we express no opinion as to the laws of any other jurisdiction
other than the Federal laws of the United States of America.
Based upon and subject to the foregoing, we are of the opinion that,
when issued and delivered against payment therefor in accordance with the terms
of the Underwriting Agreement, the Shares will be duly authorized, legally
issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the prospectus filed as part of the Registration Statement.
This opinion is furnished by us, as your counsel, in connection with
the filing of the Registration Statement and, except as provided in the
immediately preceding paragraph, is not to be used, circulated, quoted or
otherwise referred to for any other purpose without our express written
permission or relied upon by any other person.
Very truly yours,
/s/ PEPPER HAMILTON LLP
<PAGE>
Exhibit 10.39
Form of
BLUESTONE SOFTWARE, INC.
SENIOR MANAGEMENT COMPENSATION POLICY
The following sets forth the Bluestone Software, Inc. Senior
Management Compensation Policy (the "Policy") for any employee who holds the
rank of Vice President or higher. The Policy and its elements are confidential
and proprietary to Bluestone Software, Inc. (the "Company") and as such its
contents and your specific performance criteria are not to be disclosed to any
unauthorized third party.
Authorized parties are defined as your spouse, direct
supervisor, any legally recognized authority or the Company Human Resources
Department Manager. Any other party, including but not limited to peers,
colleagues, friends, associates or others shall be deemed unauthorized.
Breach of confidentiality shall be deemed terms for immediate
dismissal from the Company for cause. This Policy and its contents are subject
to final acceptance by the Company's board of directors and are subject to
change at its sole discretion.
POLICY TYPE
The Policy is applicable only to senior management members
which by classification are deemed to be exempt in nature.
POLICY TERM
This Policy shall be effective from the date of execution
indicated by the Company's President and shall remain in force through the close
of business on December 31, 1999. BASE SALARY
Your base salary is effective February 1, 1999. Adjustments,
if any, will be made retroactive to that date.
INCENTIVE COMPENSATION
Any bonuses or other cash incentive compensation will be
earned pursuant to individually prescribed performance criteria.
PERFORMANCE OPTIONS
Unlike your Incentive Stock Option awards, which vest as
outlined in the Company's 1996 Incentive and Non-Qualified Stock Option Plan
(the "Option Plan"), performance options vest immediately upon the date of
grant. Grants will be made in accordance with individually prescribed
performance criteria. Exercise of such an option will be subject to the same
terms and limitations as are outlined in the Option Plan.
<PAGE>
OVER ACHIEVEMENT
Over achievement is possible provided that the Company and/or
individuals recommended by the Company's President and approved by the Company's
board of directors achieve their individually prescribed performance goals. Over
achievement compensation, if any, will be provided only at the end of the fiscal
year, unless otherwise decided by the Company's President. The maximum available
benefit for over achievement shall be 20% above the stated 100% performance
goals. Individuals who are eligible for variable compensation as a direct result
of sales will not have any restrictions in terms of over achievement of their
variable compensation.
UNDER ACHIEVEMENT
Under achievement remuneration, if any, will be provided at
the sole discretion of the Company's President with the approval of the
Company's board of directors. Remuneration, if any, will be determined by
mitigating circumstances deemed relevant solely by the Company's President.
WINDFALL PROVISION
The Company hereby notifies Policy participants that it will
exercise a windfall provision at its sole discretion in the event that a
windfall should be realized. In this event the Company's President, at his sole
discretion, shall reserve the right to determine what compensation, if any, will
be provided as the result of a windfall.
DISTRIBUTION
Distribution will be made in accordance with individually
prescribed performance criteria on either a monthly, quarterly or annual basis.
Any and all distribution will be made at the sole discretion of the Company
based upon attainment of individually specified performance objectives.
ACCEPTANCE
In reviewing this document I accept the compensation package
provided including, but not limited, to the terms and conditions of the Policy.
I understand that no additional compensatory provision exists between the
Company and myself save that which is provided pursuant to the Policy and my
individually prescribed performance goals.
Employee: Manager:
----------------------------- -----------------------------
Print Name: Print Name:
--------------------------- --------------------------
Date: Date:
--------------------------------- --------------------------------
-2-
<PAGE>
Exhibit 10.40
FORM OF
BLUESTONE SOFTWARE, INC.
EXECUTIVE MANAGEMENT COMPENSATION POLICY
The following sets forth the Bluestone Software, Inc.
Executive Management Compensation Policy (the "Policy") for any employee who
holds the rank of Senior Vice President or higher. The Policy and its elements
are confidential and proprietary to Bluestone Software, Inc. (the "Company") and
as such their contents and your specific performance criteria are not to be
disclosed to any unauthorized third party.
Authorized parties are defined as your spouse, direct
supervisor, any legally recognized authority or the company Human Resources
Department Manager. Any other party, including but not limited to peers,
colleagues, friends, associates or others shall be deemed unauthorized.
Breach of confidentiality shall be deemed terms for immediate
dismissal from the Company for cause. This Policy and its contents are subject
to final acceptance by the Company's board of directors and are subject to
change at its sole discretion.
POLICY TYPE
The Policy is applicable only to executive management members,
which by classification are deemed to be exempt in nature.
POLICY TERM
This Policy shall be effective from the date of execution
indicated by the Company's President and shall remain in force through the close
of business on December 31, 1999.
BASE SALARY
Your base salary is effective February 1, 1999. Adjustments,
if any, will be made retroactive to that date.
INCENTIVE COMPENSATION
Any bonuses or other cash incentive compensation will be
earned pursuant to individually prescribed performance criteria.
PERFORMANCE OPTIONS
Unlike your Incentive Stock Option awards, which vest as
outlined in the Company's 1996 Incentive and Non-Qualified Stock Option Plan
(the "Option Plan"), performance options vest immediately upon the date of
grant. Grants will be made in accordance with individually prescribed
performance criteria. Exercise of such an option will be subject to the same
terms and limitations as are outlined in the Option Plan.
<PAGE>
OVER ACHIEVEMENT
Over achievement is possible provided that the Company and or
individuals recommended by the Company's President and approved by the Company's
board of directors achieve their individually prescribed performance goals. Over
achievement compensation, if any, will be provided only at the end of the fiscal
year, unless otherwise decided by the Company's President. The maximum available
benefit for over achievement shall be 20% above the stated 100% performance
goals. Individuals who are eligible for variable compensation as a direct result
of sales will not have any restrictions in terms of over achievement of their
variable compensation.
UNDER ACHIEVEMENT
Under achievement remuneration if any, will be provided at the
sole discretion of the Company's President with the approval of the Company's
board of directors. Remuneration, if any, will be determined by mitigating
circumstances deemed relevant solely by the Company's President.
WINDFALL PROVISION
The Company hereby notifies Policy participants that it will
exercise a windfall provision at its sole discretion in the event that a
windfall should be realized. In this event the Company's President, at his sole
discretion, shall reserve the right to determine what compensation, if any, will
be provided as the result of a windfall.
DISTRIBUTION
Distribution will be made in accordance with individually
prescribed performance criteria on either a monthly, quarterly or annual basis.
Any and all distributions will be made at the sole discretion of the Company
based upon attainment of individually specified performance objectives.
ACCEPTANCE
In reviewing this document I accept the compensation package
provided, including but not limited to, the terms and conditions of the Policy.
I understand that no additional compensatory provision exists between the
Company and myself save that which is provided pursuant to the Policy and my
individually prescribed performance goals.
Employee: Manager:
----------------------------- ----------------------------
Print Name: Print Name:
--------------------------- -------------------------
Date: Date:
--------------------------------- -------------------------------
-2-
<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
September 3, 1999
