<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 14, 2000
REGISTRATION NO. 333-95931
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
BLUESTONE SOFTWARE, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7372 22-2964141
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
</TABLE>
------------------------
300 STEVENS DRIVE
PHILADELPHIA, PENNSYLVANIA 19113
(610) 915-5000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------------------------
PAUL T. PORRINI, ESQUIRE
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
BLUESTONE SOFTWARE, INC.
300 STEVENS DRIVE
PHILADELPHIA, PENNSYLVANIA 19113
(610) 915-5005
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
MICHAEL P. GALLAGHER, ESQUIRE WILLIAM J. GRANT, JR., ESQUIRE
PEPPER HAMILTON LLP WILLKIE FARR & GALLAGHER
1235 WESTLAKES DRIVE, SUITE 400 787 SEVENTH AVENUE
BERWYN, PA 19312 NEW YORK, NEW YORK 10019
(610) 640-7800 (212) 728-8000
</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 the 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 Filed Pursuant to Rule 424(b)(4)
Registration No. 333-____________
[LOGO]
3,500,000 Shares
Common Stock
We are offering 1,750,000 shares and certain selling stockholders are offering
1,750,000 shares in this offering. We will not receive any of the proceeds from
the sale of common stock by the selling stockholders. Our common stock is listed
for quotation on the Nasdaq National Market under the symbol "BLSW." The last
reported sale price of our common stock on February 11, 2000 was $97.00 per
share.
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 $ $
Proceeds to selling stockholders $ $
</TABLE>
Certain selling stockholders have granted the underwriters a 30-day option to
purchase up to 525,000 additional shares of common stock at the offering price
to cover any over-allotments.
We expect to issue these shares on February , 2000.
Deutsche Banc Alex. Brown
Wit SoundView
C.E. Unterberg, Towbin
Legg Mason Wood Walker Incorporated
, 2000
<PAGE>
[INSIDE FRONT COVER OF PROSPECTUS]
[LOGO]
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 hand corner of the page and moving in a
clockwise direction is the following graphical figures:
(1) A two-directional arrow cuts through a cloud that represents and is labeled
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 laptop 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 satellite dish and the server cabinet. 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. A two-directional arrow points between the
aforementioned figures and the server cabinet. To the left of the figures is
the following text: "APPLICATION ACCESS--Access from other information
sources or computer systems."
(4) In the lower right hand 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 website titled "MyBluestone.com". A two-directional arrow
points between the computer screen and the server cabinet. To the right of
the computer screen is the following text: "E-COMMERCE COMPONENTS--Provides
content management, personalization and storefront capabilities."
<PAGE>
[GRAPHIC]
<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 CERTAIN SELLING
STOCKHOLDERS IS NOT EXERCISED.
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 Suite, which represents a new generation
of specialized Web application server focused on commerce via the Internet. In
December 1999, we released Bluestone Total-e-Business, an e-business platform
that provides the infrastructure, integration, content management,
personalization and e-commerce components that companies utilize to conduct
their businesses on 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 software would be approximately
$700 million in 1999 and grow to approximately $1.8 billion by 2001,
representing a compounded 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
1
<PAGE>
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 and Internet commerce 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:
- a 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;
- further develop indirect channels, partners and alliances; and
- make strategic acquisitions of complementary businesses and technologies.
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;
- three of the top four FORTUNE 500 companies in the entertainment industry;
and
2
<PAGE>
- 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, Avnet, Deutsche Bank, Expression
Engines, Inc., Food.com, gazoontite.com, Hewlett-Packard, Houghton Mifflin
Company, Sanchez Computer Associates, Spinrocket.com, Inc. and Strategic Weather
Services.
We were originally incorporated in 1989. Our executive offices are located
at 300 Stevens Drive, Philadelphia, Pennsylvania 19113. Our telephone number is
(610) 915-5000. 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............ 1,750,000 shares
Common stock offered by the selling 1,750,000 shares
stockholders...............................
Total offering............................... 3,500,000 shares
Common stock outstanding after this 20,262,359 shares
offering...................................
Use of proceeds.............................. Product development, sales and marketing,
potential acquisitions and working capital
Nasdaq National Market symbol................ "BLSW"
</TABLE>
Common stock outstanding after this offering is based on the number of
shares outstanding as of December 31, 1999 and includes an additional 277,842
shares of common stock offered by certain selling stockholders which were
issuable upon the exercise of stock options outstanding on such date. It
excludes:
- 2,384,645 shares of common stock issuable upon exercise of other options
and warrants at a weighted average exercise price of $11.92 per share.
- 369,356 shares reserved for future grants under our stock option and
directors' compensation plans.
- 3,459,672 additional shares reserved for issuance under our stock option
plan as approved on January 31, 2000.
3
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following table sets forth certain of our historical, pro forma and
adjusted financial data. The pro forma net loss per share amount presented below
reflects the outstanding preferred stock during the period presented on an as
converted basis. The adjusted balance sheet data presented below gives effect to
the receipt of the estimated net proceeds of $161.1 million from the sale of
shares of common stock offered by us at an assumed offering price of $97.00 per
share, after deducting $8.6 million for estimated underwriting discounts and
commissions and our estimated offering expenses and our receipt of $2.3 million
of proceeds from the exercise of 277,842 stock options by certain selling
stockholders.
In April 1997, 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>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license fees..................................... $ 2,337 $ 3,391 $ 11,654
Services.................................................. 2,179 3,620 3,993
Third party products and related services................. 5,225 1,107 --
------- -------- --------
Total revenues........................................ 9,741 8,118 15,647
Cost of revenues:
Software license fees..................................... 202 259 401
Services.................................................. 2,516 4,433 4,792
Third party products and related services................. 2,798 643 --
------- -------- --------
Total cost of revenues................................ 5,516 5,335 5,193
------- -------- --------
Gross profit................................................ 4,225 2,783 10,454
Operating expenses:
Sales and marketing....................................... 5,131 9,551 15,936
Product development....................................... 1,295 2,474 4,537
General and administrative................................ 1,616 2,316 4,412
Amortization of stock-based compensation.................. -- -- 282
------- -------- --------
Total operating expenses.............................. 8,042 14,341 25,167
------- -------- --------
Loss from operations........................................ (3,817) (11,558) (14,713)
Interest expense, net....................................... (80) (47) (405)
------- -------- --------
Loss from continuing operations............................. (3,896) (11,605) (15,118)
Income from discontinued operations......................... 99 -- --
------- -------- --------
Net loss.................................................... (3,798) (11,605) (15,118)
Accretion of preferred stock redemption value............... (240) (846) (1,636)
------- -------- --------
Net loss available to common stockholders................... $(4,038) $(12,451) $(16,754)
======= ======== ========
Basic and diluted net income (loss) per share:
Continuing operations..................................... $ (1.39) $ (4.12) $ (2.18)
Discontinued operations................................... 0.04 -- --
Accretion of preferred stock redemption value............. (0.09) (0.30) (0.24)
------- -------- --------
$ (1.44) $ (4.42) $ (2.42)
======= ======== ========
Shares used in computing basic and diluted net income (loss)
per share................................................. 2,813 2,814 6,928
Pro forma basic and diluted net loss per share from
continuing operations..................................... $ (1.13)
========
Shares used in computing pro forma basic and diluted net
loss per share............................................ 13,429
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------------
ACTUAL ADJUSTED
-------- -------------------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $66,160 $229,579
Working capital............................................. 63,545 226,964
Total assets................................................ 74,140 237,559
Long-term obligations, net of current portion............... 439 439
Total stockholders' equity.................................. 65,964 229,383
</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, $11.6 million and $15.1 million for the years ended
December 31, 1997, 1998 and 1999, respectively. Our losses have resulted in an
accumulated deficit of approximately $34.9 million as of December 31, 1999. We
expect to increase our research and development, sales and marketing and general
and administrative expenses in future periods. 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
5
<PAGE>
Internet, we may need to adapt our technology. Any required adaptation could
cause us to spend significant amounts of time and money. If use of the Internet
does not continue to grow or grows more slowly than expected, if the
infrastructure for the Internet does not effectively support growth that may
occur, if government regulations change or if the Internet does not become a
viable commercial marketplace, our business could suffer.
WE DEPEND ON OUR SAPPHIRE/WEB 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 $11.7 million or 74% of total revenues in
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. We expect to continue to commit significant resources to market and
further develop the Sapphire/Web software products and enhance the brand
awareness of Sapphire/Web and our other software 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
6
<PAGE>
longer operating histories, significantly greater financial, technical,
marketing and other resources, greater name recognition, a broader range of
products to offer and a larger installed base of customers than us, any of which
could provide them with a significant competitive advantage.
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 to 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 years ended December 31, 1998 and 1999 in the
aggregate accounted for approximately 39% and 56%, respectively, of our
revenues. Hewlett-Packard accounted for more than 10% of our revenues for the
year ended December 31, 1998 and Avnet and OpenConnect individually accounted
for more than 10% of our revenues for the year ended December 31, 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.
7
<PAGE>
OUR STOCK PRICE MAY FLUCTUATE WIDELY.
Prior to our initial public offering in September 1999, there was no public
market for our common stock. Since then, the market price of our common stock
has fluctuated significantly. The market price of our common stock could
continue to fluctuate substantially due to:
- quarterly fluctuations in operating results;
- announcements of new products or product enhancements by us or our
competitors;
- technological innovations by us or our competitors;
- general market conditions or market conditions specific to our or our
customers' industries; and
- changes in earnings estimates or recommendations by analysts.
Stock prices of Internet-related companies have been highly volatile. Our
current stock 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.
OUR FAILURE TO SUCCESSFULLY INTEGRATE FUTURE ACQUISITIONS COULD ADVERSELY AFFECT
OUR BUSINESS.
We intend to acquire complementary product lines, technologies and
businesses as part of our growth strategy. Although we may make such
acquisitions, we may not be able to successfully integrate them with our
business in a timely manner. Our failure to successfully address the risks
associated with such acquisitions, if consummated, could have a material adverse
effect on our business and our ability to develop and market products. The
success of any acquisitions will depend on our ability to:
- successfully integrate and manage the acquired operations;
8
<PAGE>
- retain the key employees of the acquisition targets;
- develop, integrate and market products and product enhancements based on
the acquired products and technologies; and
- control costs and expenses, as well as demands on our management,
associated with the potential acquisitions.
If we are not able to successfully integrate acquired product lines,
technologies or businesses with our business, we may incur substantial costs and
delays or other operational, technical or financial problems. In addition, our
failure to successfully integrate acquisitions may divert management's attention
from our existing business and may damage our relationships with key clients and
employees. To finance future acquisitions, we may issue equity securities that
could be dilutive to our stockholders. We may also incur debt and additional
amortization expenses related to goodwill and other intangible assets as a
result of future acquisitions. The interest expense related to this debt and
additional amortization expense may significantly reduce our profitability and
could have a material adverse effect on our business, financial condition and
operating results.
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.
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 eight 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.
In 1999, we derived approximately 60% 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
9
<PAGE>
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 SOFTWARE PRODUCTS COULD CAUSE
SIGNIFICANT FLUCTUATION IN OUR QUARTERLY RESULTS.
Our software products are 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 software products 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 software
solutions. For these reasons, the length of time between the date of initial
contact with the potential customer and the execution of a software license
agreement typically ranges from three to six months, and is subject to delays
over which we have little or no control. As a result, our ability to forecast
the timing and amount of specific sales is limited and the delay or failure to
complete one or more large license transactions could cause our operating
results to vary significantly from quarter to quarter.
THE FAILURE TO IMPLEMENT SUCCESSFULLY OUR SOFTWARE PRODUCTS COULD RESULT IN
DISSATISFIED CUSTOMERS AND DECREASED SALES.
Implementation of our software products 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 software. Our
failure or the failure of our alliance partners, our customers or our third
party integrators to implement successfully our software products could result
in dissatisfied customers which could limit our ability to generate repeat
business and adversely affect our reputation.
WE MAY REQUIRE FUTURE ADDITIONAL FUNDING FOR OUR BUSINESS.
Over time, we may require additional financing for our operations.
Additionally, we periodically review other companies and their 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.
10
<PAGE>
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
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.
11
<PAGE>
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.
We have not experienced any material internal Year 2000 problems to date.
While our software products are not time/date sensitive, many of the third party
software applications run by our customers are time/date sensitive. We have not
been advised of any material Year 2000 problems by our customers to date. We
have, however, in the past resold third party software that may not be Year 2000
compliant. While we have not been made aware of any material Year 2000 problems
relating to the hardware and software used by our customers in connection with
our products to date, these problems may exist. Should any of these problems
develop, they may have a material adverse effect on our business, operating
results and financial condition. In addition, we utilize software, computer
technology and other services internally developed and provided by third party
vendors that may have Year 2000 issues. Although we have not experienced any of
these problems to date, the failure of our internal computing systems or of
systems provided by third party vendors to be Year 2000 compliant could
materially adversely affect our business.
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 may still be 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. Many companies may continue to wait some length of time to assure
that their systems are Year 2000 compliant prior to making commitments to
purchase our products.
If our potential customers delay purchasing or implementing our products in
order to address the Year 2000 issue, our business would be seriously harmed.
Our costs related to Year 2000 compliance, which thus far have not been
material, could ultimately be significant if Year 2000 problems surface. In the
event that we experience disruptions as a result of any Year 2000 problems, our
business could be seriously harmed.
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 INFLUENCE DECISIONS
THAT COULD ADVERSELY AFFECT OUR STOCK PRICE.
Following the completion of this offering, our executive officers, directors
and their affiliates will own approximately 45% of the outstanding shares of
common stock. As a result, these stockholders will be able to substantially
influence all matters requiring stockholder approval and, thereby, our
management and affairs. Matters that require stockholder approval include:
- election of directors;
- certain 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.
12
<PAGE>
INVESTORS IN THIS OFFERING WILL INCUR IMMEDIATE DILUTION PER SHARE OF THE COMMON
STOCK BASED ON ITS BOOK VALUE AFTER THE OFFERING.
The offering price will be substantially higher than the book value of our
common stock. At the assumed offering price of $97.00 per share, the book value
of the common stock after the offering will be $11.32 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 or warrants 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.
Our charter and our bylaws, in conjunction with Delaware law, 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,
our charter provides for a classified board of directors and allows the board of
directors to expand its size and fill any vacancies without stockholder
approval. In addition, our bylaws restrict the ability of stockholders to call a
special meeting.
WE WILL RETAIN BROAD DISCRETION IN USING THE NET PROCEEDS TO US FROM THIS
OFFERING AND MAY SPEND A SUBSTANTIAL PORTION IN WAYS IN WHICH YOU DO NOT AGREE.
