<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 1, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED RESERVED (1) PER UNIT(2) PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.001 par value 4,025,000 $89.875 $361,746,875 $95,502
</TABLE>
(1) Includes 525,000 shares that the underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for purposes of determining the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, based on the
average of the high and low sales prices as reported by the Nasdaq National
Market on January 31, 2000.
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 January 31, 2000 was $88.13