We will retain a significant amount of discretion over the application of
the net proceeds to us from this offering, as well as over the timing of our
expenditures. Because of the number and variability of factors that determine
our use of the net proceeds to us from this offering, we may apply the net
proceeds to us from this offering in ways with which you disagree.
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 also could 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.
The 180 day lock-up period relating to our initial public offering covering
shares of common stock held by management and certain of our significant
stockholders expires on March 21, 2000. Additionally, the underwriters in this
offering have asked that our directors and certain executive officers and the
selling stockholders in this offering execute another lock-up agreement
prohibiting sales by those persons of our common stock for 90 days from the
effective date of this prospectus.
The holders of a significant amount of our common stock, as well as the
holders of outstanding warrants are entitled to registration rights with respect
to their common stock or the common stock underlying their convertible
securities. If these holders, by exercising their registration rights, cause a
large number of securities to be registered and sold in the public market, these
sales could have an adverse effect on the market price for our common stock. If
we were to include, in a registration statement initiated by us, shares held by
these holders pursuant to the exercise of their registration rights, these sales
may have an adverse effect on our ability to raise needed capital.
FORWARD-LOOKING STATEMENTS
Some statements in this prospectus constitute forward-looking statements.
Such statements are identified by the use of words such as "anticipate,"
"believe," "could," "estimate," "expect," "intend," "may," "should," "will," and
"would" or similar expressions. Forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements or those of our customers or our industry
to be materially different from any future results, performance or achievements
expressed or implied by these forward-looking statements. Such
13
<PAGE>
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 1,750,000 shares of common stock, at
an assumed offering price of $97.00 per share, will be approximately $161.1
million after deducting $8.6 million for underwriting discounts and commissions
and estimated offering expenses payable by us. We will not receive any proceeds
from the sale of shares by the selling stockholders or if the underwriters'
over-allotment option is exercised. 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, acquisitions and
working capital. With respect to acquisitions, we may periodically use a portion
of the proceeds of this offering to acquire products, technology or businesses,
or make strategic investments in businesses, that we determine are complementary
to our business. From time to time, we may be in discussions with potential
acquisition candidates. Presently, we have no definitive agreements, commitments
or understandings to consummate any acquisitions.
Pending their application as described above, we intend to invest the net
proceeds in short-term, interest-bearing government 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.
PRICE RANGE OF COMMON STOCK
Our common stock is listed on the Nasdaq National Market under the symbol
"BLSW." Public trading of our common stock commenced on September 24, 1999.
Prior to that date, there was no public market for our common stock. The
following table sets forth, for the periods indicated, the high and low sale
price per share of the common stock on the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
Year Ended December 31, 1999
Third Quarter (from September 24, 1999)................... $ 24.88 $16.63
Fourth Quarter............................................ $155.00 $22.50
Year Ending December 31, 2000
First Quarter (through February 11, 2000)................. $130.50 $75.00
</TABLE>
As of February 11, 2000 there were 89 holders of record of our common stock.
On February 11, 2000, the last sale price reported on the Nasdaq National Market
for our common stock was $97.00 per share.
14
<PAGE>
CAPITALIZATION
The following table sets forth our unaudited total capitalization as of
December 31, 1999:
- on an actual basis; and
- on an adjusted basis to give effect to the receipt of the net proceeds of
$161.1 million from our sale of 1,750,000 shares of common stock in this
offering at an assumed offering price of $97.00 per share, after deducting
$8.6 million for estimated underwriting discounts and commissions and
estimated offering expenses and the exercise of 277,842 stock options
outstanding on December 31, 1999 by certain selling stockholders and our
receipt of the related proceeds of $2.3 million.
In the following table, stockholders' equity excludes:
- 2,172,617 shares of common stock issuable upon the exercise of other stock
options outstanding as of December 31, 1999 under our 1996 Incentive and
Non-Qualified Stock Option Plan with a weighted average exercise price of
$11.88 per share and 224,042 shares reserved for issuance under the plan
as of December 31, 1999;
- 3,459,672 additional shares of common stock reserved for issuance under
our option plan as approved on January 31, 2000;
- 10,936 shares of common stock issuable upon the exercise of stock options
outstanding as of December 31, 1999 under our Director's Compensation Plan
with a weighted average exercise price of $23.13 per share and 145,314
shares reserved for issuance under this plan; and
- 201,092 shares of common stock issuable upon the exercise of warrants
outstanding as of December 31, 1999 with a weighted average exercise price
of $11.74 per share.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------
ACTUAL ADJUSTED
-------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Short-term borrowings, including current portion of
long-term debt............................................ $ 429 $ 429
Long-term debt, less current portion........................ 439 439
-------- -----------------
Total debt................................................ 868 868
Stockholders' equity:
Common stock, par value $0.001; 54,900,000 shares
authorized, 18,234,517 shares issued and outstanding
actual; 20,262,359 shares issued and outstanding
adjusted................................................ 18 20
Common stock warrants..................................... 1,205 1,205
Deferred compensation..................................... (1,134) (1,134)
Additional paid-in capital................................ 100,790 264,208
Accumulated deficit....................................... (34,916) (34,916)
-------- -----------------
Total stockholders' equity................................ 65,963 229,383
-------- -----------------
Total capitalization...................................... $ 66,831 $ 230,251
======== =================
</TABLE>
15
<PAGE>
DILUTION
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. Based on an assumed offering price of
$97.00 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 and the exercise of 277,542
stock options by certain selling stockholders and our receipt of the related
proceeds of $2.3 million from the exercise, our net tangible book value as of
December 31, 1999 would have been $229.4 million or $11.32 per share of common
stock. This represents an immediate increase in net tangible book value of $7.70
per share to existing stockholders and an immediate dilution of $85.68 per share
to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $97.00
Net tangible book value per share as of December 31,
1999.................................................... $3.62
Increase per share attributable to new investors.......... 7.70
-----
Adjusted net tangible book value per share as of
December 31, 1999......................................... 11.32
------
Dilution per share to new investors......................... $85.68
======
</TABLE>
The table above assumes no further exercise of outstanding stock options or
warrants and excludes:
- 2,172,617 shares of common stock issuable upon the exercise of other stock
options outstanding as of December 31, 1999 under our 1996 Incentive and
Non-Qualified Stock Option Plan with a weighted average exercise price of
$11.88 per share and 224,042 shares reserved for issuance under the plan
as of December 31, 1999;
- 3,459,672 additional shares of common stock reserved for issuance under
our option plan as approved on January 31, 2000;
- 10,936 shares of common stock issuable upon the exercise of stock options
outstanding as of December 31, 1999 under our Director's Compensation Plan
with a weighted average exercise price of $23.13 per share and 145,314
shares reserved for issuance under this plan; and
- 201,092 shares of common stock issuable upon the exercise of warrants
outstanding as of December 31, 1999 with a weighted average exercise price
of $11.74 per share.
Certain selling stockholders plan to exercise options to purchase 277,842
shares of common stock in connection with this offering. To the extent that
other outstanding options or warrants are exercised, there will be further
dilution to new investors.
16
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below as of December 31, 1998 and 1999
and for each of the three years in the period ended December 31, 1999 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,
1996 and 1997 and for the years ended December 31, 1995 and 1996 have been
derived from our audited financial statements which are not included in this
prospectus. The pro forma net loss per share amount presented below reflects the
outstanding preferred stock during the period presented 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 accompanying notes,
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(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 $ 11,654
Services.................................................. -- 43 2,179 3,620 3,993
Third party products and related services................. 6,950 6,555 5,225 1,107 --
------ ------- ------- -------- --------
Total revenues.......................................... 6,950 8,073 9,741 8,118 15,647
Cost of revenues:
Software license fees..................................... -- 113 202 259 401
Services.................................................. -- 305 2,516 4,433 4,792
Third party products and related services................. 3,975 4,261 2,798 643 --
------ ------- ------- -------- --------
Total cost of revenues.................................. 3,975 4,679 5,516 5,335 5,193
------ ------- ------- -------- --------
Gross profit................................................ 2,975 3,394 4,225 2,783 10,454
Operating expenses:
Sales and marketing....................................... 1,836 3,005 5,131 9,551 15,936
Product development....................................... 458 702 1,295 2,474 4,537
General and administrative................................ 841 1,515 1,616 2,316 4,412
Amortization of stock-based compensation.................. -- -- -- -- 282
------ ------- ------- -------- --------
Total operating expenses................................ 3,135 5,222 8,042 14,341 25,167
------ ------- ------- -------- --------
Loss from operations........................................ (160) (1,828) (3,817) (11,558) (14,713)
Interest expense, net....................................... (41) (50) (80) (47) (405)
------ ------- ------- -------- --------
Loss from continuing operations............................. (201) (1,878) (3,896) (11,605) (15,118)
Income (loss) from discontinued operations.................. 497 (738) 99 -- --
------ ------- ------- -------- --------
Net income (loss)........................................... 296 (2,616) (3,798) (11,605) (15,118)
Accretion of preferred stock redemption value............... -- -- (240) (846) (1,636)
------ ------- ------- -------- --------
Net income (loss) available to common stockholders.......... $ 296 $(2,616) $(4,038) $(12,451) $(16,754)
====== ======= ======= ======== ========
Basic and diluted net income (loss) per share:
Continuing operations..................................... $(0.07) $ (0.67) $ (1.39) $ (4.12) $ (2.18)
Discontinued operations................................... 0.18 (0.26) 0.04 -- --
Accretion of preferred stock redemption value............. -- -- (0.09) (0.30) (0.24)
------ ------- ------- -------- --------
$ 0.11 $ (0.93) $ (1.44) $ (4.42) $ (2.42)
====== ======= ======= ======== ========
Shares used in computing net income (loss) per share........ 2,813 2,813 2,813 2,814 6,928
Pro forma basic and diluted net loss per share from
continuing operations..................................... $ (1.13)
========
Shares used in computing pro forma basic and diluted net
loss per share............................................ 13,429
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 146 $ 1,086 $ 2,330 $ 2,535 $ 66,160
Working capital (deficit)................................... 1,205 (640) (48) (340) 63,545
Total assets................................................ 4,888 6,734 5,815 7,536 74,140
Long-term obligations, net of current portion............... 518 1,289 1,270 1,876 439
Mandatorily redeemable convertible preferred stock.......... -- -- 5,331 17,415 --
Total stockholders' equity (deficit)........................ 1,375 (1,269) (5,703) (18,147) 65,964
</TABLE>
17
<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 Suite, 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.
In December 1999, we released Bluestone Total-e-Business. For the year ended
December 31, 1999, all of our revenue was generated from our proprietary
software products and related services.
OVERVIEW
Our fiscal year end is December 31. References to 1997, 1998 or 1999 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, during 1999, one customer accounted for greater than 10% of our
total product and services revenues. Our top 10 customers represented 34%, 39%
and 56% of total revenues in 1997, 1998 and 1999, respectively. In the future,
we expect to continue to have individual customers account for a significant
portion of our revenue during a given period.
18
<PAGE>
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 generally
based on the number of developer seats and server interactions. Pricing options
based on enterprise-wide deployment or the number of processors is also
available. We also sell annual and multi-year licenses to independent software
vendors that allow for the integration of our products into their software. We
generally require a written license contract that typically provides for payment
within 30-60 days of contract signing. Certain multi-year license contracts
contain payment terms that extend beyond one year. Pursuant to the American
Institute of Certified Public Accountants' Statement of Position 97-2, any
amounts due under contracts beyond one year are not deemed to be fixed or
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 or
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 licenses also includes the cost of
third-party software products embedded in our product offerings.
COST OF SERVICES. Cost of services consists primarily of salary and benefit
costs of our consulting, support and training organizations, and are expensed
when incurred. We also engage outside consultants to meet customer demand.
SALES AND MARKETING. We license our products primarily through our indirect
channels and our 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.
19
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses include our
personnel and other costs of our corporate, 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.
RESULTS OF OPERATIONS
The table below sets forth statement of operations data for the periods
indicated as a percentage of total revenues.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------------
1997 1998 1999
-------- -------- --------
(AS A PERCENTAGE OF TOTAL
REVENUES)
<S> <C> <C> <C>
Revenues:
Software license fees..................................... 24% 42% 74%
Services.................................................. 22 44 26
Third party products and related services................. 54 14 --
---- ---- ----
Total revenues........................................ 100 100 100
Cost of revenues:
Software license fees..................................... 2 3 3
Services.................................................. 26 55 31
Third party products and related services................. 29 8 --
---- ---- ----
Total cost of revenues................................ 57 66 33
---- ---- ----
Gross profit................................................ 43 34 67
Operating expenses:
Sales and marketing....................................... 53 118 102
Product development....................................... 13 30 29
General and administrative................................ 17 29 28
Amortization of stock-based compensation.................. -- -- 2
---- ---- ----
Total operating expenses.............................. 83 177 161
---- ---- ----
Loss from operations........................................ (39) (142) (94)
Interest expense, net....................................... (1) (1) (3)
---- ---- ----
Loss from continuing operations............................. (40)% (143)% (97)%
==== ==== ====
</TABLE>
1999 COMPARED TO 1998
SOFTWARE LICENSE FEES
License fees were $11.7 million and $3.4 million for the years ended
December 31, 1999 and 1998, respectively. This increase of 243.7% was primarily
due to a shift in our product position from a low-priced development tool to a
high-end, higher-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 the licensing of our graphical user interface product line in
April 1998.
SERVICES REVENUE
Services revenue was $4.0 million and $3.6 million for 1999 and 1998,
respectively. Services revenue increased 10.3% between the two periods. This
relatively small increase in services revenue
20
<PAGE>
when compared to the increase in software license fees was primarily 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 less than two weeks in
duration, rather than long-term implementation activities. Larger sale
implementation activities currently are performed primarily by systems
integrators with which we have strategic alliances.
THIRD PARTY PRODUCTS AND RELATED SERVICES REVENUE
Third party products and related services revenue was zero and $1.1 million
for the years ended December 31, 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 96.6% for 1999 from 92.4% for
1998. This increase was primarily due to the increase in revenue per customer.
Our focus on positioning our Sapphire/Web family of products as enterprise-wide
solutions has increased the revenue associated with each sale, while the cost of
sales for the product has decreased, as we have reduced our printing and
duplication costs associated with our products and related documentation.
However, in future periods, as we continue to enhance our product offerings, the
license fee gross margin may decrease as a result of the cost of third-party
software embedded in our software products.
GROSS MARGIN-SERVICES REVENUE
Our services gross margin remained relatively flat at (20.0)% for 1999 and
(22.5)% for 1998. Our negative services gross margins are 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 $15.9 million and $9.6 million for 1999
and 1998, respectively, representing an increase of 66.9%. Of this increase,
$1.8 million was due to increases in payroll and related costs, $796,000 was due
to recruiting costs and travel costs as a result of the growth in the number of
sales personnel, $1.1 million was due to increased advertising and trade show
expenses and $1.3 million 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 1999 was 59 compared to 49 for 1998. We also
incurred increases in variable marketing expenses due to increased channels and
customer marketing, direct mail campaigns and public relations expenses in order
to increase market awareness and gain market acceptance of our products. These
costs as a percentage of revenue were 101.8% and 117.7% for 1999 and 1998,
respectively.
PRODUCT DEVELOPMENT
Product development expenses were $4.5 million and $2.5 million for 1999 and
1998, respectively, representing an increase of 83.4%. This increase is
primarily due to increased payroll and related costs of $1.6 million associated
with the development of our new products, Sapphire/Web Release 6, Bluestone XML
Suite and Bluestone Total-e-Business. We believe that our product development
investment is essential for us to maintain our market and technological
competitiveness. These costs as a percentage of revenue were 29.0% and 30.5% for
1999 and 1998, respectively. Average development headcount for the years ended
December 31, 1999 and 1998 was 33 and 21, respectively.
21
<PAGE>
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $4.4 million and $2.3 million for
1999 and 1998, respectively. Included in expenses for 1999 were $577,000 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 $3.8 million, an increase of 65.6% over
1998. This increase was primarily due to increased payroll and related costs of
$645,000 resulting from the addition of personnel to support the growth of our
business as well as increased professional fees and insurance costs. General and
administrative expenses as a percentage of revenue were 28.2% and 28.5% for the
years ended December 31, 1999 and 1998, respectively. Excluding these severance
and consulting costs, the expenses as a percentage of revenue decreased to 24.5%
for 1999.
AMORTIZATION OF STOCK-BASED COMPENSATION
Amortization of stock-based compensation was $282,000 and zero for 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
the appointment of directors during the second quarter of 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 December 31, 1999, we had an aggregate of $1.1 million of deferred
compensation to be amortized through June 30, 2003.
INTEREST EXPENSE, NET
Net interest expense was $406,000 for 1999 and $47,000 for 1998. This
additional expense in 1999 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
second quarter of 1999 based upon the fair value of the warrants at the dates of
issuance. The warrants are recorded as a component of stockholders' equity. This
$1.1 million of expense during 1999 was offset by interest income earned on the
proceeds from our initial public offering in September 1999 and our Series C
preferred stock financing in May 1999.
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.
22
<PAGE>
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 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, representing 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.
23
<PAGE>
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
------------------------------------------------------------------------------------------------
12/31/97 3/31/98 6/30/98 9/30/98 12/31/98 3/31/99 6/30/99 9/30/99 12/31/99
-------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software license fees........ $ 854 $ 432 $ 760 $ 1,354 $ 845 $ 2,257 $ 2,470 $ 3,147 $ 3,780
Services..................... 708 937 769 1,029 885 1,020 845 856 1,272
Third party software and
related services........... 1,272 785 147 114 61 -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenues........... 2,834 2,154 1,676 2,497 1,791 3,277 3,315 4,003 5,052
Cost of revenues:
Software license fees........ 78 39 57 113 50 57 99 54 191
Services..................... 865 985 1,093 1,192 1,163 1,338 1,129 945 1,379
Third party software and
related services........... 683 436 98 73 35 -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenues... 1,626 1,460 1,248 1,378 1,248 1,395 1,228 999 1,570
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit................... 1,208 694 428 1,119 543 1,882 2,087 3,004 3,482
Operating expenses:
Sales and marketing.......... 1,598 1,545 2,203 2,930 2,874 2,826 3,360 4,515 5,235
Product development.......... 376 360 544 704 866 904 964 1,219 1,450
General and administrative... 439 447 502 666 701 635 1,489 989 1,299
Amortization of stock-based
compensation............... -- -- -- -- -- -- 112 85 85
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 2,413 2,352 3,249 4,300 4,441 4,365 5,925 6,808 8,069
------- ------- ------- ------- ------- ------- ------- ------- -------
Loss from operations........... (1,205) (1,658) (2,821) (3,181) (3,898) (2,483) (3,838) (3,804) (4,587)
Interest income (expense),
net.......................... (29) (41) 8 42 (56) (48) (1,100) 113 629
------- ------- ------- ------- ------- ------- ------- ------- -------
Loss from continuing
operations................... $(1,234) $(1,699) $(2,813) $(3,139) $(3,954) $(2,531) $(4,938) $(3,691) $(3,958)
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------------------
12/31/97 3/31/98 6/30/98 9/30/98 12/31/98 3/31/99 6/30/99 9/30/99 12/31/99
-------- -------- -------- -------- -------- -------- -------- -------- --------
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software license fees........ 30% 20% 45% 54% 47% 69% 75% 79% 75%
Services..................... 25 44 46 41 49 31 25 21 25
Third party software and
related services........... 45 36 9 5 3 -- -- -- --
--- --- ---- ---- ---- ---- ---- ---- ---
Total revenues........... 100 100 100 100 100 100 100 100 100
Cost of revenues:
Software license fees........ 3 2 3 5 3 2 3 1 4
Services..................... 31 46 65 48 65 41 34 24 27
Third party software and
related services........... 24 20 6 3 2 -- -- -- --
--- --- ---- ---- ---- ---- ---- ---- ---
Total cost of revenues... 57 68 74 55 70 43 37 25 31
--- --- ---- ---- ---- ---- ---- ---- ---
Gross profit................... 43 32 26 45 30 57 63 75 69
Operating expenses:
Sales and marketing.......... 56 72 131 117 160 86 101 113 104
Product development.......... 13 17 32 28 48 28 29 30 29
General and administrative... 15 21 30 27 39 19 45 25 26
Amortization of stock-based
compensation............... -- -- -- -- -- -- 3 2 2
--- --- ---- ---- ---- ---- ---- ---- ---
Total operating
expenses............... 85 109 194 172 248 133 179 170 160
--- --- ---- ---- ---- ---- ---- ---- ---
Loss from operations........... (43) (77) (168) (127) (218) (76) (116) (95) (91)
Interest income (expense),
net.......................... (1) (2) -- 2 (3) (1) (33) 3 12
--- --- ---- ---- ---- ---- ---- ---- ---
Loss from continuing
operations................... (44)% (79)% (168)% (126)% (221)% (77)% (149)% (92)% (78)%
=== === ==== ==== ==== ==== ==== ==== ===
</TABLE>
24
<PAGE>
Our comparisons of operating results from 1997 to 1998 and from 1998 to
1999, generally apply to the comparison of the results of operations for the
nine quarters in the period ended December 31, 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 September 30, 1999 due to the increase
in our proprietary software license revenue and decreased in the fourth quarter
due to an increase in services revenue, which produces lower margins than
product revenue, as a percentage of total revenue, as well as an increase in the
cost of third-party software embedded in our product offerings. We expect to
increase our product development, sales and marketing and general and
administrative expenses in future periods to sustain the growth of our business.
The increased general and administrative expenses for the three months ended
June 30, 1999 was primarily due to one-time charges for severance related to
former officers and consulting expenses. Net interest income increased during
the two quarters ended December 31, 1999 due to higher than average cash
balances resulting from our Series C preferred stock financing in May 1999
yielding $23.1 million in net proceeds and our initial public offering in
September 1999 yielding $54.8 million in net proceeds.
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
In September 1999, we completed the initial public offering of 4,000,000
shares of our common stock, realizing net proceeds from the offering of
$54.8 million. Prior to the offering, we financed our operations and met our
capital expenditure requirements primarily through sales of preferred stock,
bank loans, equipment loans and funds generated from operations. 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 our business. As of December 31, 1999, our primary
sources of liquidity consisted of cash and cash equivalents of approximately
$66.2 million and available borrowings of approximately $1.6 million under our
revolving line of credit, which is secured by substantially all of our assets.
As of December 31, 1999, we did not have an outstanding balance on our line of
credit. During December 1999, we amended our existing loan arrangement to
increase the maximum available amount of our revolving line of credit to
$3.0 million, extend the maturity date to December 1, 2000 and decrease the
interest rate to prime plus .50%. In conjunction with the loan amendment, we
entered into an agreement that provides for a separate $500,000 line of credit
facility.
25
<PAGE>
Borrowings are subject to a borrowing base of 90% of eligible foreign accounts
receivable and interest on this line is payable monthly at a rate of prime plus
.50%.
Net cash used in operating activities was $13.0 million, $10.3 million and
$3.0 million for the years ended December 31, 1999, 1998 and 1997, respectively.
The cash used in operating activities was attributable primarily to net losses
of $15.1 million, $11.6 million and $3.8 million for the years ended
December 31, 1999, 1998 and 1997, respectively.
Net cash used in investing activities was $1.7 million, $1.2 million and
$872,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The
cash used in investing activities related primarily to purchases of computers,
software and equipment for internal use and, in 1999, furniture and leasehold
improvements for our new Philadelphia facility.
Net cash provided by financing activities amounted to $78.3 million,
$11.7 million and $5.1 million for the years ended December 31, 1999, 1998 and
1997, respectively. 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 borrowing under 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 and $919,000 was provided from borrowings under an
available equipment line. In May 1999, we sold 9,191,176 shares of Series C
preferred stock for net proceeds of $23.1 million, $1.35 million of which was
comprised of the conversion of indebtedness under bridge financing incurred
earlier in 1999. In September 1999, we completed our initial public offering of
4,000,000 shares of common stock for net proceeds of $54.8 million.
Additionally, during 1999 we received proceeds of $1.9 million from the exercise
of common stock options and made net repayments of $838,000 on our line of
credit and long-term debt and $598,000 to related parties.
On October 29, 1999, we entered into a seven and one-half year lease with a
realty company for our new operating facility in Philadelphia, Pennsylvania.
This lease is secured by a $600,000 letter of credit. We relocated several of
our departments to this facility during January 2000 and estimate that capital
expenditures, including leasehold improvements, furniture and equipment, of
approximately $1.2 million will be required related to this facility.
During November 1999, we entered into a master operating lease agreement
with an equipment leasing company that provides for an equipment lease line of
up to $1,000,000. Assets under operating leases on the lease line will be
secured with a letter of credit equal to 60% of the outstanding balance. As of
December 31, 1999 $523,000 was available under the equipment lease line. Letters
of credit totaling approximately $286,000 were outstanding to secure the
outstanding assets on the lease line.
During December 1999, we entered into a five year lease commencing on
January 15, 2000 with a realty company for facilities in Redwood Shores,
California. We intend to begin occupying this facility in March 2000 and to use
this facility to house our West Coast operations.
We anticipate that we will continue to expand our sales operations
throughout the U.S., as well as internationally, within the next 12 months and,
therefore, we expect to incur increases in our sales and marketing expenditures.
We also expect to incur increases in our product development expenditures as we
continue to enhance our product offerings. These expenditures are expected to
use significant amounts of our cash resources. However, we believe that our
existing capital resources are sufficient to meet our capital requirements for
the next 12 months. In addition, we may pursue acquisitions in the future. Such
acquisitions could require significant capital resources. Presently, we have no
definitive agreements, commitments or understandings to consummate any
acquisitions.
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
26
<PAGE>
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. We believe that most of
our customers using an older version of one of our products that is not Year
2000 compliant upgraded such version to a newer, compatible version or
discontinued using the software prior to January 1, 2000. We have not been
advised of any material Year 2000 problems by our customers to date.
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 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 was completed during the third quarter of 1999 to ensure
that systems then not compliant or systems that were newly discovered to be
non-compliant were remedied. No information technology projects have been
delayed or deferred by our Year 2000 compliance program and we have not
experienced any material internal Year 2000 problems to date.
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. 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. To date, there has been no material negative impact on
our financial condition or operations as a result of our Year 2000 compliance
program. 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 may arise 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.
27
<PAGE>
Although none have been experienced to date, 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, if any, will have a material adverse impact
on our systems or results of operations.
The costs of our Year 2000 identification, assessment, remediation and
testing efforts are based upon management's best estimates. 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.
Year 2000 issues may affect the purchasing patterns of current and potential
customers in a variety of ways. Some companies may be 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.
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 interest income is sensitive to changes in the general level of U.S.
interest rates. However, we invest our excess cash in short-term,
investment-grade and government, interest-bearing securities and we have
concluded that there is no material market risk exposure relating to these
investments.
28
<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 Suite, which represents a new generation of specialized Web application
server focused on commerce via the Internet. In December 1999, we released
Bluestone Total-e-Business, an e-business platform that provides the
infrastructure, integration, content management, personalization and e-commerce
components that companies utilize to conduct their businesses on the Internet.
In December 1999, at the Giga Information Group's Emerging Technology
Conference, we performed a live demonstration of our Total-e-Business solution,
integrating the Internet, Web application servers and wireless technology. We
were awarded a "best of" category win in the competition for this demonstration.
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 ELECTRONIC BUSINESS ENABLEMENT. In this market sector,
enterprises that wish to use the Internet as a means for conducting
business, utilize our products:
- as an infrastructure for performance, scalability and fault tolerance;
- as a basis for application integration, internally and externally;
- to manage and deliver content dynamically;
- to maintain a profile for every user, customer, partner and vendor and
to deliver information to each of them in a personalized format; and
- as the standards-based e-commerce platform, including components such
as catalogues, shopping carts, credit card authorization, shipping and
taxation systems.
Our solutions are used by some of the world's leading companies, including
ARI, Avnet, Deutsche Bank, Expression Engines, Inc., Food.com, gazoontite.com,
Hewlett-Packard, Houghton Mifflin Company, Sanchez Computer Associates,
Spinrocket.com, Inc. and Strategic Weather Services.
29
<PAGE>
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 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;
- the ability to effectively monitor and manage Web-based applications and
infrastructure;
- the ability to dynamically deliver content and manage that content based
on attributes and weighting factors;
- the ability to deliver content to individuals based on their own unique
needs and attributes and to personalize that delivery; and
- the ability to incorporate e-commerce components seamlessly into the
corporate environment to satisfy the demands of the new business model
centered on the Internet.
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;
30
<PAGE>
- 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; integrate their
corporate systems internally and with those of their partners and vendors;
identify, manage and dynamically deliver information; personalize and analyze
interaction with users, customers, partners and vendors; and utilize
commercially available e-commerce components to enable Internet commerce. Our
deployment solution is certified by Sun Microsystems as 100% Pure JAVA and
therefore operates in all enterprise computing environments. We have recently
introduced the capability to support Hot Swapping, which enables the movement of
applications from one computer to another, and Hot Versioning, which enables
software programs to be updated between user clicks. These features allow
businesses to upgrade or fix their hardware and software without interrupting
user interactions permitting true 24x7 operations. This is particularly critical
for companies engaged in Internet commerce where down time can be very costly.
We believe our solution is the only one available that 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.
31
<PAGE>
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 by the release of our
Bluestone XML Suite, and our early entry as an e-business platform provider with
our Total-e-Business Suite will continue into the future.
EXPAND PRODUCT OFFERINGS. We intend to continue to develop new products and
enhancements to existing products to fuel continued growth. Recently, we
introduced our XML Suite of products, which expands the markets and applications
for our technology, with a focus on Internet commerce and inter-enterprise
information exchange. New enhancements to our stable of products 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. In December 1999, we released a new product
line called Total-e-Business which is a new category of software referred to as
an e-business platform. Total-e-Business combines our JAVA Web application
infrastructure, our XML integration server, content management both from
Bluestone and complementary software providers, delivery personalization based
on dynamic user profile and analysis, and easy access to standard industry
e-commerce components. 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. At the December 1999 Emerging
Technology Conference sponsored by Giga Information Group, we performed a live
demonstration integrating the Internet, Web application servers and wireless
technology. Consequently, we believe that we are uniquely positioned as a
performance leader and innovator in our industry and will benefit as an
increasing number of large mission-critical systems move to the Web and as
Internet commerce and e-business grows.
32
<PAGE>
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, e-commerce and e-business most easily
identified by their Internet initiatives. We intend to increase the number of
field sales offices and field sales representatives over the next 12 months. Our
direct sales organization is primarily organized around geographic regions. As
of December 31, 1999, we had 79 employees in sales and marketing, 32 of which
were quota-carrying field and inside 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 Computer Associates;
- 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.
MAKE STRATEGIC ACQUISITIONS OF COMPLEMENTARY BUSINESSES AND
TECHNOLOGIES. An element of our growth strategy is to make selected, strategic
acquisitions of businesses and technology to consolidate our position as a
leading provider of complete e-business solutions. We intend to pursue
acquisitions that we believe will increase market share, expand product and
service capabilities, obtain key human resources and technical expertise and
generate greater critical mass and market presence.
OUR PRODUCTS
SAPPHIRE/WEB SUITE--APPLICATION SERVER FRAMEWORK
SAPPHIRE/DEVELOPER. Sapphire/Developer is a software product that delivers
the capability to build applications that are used through the Web to find,
access and deliver enterprise-class information to users. It connects any
back-end data source to any front-end data user. It supports a wide variety of
industry standard data formats and programming languages, such as HTML and
ActiveX, and enables the delivery of information to any database, flat file or
other enterprise application. Sapphire/ Developer's ability to incorporate new
technology, tools and development approaches allows increased productivity and
faster deployment of Web applications.
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/Developer 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 a
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.
33
<PAGE>
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.
BLUESTONE XML SUITE--INTEGRATION SERVER
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 Bluestone 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.
TOTAL-E-BUSINESS SUITE--E-BUSINESS PLATFORM
INFRASTRUCTURE. Our Total-e-Business Suite, released in December 1999, is
built upon our proven application server framework, Sapphire/Web, which supplies
the performance, scalability, fault tolerance, Pure JAVA deployment and
application management for e-business operations.
INTEGRATION SERVER. Our Total-e-Business Suite uses our Bluestone XML Suite
and our Sapphire Integration Modules to integrate an enterprise's internal
applications and to extend that integration to external sources of information
from users, customers, partners and vendors.
DYNAMIC CONTENT MANAGEMENT. Our Total-e-Business Suite provides the ability
to tag content with attributes and weighting factors thereby enabling our
customers to identify and manage content for dynamic delivery based on
specification. This is a fundamental capability needed to deploy an overall
e-business approach of having a single architectural model for all content
delivery and avoiding islands of technology solutions. This capability uses the
XML standard to provide an open, flexible and scaleable solution to creating a
complex Web site and e-business platform.
PERSONALIZATION. Our Total-e-Business Suite includes the ability to
identify and tag with attributes and weighting factors, individuals or systems
authorized to access the e-business platform. This allows for complete
customized content and personalized view depending on the recipient. We offer
our customers multiple methods to meet their varied personalization needs
ranging from collaborative filtering to declarative rules.
XML RULES ENGINE. One of our methods of personalization allows for business
managers to declare rules specifying the type of content for different
categories of users--for example, senior citizen discounts or promotion of
overstocked inventory. Bluestone has created a rules engine that we believe
34
<PAGE>
to be unique in the industry that is designed so that multiple rules may be used
to customize content for each user of a Web site. This provides our customers
with the power to provide flexible, customized Web sites managed by the business
units responsible for the interaction with the client.
E-COMMERCE COMPONENTS. Bluestone Total-e-Business is packaged with a set of
e-commerce components built for easy reuse by customers. These components
include catalog, searching, shopping cart, shipping, taxation and others. There
is a sample storefront supplied with the system for our customers use in setting
up a unique site to meet the needs of their clients. There is also a
personalization capability included in the storefront that enables the client to
log into the finished e-business site and customize their own content delivery.
SERVICES AND SUPPORT
We offer short-term mentoring, consulting and customer training services
through our Advanced Technology Group. We use our Advanced Technology Group
resources to assist our partners and clients in the early implementation
efforts, which tend to be less than one month in duration, and rely on our
systems integration partners to deliver longer-term professional integration
services. This strategy allows us to offer a higher degree of pre- and
post-sales support to our prospects, partners and licensees in support of
furthering the sales of our software products.
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 Total-e-Business, Sapphire/Web and XML Suite solutions.
We offer extensive training and certification for all of our 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 December 31, 1999, our sales and marketing organization consisted of
79 individuals, all of whom were based in North America. We had 22 field sales
representatives and 10 inside sales representatives, all of whom carry quotas.
The sales force is comprised of two primary organizations: 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,
San Francisco, Toronto, Boston, New York, Philadelphia 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 eight 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.
35
<PAGE>
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, Sanchez Computer Associates and Sun Microsystems, among
others.
We have relationships with independent software vendors, including
Hewlett-Packard, Computer Associates, 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.
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 1999, we licensed copies of our Sapphire/Web, XML Suite
and Total-e-Business 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, and broadening their usage of these
Web-enabled applications to include business-to-business and
business-to-consumer interactions.
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, Avnet, Deutsche Bank, Expression Engines, Inc.,
Food.com, gazoontite.com, Hewlett-Packard, Houghton Mifflin Company, Sanchez
Computer Associates, Spinrocket.com, Inc. and Strategic Weather Services. Each
of these customers has accounted for at least $100,000 in revenue.
36
<PAGE>
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 focused on two areas:
- fundamental infrastructure for deploying and managing large, mission
critical applications; and
- implementing solutions for e-business on standards-based platforms.
Specific technology features of the Bluestone solution include:
100% PURE JAVA APPLICATION SERVER. The JAVA platform offers enormous
benefits to our customers and us. 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 AS/400 computers. JAVA
has also brought large productivity gains to our development team by decreasing
development time, eliminating porting costs and speeding time to market.
J2EE PLATFORM. Bluestone's product families are built on the J2EE platform.
This means that thousands of developers working on this platform are all
creating software that integrates and runs with the Bluestone environment.
Bluestone provides value added capabilities on top of the J2EE environment to
increase the scalability, fault tolerance and management of applications, while
providing tools and components that allow for complete solutions to the
e-business needs of our customers. Customers are able to build applications
faster using the combination of JAVA Server Pages, Java Beans, Enterprise JAVA
Beans and leveraging Bluestone's XML capabilities.
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 our application servers 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
37
<PAGE>
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 also contributes to fault tolerance by
working in conjunction with the persistent state server.
BLUESTONE XML-SERVER COMMUNICATIONS SERVICES. This program recognizes the
protocol of incoming communications and translates it to a request for service
to the Bluestone XML-Server. XML documents can be passed to and from the
Bluestone 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.
HOT VERSIONING AND HOT SWAPPING. These capabilities 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. Our application servers also
support 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.
DYNAMIC CONTENT MANAGEMENT. The new Total-e-Business product meets
customers' needs for dynamically creating Web pages. This capability is built on
the open J2EE platform and leverages the XML standard to provide an open,
flexible and scaleable solution to creating a complex Web site.
PERSONALIZATION. Total-e-Business includes the ability to customize content
depending on the individual. Bluestone has created a powerful, open approach for
personalization built on standards and XML. We offer our customers multiple
methods to meet their varied personalization needs from collaborative filtering
to declarative rules.
38
<PAGE>
XML RULES ENGINE. One of the methods of personalization allows for business
managers to declare rules specifying the type of content for different
categories of users--for example senior citizen discounts or promotion of
overstocked inventory. Bluestone has created a rules engine that we believe to
be unique in the industry by using XML as the design and specification language
for all rules. The rules engine compiles the rules into JAVA Servlets that
execute very fast, so that multiple rules may be used to customize content for
each user of a Web site. This provides Web developers with the power to provide
flexible, customized sites controlled by the business manager.
E-COMMERCE COMPONENTS. Bluestone Total-e-Business is packaged with a set of
e-commerce components built for easy reuse by customers. These components
include catalog, searching, shopping cart, shipping, taxation and others. The
components are 100% Pure JAVA and include an XML interface for ease of use by
HTML developers responsible for the look and feel of a site. Bluestone's early
adoption of XML technology has benefited our design and reuse of these
components.
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 December 31, 1999, we had 42 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 facility 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
benefited from a very low turnover rate.
We are currently developing new releases to our Total-e-Business,
Sapphire/Web and XML product families. We anticipate that these new releases
will enable more effective business-to-consumer and business-to-business
e-commerce, through high-end management and ease of use capabilities.
Furthermore, we intend to develop 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 December 31, 1999, we had 190 employees, of which 79 were employed in
sales and marketing, 32 were employed in services, 42 were employed in product
development and 37 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 24,000 square feet of office space in Philadelphia, Pennsylvania.
We have additional offices 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, San Francisco, Toronto, Boston, New York,
Philadelphia and Mount Laurel, New Jersey. Average annual rent and expense for
the Philadelphia and Mount Laurel facilities are approximately $625,000 and
$480,000, respectively. The Philadelphia lease expires in June 2007 and the
Mount Laurel lease expires in November 2003.
During December 1999, we entered into a lease agreement for approximately
11,000 square feet of space in Redwood Shores, California to house our West
Coast operations. We anticipate that we will
39
<PAGE>
begin occupying this facility in March 2000. Average annual rent expense for
this facility is approximately $480,000 and the lease expires in January 2005.
We believe that our existing facilities are adequate for our current needs.
However, as we continue to experience growth in our sales, marketing and
corporate organizations, we believe that additional space will be required by
mid to late 2000. 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.
TRADEMARKS
Bluestone-TM- and Sapphire/Web-TM- 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-, Total-e-Business-TM-,
and IQS-TM-(Internet Quality of Service) are trademarks of Bluestone
Software, Inc.
40
<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 and Executive Technology
Officer
John H. Capobianco..................... 48 Senior Vice President, Marketing
Joseph K. Krivickas.................... 37 Senior Vice President, Worldwide Sales
Paul T. Porrini........................ 38 Senior Vice President and General Counsel
Mel Baiada............................. 41 Chairman of the Board of Directors and Founder
Gregory M. Case........................ 37 Director
William C. Hulley...................... 41 Director
Andrew J. Filipowski................... 49 Director
Paul E. Blondin........................ 49 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 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 and Executive
Technology Officer 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 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.
41
<PAGE>
PAUL T. PORRINI has served as our Senior Vice President and General Counsel
since December 1999. From 1997 to 1999, Mr. Porrini was a corporate securities
lawyer with Pepper Hamilton LLP. From 1994 to 1996, Mr. Porrini was a corporate
securities lawyer with Fox Rothschild O'Brien & Frankel LLP.
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.
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
to those positions, 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
Pursuant to our certificate of incorporation, the board of directors is
classified into three classes, with each director serving for a term of three
years. Messrs. Kilroy and Blondin serve in the class whose term expires in 2000;
Messrs. Baiada and Case serve in the class whose term expires in 2001; and
Messrs. Filipowski and Hulley serve in the class whose term expires in 2002.
Upon the expiration of the term of a class of directors, the directors in such
class will be elected for three-year terms at the annual meeting of stockholders
in the year in which such term expires.
42
<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 Paul E. Blondin, William C. Hulley
and Gregory M. Case. The Compensation Committee administers the issuance of
stock options under our stock option plan, makes recommendations regarding stock
options and various incentive compensation and benefit plans and determines
salaries for the executive officers and incentive compensation for our employees
and consultants.
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."
DIRECTORS 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 are 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 of directors meetings, of which four are
anticipated each year;
- $1,000 for telephone board of directors meetings, of which six are
anticipated each year; and
- $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 table below summarizes the compensation paid to or earned by Bluestone's
Chief Executive Officer and other executive officers whose salary and bonus for
services rendered in all capacities to Bluestone for the fiscal year ended
December 31, 1999 exceeded $100,000. We will use the term "named executive
officers" to refer collectively to these individuals later in this prospectus.
43
<PAGE>
Other annual compensation represents commissions paid to Mr. Kilroy and
Mr. Krivickas. Other annual compensation for Mr. Huke represents amounts paid
for relocation expenses during 1999. Other annual compensation for Mr. Ballezzi
represents amounts paid for severance during 1999. All other compensation in
1999 includes amounts paid by us 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, $285 in 401(k) contributions;
- Mr. Bickel, $600 in 401(k) contributions and $186 for life insurance
premiums;
- Mr. Capobianco, $228 for life insurance premiums;
- Mr. Huke, $600 in 401(k) contributions and $160 for life insurance
premiums;
- Mr. Krivickas, $600 in 401(k) contributions and $100 for life insurance
premiums; and
- Mr. Ballezzi, $600 in 401(k) contributions.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS(#) COMPENSATION
- --------------------------- -------- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
P. Kevin Kilroy......................... 1999 $225,095 $66,925 $153,983 848,561 285$260
President and Chief Executive Officer 1998 148,077 9,140 83,509 146,257
(1)
Robert W. Bickel........................ 1999 178,919 78,825 -- 103,292 786 796
Senior Vice President, Products 1998 155,330 19,554 -- 56,778
John H. Capobianco...................... 1999 219,231 154,506 -- 127,973 228 218
Senior Vice President, Marketing 1998 170,077 74,294 -- 142,716
S. Craig Huke........................... 1999 111,450 59,750 65,500 92,571 760
Senior Vice President and Chief 1998 -- -- -- -- --
Financial Officer (2)
Joseph K. Krivickas..................... 1999 113,750 95,627 108,656 192,986 700
Senior Vice President, Worldwide Sales 1998 -- -- -- -- --
(3)
Enrico J. Ballezzi...................... 1999 114,600 22,176 42,000 28,502 600
Chief Financial Officer (4) 1998 123,557 19,992 -- 40,108 600
</TABLE>
- ------------------------
(1) During 1998, Mr. Kilroy served as our Senior Vice President, Worldwide
Sales. He became President in January 1999.
(2) Mr. Huke became Senior Vice President and Chief Financial Officer on
April 15, 1999.
(3) Mr. Krivickas became Senior Vice President, Worldwide Sales on May 15, 1999.
(4) Mr. Ballezzi served as our Chief Financial Officer until April 15, 1999.
Mr. Ballezzi resigned from his employment with us effective September 30,
1999.
44
<PAGE>
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, 1999. The potential
realizable value set forth below is calculated based on the term of the option
at the time of the grants (10 years). The assumed stock price appreciation rates
used to determine the 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. This table does not
take into account actual appreciation in the price of the common stock to date.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
INDIVIDUAL GRANTS AT ASSUMED ANNUAL RATES
--------------------------------------------------------------------- OF STOCK PRICE
NUMBER OF OUR PERCENT OF TOTAL APPRECIATION
SHARES OPTIONS GRANTED TO FOR TERM (10 YEARS)
UNDERLYING OPTIONS OUR EMPLOYEES IN EXERCISE PRICE EXPIRATION ---------------------------
NAME GRANTED(1) FISCAL YEAR $/SHARE DATE 5% 10%
- ---- ------------------ ------------------ -------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
P. Kevin Kilroy...... 291,244 16% $ 3.07 1/25/09 $ 562,307 $1,424,996
21,055 1 8.70 3/31/09 115,200 291,939
428,418 23 8.70 4/24/09 2,344,039 5,940,255
20,344 1 9.92 6/30/09 126,919 321,637
21,875 1 23.13 9/30/09 318,132 806,210
21,875 1 115.00 12/31/09 1,582,063 4,009,258
Robert W. Bickel..... 60,123 3 3.07 1/25/09 116,080 294,169
6,820 * 8.70 3/31/09 37,315 94,563
6,857 * 9.92 6/30/09 42,778 108,409
7,373 * 23.13 9/30/09 107,227 271,734
7,373 * 115.00 12/31/09 533,237 1,351,326
John H. Capobianco... 81,691 4 3.07 1/25/09 157,721 399,697
7,560 * 8.70 3/31/09 41,364 104,824
7,305 * 9.92 6/30/09 45,573 115,492
7,854 * 23.13 9/30/09 114,222 289,461
7,854 * 115.00 12/31/09 568,024 1,439,484
S. Craig Huke........ 76,500 4 3.07 4/15/09 147,699 374,298
5,358 * 9.92 6/30/09 33,427 84,710
5,358 * 23.13 9/30/09 77,922 197,471
2,678 * 115.00 12/31/09 193,681 490,825
Joseph K. Krivickas.. 156,251 8 3.07 5/10/09 301,675 764,503
8,168 * 9.92 6/30/09 50,957 129,135
8,168 * 23.13 9/30/09 118,789 301,034
8,168 * 115.00 12/31/09 590,733 1,497,034
Enrico Ballezzi...... 28,502 2 3.07 1/25/09 55,029 139,454
</TABLE>
- ------------------------
* Represents amounts less than 1%
The exercise price of Mr. Huke's option grant on April 15, 1999 and Mr.
Krivickas' option grant on May 10, 1999 was below the fair market value of our
common stock on those dates. The value of those options on their respective
grant dates was $430,695 for Mr. Huke and $879,693 for Mr. Krivickas.
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, 1999 and with respect to stock
options exercised by the named executive officers during the fiscal year ended
December 31, 1999.
45
<PAGE>
The values of unexercised options set forth below have been calculated on
the basis of the closing price of $115.00 on the Nasdaq National Market on
December 31, 1999, 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
SHARES OPTIONS AT IN THE MONEY OPTIONS
ACQUIRED DECEMBER 31, 1999 AT DECEMBER 31, 1999
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
P. Kevin Kilroy.......... 70,000 $848,069 231,626 649,444 $22,177,725 $70,922,175
Robert W. Bickel......... -- -- 186,411 52,665 19,864,814 5,914,247
John H. Capobianco....... 38,899 1,553,240 47,774 168,307 4,218,092 18,896,962
S. Craig Huke............ -- -- 13,394 76,500 1,055,258 8,562,645
Joseph K. Krivickas...... -- -- 24,504 156,251 1,608,688 17,489,174
Enrico Ballezzi.......... 15,000 547,735 72,378 -- 8,123,965 --
</TABLE>
EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Robert W. Bickel in April 1997
which may be terminated by us or Mr. Bickel at any time, with or without cause.
Under this agreement, in 1999 we paid Mr. Bickel a base salary of $178,919 and a
bonus of $78,825. Future increases to these amounts are at the discretion of our
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 on 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.
Messrs. Huke and Krivickas have similar severance agreements except that
they will receive 6, rather than 12, months of salary and benefits, plus an
additional month of salary and benefits for each year of service.
Mr. Ballezzi's employment with us terminated on September 30, 1999. During 1999,
we recorded $231,650 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.
EXECUTIVE BONUS POOL
Our board of directors established an executive bonus pool of 384,794 shares
of common stock under options issuable to our chairman, executive officers and
certain other officers under our stock
46
<PAGE>
option plan in 1999. Grants of immediately vested options under the bonus pool
were contingent upon our meeting predetermined revenue and profit goals on a
quarterly and annual basis in 1999.
The following table sets forth the total amount of shares that each of our
chairman and executive officers received under the bonus pool:
<TABLE>
<S> <C>
P. Kevin Kilroy............................................. 128,899
Robert W. Bickel............................................ 43,169
John H. Capobianco.......................................... 46,282
S. Craig Huke............................................... 16,071
Joseph K. Krivickas......................................... 36,735
Mel Baiada.................................................. 12,321
</TABLE>
We met our quarterly revenue and profit goals in each of our four quarters
of 1999. Accordingly, options to purchase 52,657 shares of common stock were
granted at March 31, 1999, options to purchase 64,990 shares were granted at
June 30, 1999, options to purchase 65,161 shares of common stock were granted at
September 30, 1999 and options to purchase 61,886 shares of common stock were
granted at December 31, 1999. On January 7, 2000, options to purchase 111,777
shares of common stock were granted related to the achievement of annual goals.
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, cash less 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 December 31, 1999, a total of 3,290,328 shares of common stock were
authorized for issuance to directors, officers, employees and consultants
selected by the administrator of the option plan. On January 31, 2000, we
received the approval of our stockholders to increase our shares reserved under
the option plan by 3,459,672 to 6,750,000.
Until the option plan terminates, any unpurchased shares of common stock
underlying all options that expire, are terminated or become unexercisable for
any reason, are returned to the option plan and become available for future
grants. The number of shares of common stock underlying an option, the total
number of shares of common stock authorized under the option plan but for which
no options have been granted, and the exercise price per share of the common
stock underlying all outstanding options are proportionately adjusted for any
increase or decrease in the number of outstanding shares 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.
Prior to our initial public offering and the listing of our common stock on the
Nasdaq National Market, the board of directors, at its discretion, determined
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
47
<PAGE>
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 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
$1,000 per plan year. 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
48
<PAGE>
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 25% of these contributions each year over 4 years.
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, 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.
49
<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, bearing interest at a rate of 10% per annum,
compounded annually. On September 15, 1999 Mr. Baiada converted the note into
218,750 shares of our 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, 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.
50
<PAGE>
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 were required to make
interest payments in arrears on each anniversary date of the note until paid in
full. The principal amount of the note was payable in full on December 31, 2005.
In November 1999, we prepaid the note in full 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. Prior to conversion of their shares of Series A preferred stock into shares
of our common stock, as described below, holders of Series A preferred stock
were 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 a 1 for 3.2 reverse stock split of our outstanding shares of
common stock effective immediately prior to our initial public offering, each
share of our Series A preferred stock was convertible into 0.3125 shares of our
common stock. All of the outstanding shares of our Series A preferred stock and
all accrued dividends were converted into shares of common stock immediately
upon the completion of our initial public offering in September 1999.
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 below under the heading "Baiada
Agreement." 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.
51
<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
52
<PAGE>
when our lease expires or is terminated for any reason, including our default
under our lease. We are in negotiations with Bluestone Consulting, Inc. to
increase the amount of space subleased by them.
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. Prior to the conversion of
their shares of preferred stock into shares of our common stock, as described
below, holders of Series B preferred stock were 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 our reverse
stock split immediately prior to our initial public offering, each share of our
Series B preferred stock was convertible into 0.6541 shares of our common stock.
All of the outstanding shares of our Series B preferred stock and all accrued
dividends were converted into shares of our common stock immediately upon the
completion of our initial public offering in September 1999.
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. During December 1999, 84,859
shares of our common stock were issued to entities affiliated with Patricof &
Co. Ventures, Inc. upon a cashless exercise of all of their outstanding
warrants. Warrants to purchase 50,644 shares of our common stock were
outstanding related to this bridge financing as of December 31, 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 was 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
53
<PAGE>
to $2.56 per share. During October 1999, 9,100 shares of our common stock were
issued to Silicon Valley Bank upon the cashless exercise of this warrant.
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. Prior to the conversion of their shares of
preferred stock into shares of our common stock, as described below, holders of
Series C preferred Stock were 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 our
reverse stock split, immediately prior to our initial public offering each share
of our Series C preferred stock was convertible into 0.3125 shares of our common
stock. All of the outstanding shares of our Series C preferred stock and all
accrued dividends were converted into shares of our common stock immediately
upon the completion of our initial public offering in September 1999.
REGISTRATION RIGHTS
Subject to the lock up agreements entered into between management, certain
stockholders and the managing underwriter of our initial public offering, under
the second restated investors' rights agreement dated May 25, 1999 by and among
us and our former preferred stockholders, such stockholders are entitled to
certain rights with respect to the registration under the Securities Act for
resale to the public of their common stock. The second restated investors'
rights agreement permits the former preferred stockholders to require us on two
occasions, whether or not we propose to register our common stock for sale, to
register all or part of those stockholders' common stock so long as the
securities that would be covered by the registration statement have an aggregate
gross offering amount of at least $20.0 million. If any registration involves an
underwritten offering, the former 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, including
the right of the underwriters to exclude a portion of the securities owned by
the former preferred stockholders from the offering.
The second restated investors' rights agreement also provides demand
registration rights to the former 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 former preferred stockholders for this
offering;
- the offering price of the securities to be registered by the former
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 former preferred
stockholders have the right, subject to several exceptions and the lock up
agreements, to have their registrable securities included in any registration
statement filed by us. Each former preferred stockholder that wishes to
participate in the offering must enter into a customary agreement with us and
the underwriter, which
54
<PAGE>
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 our
initial public offering.
ADDITIONAL BLUESTONE CONSULTING, INC. TRANSACTIONS
In December 1999, we licensed our Sapphire/Web software product to Bluestone
Consulting, Inc. for their internal use. The license fee paid to us by Bluestone
Consulting, Inc. was $350,000. Also in December 1999, we entered into a services
agreement with Bluestone Consulting, Inc. whereby Bluestone Consulting, Inc.
will provide us with two consultants to perform consulting services for our
customers throughout 2000. We will pay Bluestone Consulting, Inc. $700,000 for
those consulting services.
BAIADA AGREEMENT
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. During 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 "Transactions in Connection with the Spin Off--Issuance of
Series A Preferred Stock and Stock Repurchase Agreement."
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 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.
55
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of December 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;
(4) all directors and executive officers as a group; and (5) each selling
stockholder. Unless otherwise indicated, the address of each person identified
is c/o Bluestone Software, Inc., 300 Stevens Drive, Philadelphia, Pennsylvania
19113.
The percentages shown are based on 18,234,517 shares of common stock
outstanding prior to the offering as of December 31, 1999 and 20,262,359 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>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING NUMBER OF AFTER OFFERING
--------------------------- SHARES BEING -------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
- ------------------------ ----------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
P. Melan Baiada.................... 2,661,082(1) 14.6 371,922 2,289,160 11.3
General Electric Capital
Corporation...................... 2,658,562(2) 14.5 364,606 2,293,956 11.3
Entities affiliated with Patricof &
Co. Ventures, Inc................ 5,259,626(3) 28.8 735,630 4,523,996 22.3
Fostin Capital Partners II, L.P.... 1,600,315(4) 8.8 223,787 1,376,528 6.8
P. Kevin Kilroy.................... 231,626(5)(6) 1.3 205,000 26,626 *
S. Craig Huke...................... 14,144(7) * -- 14,144 *
Joseph K. Krivickas................ 24,504(5) * -- 24,504 *
Robert W. Bickel................... 186,411(5) 1.0 38,073 148,338 1.0
John H. Capobianco................. 142,773(8) 1.0 34,769 108,004 1.0
Gregory M. Case.................... 5,264,313(9) 28.9 735,630 4,528,683 22.4
William C. Hulley.................. 1,604,221(10) 8.8 223,787 1,380,434 6.8
Andrew J. Filipowski............... 28,906(5) * -- 28,906 *
Paul E. Blondin.................... 7,812(5) * -- 7,812 *
Enrico Ballezzi.................... 73,128(11) * -- 73,128 *
All directors and executive
officers as a group (11
persons)......................... 8,566,640(12) 45.4 7,181,246 34.9
</TABLE>
- ------------------------
* Represents less than 1% of the outstanding Common Stock.
(1) Includes 779,336 shares of common stock owned by four trusts for which
Mr. Baiada or his wife act as trustees and 12,321 shares of common stock
issuable upon exercise of currently exercisable stock options. In addition
to the shares of our common stock being sold in this offering as noted in
the table above, Mr. Baiada has granted the underwriters the right to
purchase 254,470 shares pursuant to the underwriters over-allotment option.
(2) Includes 50,644 shares of common stock underlying warrants. General Electric
Capital Corporation is a subsidiary of the General Electric Company. In
addition to the shares of our common stock being sold in this offering as
noted in the table above, General Electric Capital Corporation has granted
the underwriters the right to purchase 250,530 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,
56
<PAGE>
Frank H. T. Rhodes, Andrew C. Sigler, Douglas A. Warner III, and John F.
Welch, Jr. The address for General Electric Capital Corporation is 260 Long
Ridge Road, Stamford, Connecticut 06927.
(3) 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) 1,600,315 shares held by The P/A Fund, L.P. 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.
(B) 3,060,645 shares held by APA Excelsior IV, L.P. 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.
(C) 540,115 shares held by APA Excelsior IV/Offshore, L.P. 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.
(D) 58,551 shares held by Patricof Private Investment Club, L.P.
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.
(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.
(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 December 31, 1999.
(6) In addition to the shares of our common stock being sold in this offering as
noted in the table above, Mr. Kilroy has granted the underwriters the right
to purchase 20,000 shares pursuant to the underwriters over-allotment
option.
(7) Includes 13,394 shares of common stock issuable upon exercise of currently
exercisable stock options.
(8) Includes 103,874 shares of common stock issuable upon exercise of stock
options which are currently exercisable and which are exercisable within
60 days after December 31, 1999.
(9) Includes 4,687 shares of common stock issuable upon exercise of stock
options which are currently exercisable. 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.
(10) Includes 3,906 shares of common stock issuable upon exercise of currently
exercisable stock options. Mr. Hulley is a general partner of Fostin Capital
Partners II, L.P., which is a general
57
<PAGE>
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.
(11) Includes 72,378 shares of common stock issuable upon exercise of currently
exercisable stock options.
(12) Includes 617,441 shares of our common stock issuable upon the exercise of
stock options which are currently exercisable and which are exercisable
within 60 days after December 31, 1999.
58
<PAGE>
DESCRIPTION OF SECURITIES
Our authorized capital stock as of December 31, 1999 consisted of 54,900,000
shares of common stock, par value $0.001 per share.
The following is a summary of certain provisions of our common stock and our
third amended and restated certificate of incorporation.
COMMON STOCK
As of December 31, 1999, there were 18,234,517 shares of common stock
outstanding held of record by 83 stockholders. Holders of common stock 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 shares of preferred stock 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.
ANTI-TAKEOVER EFFECTS OF BLUESTONE'S CERTIFICATE OF INCORPORATION AND BYLAWS AND
PROVISIONS OF DELAWARE LAW
Our certificate of incorporation, bylaws and the Delaware corporate law
contain provisions that 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. Our certificate of incorporation
divides the board of directors into three classes. The directors' terms are
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. Our bylaws provide for 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 nominees for director;
59
<PAGE>
- 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
permit special meetings of the stockholders to be called only by the board of
directors, the chief executive officer or 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 are 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 can
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. Section 203 of the Delaware General
Corporation Law applies to us. This section prohibits us from engaging in a
"business combination" with an "interested stockholder." This restriction
applies 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
Our common stock is listed on the Nasdaq National Market under the trading
symbol "BLSW."
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Based on the number of shares outstanding on December 31, 1999, upon
completion of this offering we will have outstanding an aggregate of 20,262,359
shares of our common stock, excluding any exercises of outstanding convertible
securities. Of these shares, all 3,500,000 of the shares sold in this offering
and the 4,600,000 shares sold in our initial public 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. Other than shares issued upon exercise of
options after our initial public offering, the remaining shares of common stock
held by existing stockholders are "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 subject to the
provisions of Rule 144, additional shares will be available for sale in the
public market as follows:
<TABLE>
<CAPTION>
APPROXIMATE SHARES
DATE ELIGIBLE FOR FUTURE SALE
- ---- ------------------------
<S> <C> <C>
Currently................... 5,134,517 Freely tradable shares sold in initial
public offering or issued more than one
year ago or issued under employee stock
option plan
At effectiveness of this
registration statement...... 3,500,000 Shares sold in this offering
March 21, 2000.............. 220,250 Expiration of initial public offering
lock-up agreements
91 days after the date of
this registration
statement................... 8,501,911 90 day lock-up expires; Rule 144
limitations apply
May 26, 2000................ 2,878,144 Expiration of Series C preferred stock
holding period
September 24, 2000.......... 27,537 Expiration of holding period applicable to
initial public offering underwriters'
affiliates
</TABLE>
LOCK-UP AGREEMENTS
In connection with our initial public offering, certain of our officers and
directors and some of our stockholders have entered 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 until March 21, 2000. In addition,
certain officers, the directors and selling stockholders of Bluestone have
agreed not to sell or otherwise dispose of an aggregate of 8,501,911 shares
until 91 days after the date of this offering without the consent of Deutsche
Bank Securities Inc.
Transfers or dispositions can be made during the lock-up period in the case
of gifts for estate planning purposes where the donee signs a lock-up agreement.
61
<PAGE>
RULE 144
In general, under Rule 144 as currently in effect, 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 202,624 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 Securities and Exchange
Commission.
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.
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 his or her shares without complying with the manner of sale,
public information, volume limitation or notice provisions of Rule 144.
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 in reliance on Rule 144, but without
compliance with some restrictions, including the holding period, contained in
Rule 144.
REGISTRATION RIGHTS
Holders of 9,100,346 shares of our common stock and warrants exercisable for
201,092 shares of our common stock are 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 our initial
public offering. Therefore, those stockholders may not demand that we register
their shares of our Common Stock under the Securities Act in 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, subject to the lock up agreements
described above, if 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. 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 our initial public offering.
62
<PAGE>
STOCK OPTIONS
Effective on October 6, 1999, we filed with the Securities and Exchange
Commission a registration statement on Form S-8 under the Securities Act
covering shares of common stock reserved for issuance under our stock option
plan. We plan to amend our S-8 registration statement in the near future to
cover the additional 3,459,672 shares reserved for issuance under our stock
option plan on January 31, 2000 and also file an S-8 registration statement to
cover 156,250 shares of common stock under our directors' compensation plan. As
of December 31, 1999, options to purchase 2,461,395 shares of common stock were
issued and outstanding under these plans, 835,551 of which are vested.
63
<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
and the selling stockholders the following respective numbers of shares of
common stock at the 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 the 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 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 offering, the offering
price and other selling terms may be changed by the representatives of the
underwriters.
Certain stockholders have granted the underwriters an option, exercisable
not later than 30 days after the date of this prospectus, to purchase up to
525,000 additional shares of common stock at the 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 bear to 3,500,000. 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 3,500,000 shares are being offered. If the underwriters fully exercise
their option, net proceeds to the selling stockholders will be $48.5 million
after the payment of $2.4 million of underwriting discounts.
We and the selling stockholders have agreed to indemnify the underwriters
against specified liabilities, including liabilities under the Securities Act.
We, certain of our officers, our directors and the selling stockholders have
each agreed not to offer, sell, sell short, transfer, hypothecate, pledge or
otherwise dispose of any shares of our common stock or other securities
convertible into or exchangeable or exercisable for shares of our common stock
or derivatives of our common stock, or enter into an agreement for the sale of
our common stock, for a period of 90 days after the date of our registration
statement, of which this prospectus is a part, directly or indirectly, 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
64
<PAGE>
option plans and the exercise of such options, without the prior written consent
of Deutsche Bank Securities Inc.
Transfers or dispositions can be made during the lock-up period in the case
of gifts for estate planning purposes where the donee signs a lock-up agreement.
A prospectus in electronic format is being made available on an Internet web
site maintained by Wit SoundView's affiliate, Wit Capital Corporation. Other
than the prospectus in electronic format, the information on our affiliate's web
site and any information contained on any other web site maintained by Wit
Capital is not part of the prospectus or the registration statement of which
this prospectus forms a part, has not been approved and/or endorsed by Bluestone
Software, Inc. or any underwriter in its capacity as underwriter and should not
be relied upon by investors.
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 exercise price was adjusted to $15.00 per share
on September 23, 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 also participated in our initial
public offering in September 1999 and received compensation for their
underwriting services. 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. The warrant issued to Deutsche Bank
Securities Inc., 9,191 shares of Series C preferred stock held by James Moore
and 18,346 shares of Series C preferred stock held by U.S. Development Capital
Investment Co. were considered to be compensation in connection with our initial
public offering and are subject to lock-up agreements under which they agreed
not to transfer or otherwise dispose of, directly or indirectly, any shares of
common stock or any securities convertible into or exchangeable or exercisable
for shares of our common stock until September 24, 2000, except to officers or
partners of the underwriters and members of the selling group in the initial
public offering and their officers or partners.
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, 1998 and 1999 and for the years
ended December 31, 1997, 1998 and 1999 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.
65
<PAGE>
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.
We are subject to the information requirements of the Exchange Act, and, in
accordance therewith, file reports and other information with the Securities and
Exchange Commission. 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 Securities and Exchange Commission in
accordance with the Exchange Act may be inspected without charge at the public
reference facilities maintained by the Securities and Exchange Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the following regional offices
of the Securities and Exchange Commission: 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 Securities and Exchange
Commission, 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 Securities and Exchange Commission at 1-800-SEC-0330. The
Securities and Exchange Commission also maintains an Internet Web site at
http://www.sec.gov that contains reports, proxy statements and other
information.
[INSIDE BACK COVER OF PROSPECTUS]
GRAPHIC:
Single page graphic containing five stones arranged one on top of the other
and descending in size from top to bottom. The bottom three stones are flat and
grey in color. The top two stones are circular, with the penultimate stone
colored grey and the top stone colored blue. The middle right side of the
graphic, positioned to the right of the middle stone, contains the statement
"Bluestone rocks."
66
<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>
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, 1998 and 1999, 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, 1999. 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, 1998 and 1999 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Philadelphia, PA
January 31, 2000
F-2
<PAGE>
BLUESTONE SOFTWARE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,534,819 $ 66,159,785
Accounts receivable, net of allowance of $44,473 and
$134,985................................................ 3,369,514 4,079,063
Prepaid expenses and other................................ 149,318 1,043,092
Due from related party.................................... -- --
----------- ------------
Total current assets.................................... 6,053,651 71,281,940
----------- ------------
Property and equipment:
Equipment................................................. 2,418,590 3,147,995
Furniture and fixtures.................................... 183,767 895,238
Leasehold improvements.................................... 131,845 420,173
----------- ------------
2,734,202 4,463,406
Less--Accumulated depreciation and amortization........... (1,284,921) (1,967,952)
----------- ------------
Net property and equipment.............................. 1,449,281 2,495,454
----------- ------------
Deposits.................................................... 32,997 362,798
----------- ------------
$ 7,535,929 $ 74,140,192
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit............................................ $ 473,365 $ --
Current portion of long-term debt......................... 356,728 428,706
Accounts payable.......................................... 1,094,286 2,259,394
Accrued wages............................................. 501,246 892,136
Other accrued expenses.................................... 555,371 2,099,469
Due to related parties.................................... 188,898 90,973
Deferred revenues......................................... 3,223,338 1,966,110
----------- ------------
Total current liabilities............................... 6,393,232 7,736,788
----------- ------------
Long-term debt.............................................. 875,642 439,246
----------- ------------
Subordinated notes due to related parties................... 1,000,000 --
----------- ------------
Mandatorily redeemable convertible preferred stock.......... 17,414,551 --
----------- ------------
Commitments and contingencies (Note 13)
Stockholders' equity (deficit):
Common stock, $.001 par value, 54,900,000 shares
authorized, 2,815,039 and 18,234,517 shares issued and
outstanding............................................. 2,816 18,235
Common stock warrants..................................... -- 1,204,831
Deferred stock-based compensation......................... -- (1,133,550)
Additional paid-in capital................................ 11,871 100,790,252
Accumulated deficit....................................... (18,162,183) (34,915,610)
----------- ------------
Total stockholders' equity (deficit).................... (18,147,496) 65,964,158
----------- ------------
$ 7,535,929 $ 74,140,192
=========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
BLUESTONE SOFTWARE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Net revenues:
Software license fees..................................... $ 2,337,199 $ 3,391,226 $ 11,653,817
Services.................................................. 2,178,664 3,619,997 3,992,959
Third party products and related services................. 5,225,429 1,106,688 --
----------- ------------ ------------
Total revenues...................................... 9,741,292 8,117,911 15,646,776
Cost of revenues:
Software license fees..................................... 202,219 258,572 400,627
Services.................................................. 2,516,451 4,433,309 4,791,696
Third party products and related services................. 2,797,656 643,120 --
----------- ------------ ------------
Total cost of revenues.............................. 5,516,326 5,335,001 5,192,323
----------- ------------ ------------
Gross profit.......................................... 4,224,966 2,782,910 10,454,453
Operating expenses:
Sales and marketing....................................... 5,130,799 9,551,284 15,935,707
Product development....................................... 1,295,148 2,473,771 4,537,332
General and administrative................................ 1,615,787 2,316,017 4,412,283
Amortization of stock-based compensation.................. -- -- 281,998
----------- ------------ ------------
Total operating expenses............................ 8,041,734 14,341,072 25,167,320
----------- ------------ ------------
Operating loss...................................... (3,816,768) (11,558,162) (14,712,867)
Interest expense, net....................................... (79,701) (46,520) (404,928)
----------- ------------ ------------
Loss from continuing operations............................. (3,896,469) (11,604,682) (15,117,795)
Income from discontinued operations......................... 98,898 -- --
----------- ------------ ------------
Net loss.................................................... (3,797,571) (11,604,682) (15,117,795)
Accretion of preferred stock redemption value............... (240,399) (845,836) (1,635,632)
----------- ------------ ------------
Net loss available to common stockholders................... $(4,037,970) $(12,450,518) $(16,753,427)
=========== ============ ============
Basic and diluted net loss per share:
Continuing operations..................................... $ (1.39) $ (4.12) $ (2.18)
Discontinued operations................................... 0.04 -- --
Accretion of preferred stock redemption value............. (0.09) (0.30) (0.24)
----------- ------------ ------------
$ (1.44) $ (4.42) $ (2.42)
=========== ============ ============
Shares used in computing net loss per share............... 2,812,500 2,814,105 6,927,864
=========== ============ ============
</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
STOCK STOCK STOCK SHARES AMOUNT WARRANTS
----------- ------------ ------------ ---------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
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......................... 249,008 529,382 857,242 -- -- --
Issuance of options to purchase
common stock below fair market
value......................... -- -- -- -- -- --
Amortization of stock-based
compensation.................. -- -- -- -- -- --
Issuance of common stock options
to
non-employees................. -- -- -- -- -- --
Issuance of common stock
warrants...................... -- -- -- -- -- 1,900,000
Exercise of common stock
options....................... -- -- -- 613,288 613 --
Exercise of common stock
warrants...................... -- -- -- 93,959 94 (695,169)
Conversion of preferrred stock
into common stock............. (5,921,347) (12,271,594) (23,117,341) 10,493,481 10,493 --
Conversion of related-party
convertible subordinated note
into common stock............. -- -- -- 218,750 219 --
Issuance of common stock, net of
offering expenses............. -- -- -- 4,000,000 4,000 --
Net loss........................ -- -- -- -- -- --
----------- ------------ ------------ ---------- ------- ----------
Balance, December 31, 1999........ $ -- $ -- $ -- 18,234,517 $18,235 $1,204,831
=========== ============ ============ ========== ======= ==========
<CAPTION>
STOCKHOLDERS' DEFICIT
-------------------------------------------------------------
DEFERRED ADDITIONAL ACCUMULATED
COMPENSATION PAID-IN-CAPITAL DEFICIT TOTAL
------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
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......................... -- -- (1,635,632) (1,635,632)
Issuance of options to purchase
common stock below fair market
value......................... (1,415,548) 1,415,548 -- --
Amortization of stock-based
compensation.................. 281,998 -- -- 281,998
Issuance of common stock options
to
non-employees................. -- 190,954 -- 190,954
Issuance of common stock
warrants...................... -- -- -- 1,900,000
Exercise of common stock
options....................... -- 1,864,873 -- 1,865,486
Exercise of common stock
warrants...................... -- 695,084 -- 9
Conversion of preferrred stock
into common stock............. -- 41,299,789 -- 41,310,282
Conversion of related-party
convertible subordinated note
into common stock............. -- 499,781 -- 500,000
Issuance of common stock, net of
offering expenses............. -- 54,812,352 -- 54,816,352
Net loss........................ -- -- (15,117,795) (15,117,795)
----------- ------------ ------------ ------------
Balance, December 31, 1999........ $(1,133,550) $100,790,252 $(34,915,610) $ 65,964,158
=========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
BLUESTONE SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net loss........................................... $(3,797,571) $(11,604,682) (15,117,795)
Adjustments to reconcile net loss to net cash used
in operating activities-
Depreciation and amortization.................... 239,835 656,654 683,031
Provision for doubtful accounts.................. 95,883 32,800 204,536
Accrued interest on subordinated notes........... 103,109 109,352 41,467
Issuance of bridge loan warrants................. -- -- 1,100,000
Amortization of stock-based compensation......... -- -- 281,998
Issuance of common stock options to
non-employees.................................. -- -- 190,954
Changes in operating assets and liabilities-
Accounts receivable............................ (310,896) (1,654,641) (914,085)
Prepaid expenses and other assets.............. (84,169) 130,619 (1,223,566)
Accounts payable and accrued expenses.......... 408,822 379,410 3,058,629
Deferred revenues.............................. 314,263 1,662,706 (1,257,228)
----------- ------------ ------------
Net cash used in operating activities........ (3,030,724) (10,287,782) (12,952,059)
----------- ------------ ------------
Investing activities:
Purchases of property and equipment................ (871,717) (1,160,882) (1,729,204)
----------- ------------ ------------
Financing activities:
Net proceeds from (repayments of) line of credit... 604,311 (1,137,196) (473,365)
Proceeds from long-term debt....................... 315,620 919,481 --
Proceeds from (repayments of) subordinated notes... 250,000 -- (500,000)
Repayments of long-term debt....................... (122,056) (40,758) (364,418)
Proceeds from issuance of preferred stock, net..... 4,840,328 11,237,988 23,060,099
Restricted cash.................................... (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 (97,925)
Proceeds from exercise of common stock options..... -- 5,687 1,865,486
Proceeds from issuance of common stock, net........ -- -- 54,816,352
----------- ------------ ------------
Net cash provided by financing activities.... 5,147,133 11,653,111 78,306,229
----------- ------------ ------------
Net increase in cash and cash equivalents............ 1,244,692 204,447 63,624,966
Cash and cash equivalents, beginning of period....... 1,085,680 2,330,372 2,534,819
----------- ------------ ------------
Cash and cash equivalents, end of period............. $ 2,330,372 $ 2,534,819 66,159,785
=========== ============ ============
Supplemental cash flow information:
Cash paid for interest............................. $ 133,409 $ 170,232 $ 440,879
Non-cash investing and financing activities:
Conversion of related party subordinated note to
common stock..................................... -- -- 500,000
Conversion of preferred stock and all accrued
dividends thereon to common stock................ -- -- 41,310,282
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
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 World Wide Web in a
controlled manner, supporting high volumes of users and interactions. On
April 17, 1997, in connection with the sale of Series A Convertible Preferred
Stock (see Note 6), 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 was named Bluestone
Consulting, Inc. ("BCI") and in 1997 provided the Company with certain
administrative services under a shared services agreement (see Note 12). The
consulting division spin-off is reported in the accompanying financial
statements as a discontinued operation (see Note 2).
The Company has incurred significant losses, and as of December 31, 1999 had
an accumulated deficit of $34.9 million. For the years ended December 31, 1997,
1998 and 1999 the Company's net losses were $3.9 million, $11.6 million and
$15.1 million, respectively. The Company intends to invest heavily in product
development, sales and marketing and the development of its administration
organization. There can be no assurance that the Company will be able to
generate sufficient revenues to achieve or sustain profitability in the future.
However, the Company believes that its current cash and cash equivalents will be
sufficient to sustain its operations through December 31, 2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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.
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.
OTHER ACCRUED EXPENSES
Other accrued expenses at December 31, 1999 includes $505,733 for accrued
bonuses and $628,307 for accrued payroll taxes.
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,
F-7
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 primarily sells perpetual licenses to end-users and perpetual,
annual and multi-year licenses 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 or
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. Revenues 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 13% of net revenues for the year ended December 31,
1999 and two customers accounted for approximately 12% and 14%, respectively, of
net accounts receivable at December 31, 1999. No one customer accounted for
greater than 10% of net revenues for the year ended December 31, 1997 or greater
than 10% of net accounts receivable at December 31, 1997.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense for
continuing operations for the years ended December 31, 1997, 1998 and 1999 was
$615,374, $882,761 and $2,022,252, respectively, including $251,640, $549,487
and $1,040,189, 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
F-8
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
income or losses were included in the sole stockholder's tax return. In
connection with the Series A Convertible Preferred Stock sale (see Note 6), 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 and director stock options. Under
APB No. 25, if the exercise price of the Company's 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 10).
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, 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 instruments. The carrying amount of
long-term debt obligations approximate fair value at the balance sheet dates.
RECAPITALIZATION
In August 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
Company's Initial Public Offering (see below). The reverse stock split has been
retroactively reflected in the accompanying financial statements.
INITIAL PUBLIC OFFERING
On September 29, 1999 the Company consummated an initial public offering of
its Common stock (the "Initial Public Offering"). The company sold
4,000,000 shares of its Common stock at an initial
F-9
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
public offering price of $15.00 per share. After deducting the underwriters'
discount and other offering expenses, the net proceeds to the company were
approximately $54.8 million.
DISCONTINUED OPERATIONS
On April 17, 1997, in connection with the sale of Series A Convertible
Preferred Stock (see Note 6), 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 $4,537,147 for the year ended
December 31, 1997. The spin-off was treated as a tax-free reorganization for
federal and state income tax purposes.
RECENT ACCOUNTING PRONOUNCEMENTS
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.
RECLASSIFICATIONS
Prior year financial statements have been reclassified to conform with the
current year presentation.
3. 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 4). 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 4). The line is cross-defaulted and cross-collateralized with the equipment
line. The loan agreement also requires the Company to maintain certain financial
and nonfinancial covenants, as defined.
F-10
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. LINE OF CREDIT: (CONTINUED)
During December 1999, the Company amended the loan arrangement to increase
the maximum available amount of the revolving line of credit to $3.0 million,
extend the maturity date to December 1, 2000 and decrease the interest rate to
prime plus .50%. At December 31, 1999, borrowings of approximately $1,572,000
were available under the line. Letters of credit of approximately $886,000,
related to certain operating leases (see Note 13), were outstanding at
December 31, 1999 and therefore have been deducted from available borrowings
under the line. In conjunction with the December 1999 loan amendment, the
Company entered into an agreement that provides for a separate $500,000 line of
credit facility. Borrowings are subject to a borrowing base of 90% of eligible
foreign accounts receivable.
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. In October 1999, the Company issued 9,100 shares of
common stock to the bank in exchange for the warrant.
4. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1999
---------- --------
<S> <C> <C>
Term note with bank......................................... $1,157,101 $838,124
Capital leases.............................................. 75,269 29,828
---------- --------
1,232,370 867,952
Less- Current portion....................................... (356,728) (428,706)
---------- --------
$ 875,642 $439,246
========== ========
</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, the then outstanding balance of $959,086 was converted to a term
note payable in 36 monthly installments and no additional borrowings are
available under the equipment line. The term note under the equipment line is
secured by equipment and is cross-defaulted and cross-collateralized with the
Company's line of credit (see Note 3).
At December 31, 1998 and 1999, property under capital leases totaled
$130,897 with corresponding accumulated amortization of $90,900 and $117,565,
respectively.
5. SUBORDINATED NOTES DUE TO RELATED PARTIES:
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
F-11
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SUBORDINATED NOTES DUE TO RELATED PARTIES: (CONTINUED)
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 was due on December 31, 2002 and principal on the note with BCI was due on
December 31, 2005. At December 31, 1998 and 1999 other accrued expenses includes
$206,878 and $41,467, respectively, related to interest on the notes. On
September 15, 1999, the $500,000 convertible subordinated note was converted
into 218,750 shares of the Company's Common stock at the holder's request. In
November 1999, the Company repaid the note to BCI in full without penalty or
premium.
6. 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 included 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 was
convertible into 0.3125 shares of Common stock, subject to adjustment, as
defined, and was automatically convertible upon a public stock offering, as
defined.
Dividends on the Series A Preferred were cumulative at $0.057 per share per
annum and the Series A Preferred had 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 would have been able to require the Company to redeem the Series A
Preferred at $0.95 per share plus accrued dividends over a three-year period.
The Series A Preferred stockholders would have been able to participate in
Common stock dividends and had Common stock voting rights on an as converted
basis. Upon completion of the Company's initial public offering in September
1999, all of the outstanding shares of Series A Preferred stock and the accrued
dividends thereon were converted into Common stock.
7. 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 6) for approximately $11.4 million in cash. The Series B
Preferred was 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 was 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 were cumulative at $0.078 per share per
annum and the Series B Preferred had 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 would have been able
to participate in Common stock dividends and had Common stock voting rights on
an as converted basis. Upon completion of our initial public offering in
September 1999, all of the outstanding shares of Series B Preferred stock and
the accrued dividends thereon were converted into Common stock.
F-12
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. MANDATORILY REDEEMABLE SERIES C CONVERTIBLE PREFERRED STOCK:
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 was
senior to the Series A Preferred and Series B Preferred and was automatically
convertible into Common stock upon a public stock offering, as defined.
Dividends on the Series C Preferred were cumulative at $0.1632 per share per
annum. The Series C Preferred stockholders would have been able to participate
in Common stock dividends and had Common stock voting rights on an as converted
basis. 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. Upon completion of our initial public offering in
September 1999, all of the outstanding shares of Series C Preferred stock and
the accrued dividends thereon were converted into Common stock.
9. CONVERTIBLE SUBORDINATED NOTES AND WARRANTS:
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 1999. The notes were converted into 496,322 shares
of Series C Preferred stock on May 25, 1999. During December 1999, 84,859 shares
of Common stock were issued to certain investors pursuant to their warrant
exercises. At December 31, 1999, 50,644 warrants remain outstanding related to
this Note and Warrant Purchase Agreement.
10. 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 6),
F-13
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION AND EMPLOYEE BENEFIT PLANS: (CONTINUED)
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 7), 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 and in August 1999, the 1996 Plan was amended to
increase the total shares available under the plan to 3,290,328. In January
2000, the 1996 Plan was amended to increase the total shares available under the
plan to 6,750,000.
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 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................ 1,690,211 3.07-125.00 26,227,252 15.52
Granted below fair market value............. 309,313 3.07-8.70 1,224,108 3.96
Exercised................................... (613,288) 2.24-15.00 (1,865,486) 3.04
Canceled.................................... (117,846) 2.24-15.00 (598,303) 5.08
--------- ------------- ----------- ------
Outstanding December 31, 1999................. 2,450,459 $2.24-$125.00 $28,121,676 $11.48
========= ============= =========== ======
</TABLE>
The options under the 1996 Plan generally vest over a four-year period. At
December 31, 1999 there were options to purchase 824,615 shares of Common stock
exercisable and options to purchase 224,042 shares of Common stock were
available for future grant under the 1996 Plan prior to the January 2000
amendment. The weighted average remaining contractual life of the outstanding
options at December 31, 1999 was 9.01 years.
In connection with certain options granted to employees during 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 year ended December 31, 1999, $281,998 of deferred
compensation was charged to expense. At December 31, 1999, the Company had
$1,133,550 of deferred compensation to be amortized over the remaining vesting
periods.
Included in options granted below fair market value during the year ended
December 31, 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 1999 related to these options.
F-14
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION AND EMPLOYEE BENEFIT PLANS: (CONTINUED)
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 quarterly and annual performance
goals. The Company granted 244,694 options under the bonus pool for the
Company's quarterly operating results during the year ended December 31, 1999.
On January 7, 2000, options to purchase 111,777 shares of Common stock were
granted related to the achievement of annual goals for the year ended
December 31, 1999. 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 reserved for
issuance under the Directors' Compensation Plan is 156,250. As of December 31,
1999, 10,936 options were granted at a weighted average exercise price of $23.13
per share to non-employee directors of the Company pursuant to the Directors'
Compensation Plan.
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 plans. Had compensation cost for the plans 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,
1998 and 1999 would have increased to the following pro forma amount:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Net loss available to Common stockholders, as
reported........................................... $(4,037,970) $(12,450,518) $(16,753,427)
Net loss per share, as reported...................... $ (1.44) $ (4.42) $ (2.42)
=========== ============ ============
Pro forma net loss................................... $(4,111,949) $(12,610,365) $(18,568,724)
Pro forma net loss per share......................... $ (1.46) $ (4.48) $ (2.68)
=========== ============ ============
</TABLE>
The weighted average fair value of the options granted is estimated as $8.38
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% to
70%, a weighted average risk-free interest rate of 5.567% 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 $1,000. The Company's contributions to the Plan were $22,009, $31,807
and $40,151 for the years ended December 31, 1997, 1998 and 1999, respectively.
F-15
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES:
The income tax provision consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Current provision......................................... $ -- $ -- $ --
Deferred benefit.......................................... (64,000) (81,000) (656,000)
Net operating loss not benefited.......................... (1,134,000) (4,410,000) (5,951,000)
Termination of S corporation status....................... (121,000) -- --
Increase in valuation allowance........................... 1,319,000 4,491,000 6,607,000
---------- ---------- ----------
$ -- $ -- $ --
========== ========== ==========
</TABLE>
The tax effect of the differences that give rise to deferred income taxes is
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
---------- ------------
<S> <C> <C>
Net operating loss carryforwards............................ $5,544,000 $ 11,495,000
Accounts receivable......................................... 18,000 54,000
Accrued expenses............................................ 174,000 159,000
Property and equipment...................................... 24,000 24,000
Deferred revenue............................................ 252,000 786,000
Cash-to-accrual adjustment.................................. (202,000) (101,000)
---------- ------------
5,810,000 12,417,000
Less-Valuation allowance.................................... (5,810,000) (12,417,000)
---------- ------------
$ -- $ --
========== ============
</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, 1999, the Company had a
net operating loss carryforward of approximately $29 million beginning to expire
in 2012 for federal tax purposes and in 2004 for state tax purposes.
12. TRANSACTIONS WITH BCI:
On April 17, 1997, in connection with the sale of the Series A Convertible
Preferred stock (see Note 6), 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, 1998 and 1999, the Company's sales to BCI totaled $40,448,
$58,607 and $951,667, respectively, and total purchases from BCI were $47,088,
$351,739 and $52,818, respectively. At December 31, 1998 and 1999, accounts
receivable
F-16
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. TRANSACTIONS WITH BCI: (CONTINUED)
includes $23,299 and $431,131, respectively, due from BCI and accounts payable
includes $77,097 and $0, respectively, payable to BCI. In December 1999 the
Company entered into a services agreement with BCI, whereby BCI will provide the
Company two consultants during 2000 for $700,000 in the aggregate, payable
quarterly during 2000.
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 $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 13). Amounts charged to BCI, which reduced the Company's rent expense for
the years ended December 31, 1997, 1998 and 1999, totaled $130,588, $74,165 and
$93,510, respectively. During the years ended December 31, 1998 and 1999, the
Company rented certain equipment from BCI, totaling $89,489 and $89,530,
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 5). In November 1999, the Company repaid this note in full.
13. COMMITMENTS AND CONTINGENCIES:
The Company has operating leases on its office facilities (see Note 12) and
certain equipment. Future minimum lease payments under such noncancelable
operating leases are summarized as follows, as of December 31, 1999:
<TABLE>
<S> <C>
2000........................................................ 2,229,489
2001........................................................ 1,810,713
2002........................................................ 1,806,477
2003........................................................ 1,567,218
2004........................................................ 1,105,428
2005 and thereafter......................................... 1,599,336
-----------
$10,118,661
===========
</TABLE>
On October 29, 1999, the Company entered into a seven and one-half year
lease for additional office facilities. The lease is secured by a $600,000
letter of credit (see Note 3). During November 1999, we entered into a master
operating lease agreement with an equipment leasing company that provides for an
equipment lease line of up to $1,000,000. Assets under operating leases on the
lease line will be secured with a letter of credit equal to 60% of the asset
amount. As of December 31, 1999, approximately $523,000 was available on the
equipment lease line. Letters of credit of approximately $286,000 (see Note 3)
were outstanding to secure the outstanding assets on the equipment lease line.
Rent expense for continuing operations was $551,832, $691,615 and $868,683
for the years ended December 31, 1997, 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.
F-17
<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....................... 14
Dividend Policy....................... 14
Price Range of Common Stock........... 14
Capitalization........................ 15
Dilution.............................. 16
Selected Financial Data............... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 29
Management............................ 41
Certain Transactions.................. 50
Principal and Selling Stockholders.... 56
Description of Securities............. 59
Shares Eligible For Future Sale....... 61
Plan of Distribution.................. 64
Legal Matters......................... 65
Experts............................... 65
Where You Can Find More Information... 66
Index to Financial Statements......... F-1
</TABLE>
------------------------
3,500,000 Shares
[LOGO]
Common Stock
---------------------
PROSPECTUS
---------------------
Deutsche Banc Alex. Brown
Wit SoundView
C.E. Unterberg, Towbin
Legg Mason Wood Walker
Incorporated
, 2000
<PAGE>
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 95,502
NASD and Blue Sky fees and expenses......................... 40,500
Nasdaq National Market additional securities listing fee.... 17,500
Accountants' fees and expenses.............................. 150,000
Legal fees and expenses..................................... 100,000
Transfer Agent's fees and expenses.......................... 1,500
Printing and engraving expenses............................. 150,000
Miscellaneous............................................... 19,998
--------
Total Expenses.............................................. $575,000
========
</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. Article VI 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 IX 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.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement will provide for indemnification by the Underwriters of Bluestone 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, Bluestone 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, Bluestone
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.
II-1
<PAGE>
No underwriters were used for such offering. Each share of Series A preferred
stock was converted into 0.3125 shares of common stock at Bluestone's initial
public offering.
In connection with Bluestone's credit facility with Silicon Valley Bank,
Bluestone 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 was exercisable were 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 Bluestone 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 was exercisable were 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. In October 1999, Bluestone
issued 9,100 shares of common stock to Silicon Valley Bank upon the cashless
exercise of the warrant.
Pursuant to a stock purchase agreement dated April 22, 1998, Bluestone
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 $2.72 per
share. No underwriters were used for such offering. Each share of Series B
preferred stock was converted into 0.6541 shares of common stock at Bluestone's
initial public offering.
On January 21, 1999, Bluestone 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"). Bluestone 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 issuance of
9,191,178 shares of Series C preferred stock at $2.72 per share on May 25, 1999.
In December 1999, Bluestone issued 84,859 shares of common stock to entities
affiliated with Patricof & Co, Ventures, Inc. upon the cashless exercise of
their warrants.
Pursuant to a stock purchase agreement dated May 25, 1999, Bluestone issued
9,191,178 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 $2.72 per share. Each share of Series C preferred stock was
converted into 0.3125 shares of common stock at Bluestone's initial public
offering.
From March 1, 1996 to October 6, 1999, Bluestone granted stock options to
purchase 3,038,666 shares of common stock at exercise prices ranging from $2.24
to $23.13 per share to employees, consultants and directors pursuant to its
Amended and Restated 1996 Incentive and Non-Qualified Stock Option Plan.
Between March 1998 and October 6, 1999, 80,808 shares of common stock of
Bluestone have been issued to current and former employees pursuant to the
exercise of stock options.
Bluestone believes that, prior to October 6, 1999, all grants of stock
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. Bluestone believes that all of the 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 Bluestone or its
management and to have been purchasing for investment without a view to further
II-2
<PAGE>
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 Bluestone.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are filed herewith or incorporated herein by
reference:
<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** Amended and Restated Certificate of Incorporation of
Bluestone.
3.2** Bylaws of Bluestone.
4.1* Specimen Common 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 and restated, 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, dated as of May 3, 1994, between
Andrew J. Filipowsli and Bluestone.
10.12* Reseller Agreement, dated January 1, 1998, between Bluestone
and Bluestone Consulting, Inc.
10.13* Subcontract Agreement, dated April 23, 1998, between
Bluestone and Bluestone Consulting, Inc.
10.14* Intercompany Services Agreement, dated April 17, 1997,
between Bluestone and Bluestone Consulting, Inc.
10.15* Service Mark License Agreement, dated April 17, 1997,
between Bluestone and Bluestone Consulting, Inc.
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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
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.
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 Bank 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* Series C Preferred Stock Purchase Agreement 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* Real Estate Lease for 1000 Briggs Road, Mount Laurel, New
Jersey, dated February 1, 1998, with Liberty Properties as
landlord.
10.38*+ Senior Management Compensation Policy 1999.
10.39*+ Executive Management Compensation Policy 1999.
10.40** Lease for Philadelphia, Pennsylvania headquarters.
10.41** Lease for Redwood Shores, California office.
10.42** Fourth Loan Modification Agreement between Silicon Valley
Bank and Bluestone.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Pepper Hamilton LLP (included in Exhibit 5.1).
23.3** Consent of International Data Corporation.
24.1** Powers of Attorney (included in the signature page to the
Registration Statement).
27.1 Financial Data Schedule (in electronic format only).
</TABLE>
- ------------------------
* Incorporated herein by reference to the corresponding exhibit to Bluestone's
Form S-1, as amended, filed with the Securities and Exchange Commission on
July 2, 1999.
** Previously filed.
+ Management contract or compensatory plan.
(b) The following financial statement schedules are filed herewith:
Schedule II - Valuation and Qualifying Accounts (and the report thereon).
II-4
<PAGE>
ITEM 17. UNDERTAKINGS
(a) Bluestone 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 Bluestone
pursuant to the foregoing provisions, or otherwise, Bluestone has been advised
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Bluestone of expenses
incurred or paid by a director, officer or controlling person of Bluestone 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, Bluestone 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) Bluestone 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 Bluestone 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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Philadelphia, Pennsylvania on the
14th day of February, 2000.
<TABLE>
<S> <C> <C>
BLUESTONE SOFTWARE, INC.
BY: /S/ P. KEVIN KILROY
-----------------------------------------
P. Kevin Kilroy
President and Chief Executive Officer
</TABLE>
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>
* Chairman of the Board of
------------------------------------------- Directors February 14, 2000
P. Melan Baiada
President and Chief
/s/ P. KEVIN KILROY Executive Officer and
------------------------------------------- Director (Principal February 14, 2000
P. Kevin Kilroy Executive Officer)
Senior Vice President Chief
/s/ S. CRAIG HUKE Financial Officer
------------------------------------------- (Principal Financial and February 14, 2000
S. Craig Huke Accounting Officer)
* Director
------------------------------------------- February 14, 2000
Gregory M. Case
* Director
------------------------------------------- February 14, 2000
William C. Hulley
* Director
------------------------------------------- February 14, 2000
Andrew J. Filipowski
* Director
------------------------------------------- February 14, 2000
Paul E. Blondin
</TABLE>
<TABLE>
<S> <C> <C> <C>
* /s/ P. KEVIN KILROY
--------------------------------------
P. Kevin Kilroy
AS ATTORNEY-IN-FACT
</TABLE>
II-6
<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** Amended and Restated Certificate of Incorporation of
Bluestone.
3.2** Bylaws of Bluestone.
4.1* Specimen Common 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 and restated, 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, dated as of May 3, 1994, between
Andrew J. Filipowsli and Bluestone.
10.12* Reseller Agreement, dated January 1, 1998, between Bluestone
and Bluestone Consulting, Inc.
10.13* Subcontract Agreement, dated April 23, 1998, between
Bluestone and Bluestone Consulting, Inc.
10.14* Intercompany Services Agreement, dated April 17, 1997,
between Bluestone and Bluestone Consulting, Inc.
10.15* Service Mark License Agreement, dated April 17, 1997,
between Bluestone and Bluestone Consulting, Inc.
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.
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
10.28* Warrant to purchase 481,434 shares of Common Stock of
Bluestone, dated as of April 28, 1999, issued by Bluestone
to Deutsche Bank 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* Series C Preferred Stock Purchase Agreement 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* Real Estate Lease for 1000 Briggs Road, Mount Laurel, New
Jersey, dated February 1, 1998, with Liberty Properties as
landlord.
10.38*+ Senior Management Compensation Policy 1999.
10.39*+ Executive Management Compensation Policy 1999.
10.40** Lease for Philadelphia, Pennsylvania headquarters.
10.41** Lease for Redwood Shores, California office.
10.42** Fourth Loan Modification Agreement between Silicon Valley
Bank and Bluestone.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Pepper Hamilton LLP (included in Exhibit 5.1).
23.3** Consent of International Data Corporation.
24.1** Powers of Attorney (included in the signature page to the
Registration Statement).
27.1 Financial Data Schedule (in electronic format only).
</TABLE>
- ------------------------
* Incorporated herein by reference to the corresponding exhibit to Bluestone's
Form S-1, as amended, filed with the Securities and Exchange Commission on
July 2, 1999.
** Previously filed.
+ Management contract or compensatory plan.
<PAGE>
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 January 31,
2000. 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.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, PA
January 31, 2000
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>
1999................................... $44,473 $204,536 $ -- $(114,024) $134,985
1998................................... 37,012 32,800 -- (25,339) 44,473
1997................................... 77,090 95,883 (104,372) (31,589) 37,012
</TABLE>
S-2
<PAGE>
Exhibit 5.1
[LETTER HEAD OF PEPPER HAMILTON LLP]
February 14, 2000
Bluestone Software, Inc.
300 Stevens Drive
Philadelphia, PA 19113
Re: Registration Statement on Form S-1
(REGISTRATION NO. 333-95931)
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 3,500,000 shares (the "Primary Shares") of the Company's
Common Stock, $.001 par value (the "Common Stock"), of which 1,750,000 shares
will be sold by the Company and 1,750,000 shares will be sold by certain selling
shareholders, and up to an additional 525,000 shares of Common Stock to cover
over-allotments to be sold by certain selling shareholders (collectively, 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 February 1, 2000 and Amendment No. 1 thereto filed on
February 14, 2000 (collectively, the "Registration Statement"); (ii) the form
of underwriting agreement, filed as Exhibit 1.1 to the Registration Statement
(the "Underwriting Agreement"), to be entered into by and among the Company,
Deutsche Bank 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) certain
resolutions of the Board of Directors of the Company relating to, among other
things, the issuance of the Shares; and (v) such other
<PAGE>
Bluestone Software, Inc.
February 14, 2000
Page 2
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.
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.
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 and the General
Corporation Law of the State of Delaware ("GCL").
Based upon and subject to the foregoing, we are of the opinion that
the Additional Shares have been duly and validly issued and are fully-paid
and non-assessable by the Company under the GCL and that when issued and
delivered against payment therefor in accordance with the terms of the
Underwriting Agreement, the Primary 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. In giving this consent, we do not hereby admit that we are in the
category of persons whose consent is required under Section 7 of the Act.
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 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
February 14, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 66,159,785
<SECURITIES> 0
<RECEIVABLES> 4,079,063
<ALLOWANCES> 134,985
<INVENTORY> 0
<CURRENT-ASSETS> 71,281,940
<PP&E> 4,463,406
<DEPRECIATION> 1,967,951
<TOTAL-ASSETS> 74,140,192
<CURRENT-LIABILITIES> 7,736,788
<BONDS> 0
0
0
<COMMON> 18,235
<OTHER-SE> 65,945,923
<TOTAL-LIABILITY-AND-EQUITY> 74,140,192
<SALES> 11,653,817
<TOTAL-REVENUES> 15,646,776
<CGS> 400,627
<TOTAL-COSTS> 5,192,323
<OTHER-EXPENSES> 25,167,320
<LOSS-PROVISION> 175,329
<INTEREST-EXPENSE> 1,375,467
<INCOME-PRETAX> (15,117,795)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,117,795)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,117,795)
<EPS-BASIC> (2.42)
<EPS-DILUTED> (2.42)
</TABLE>
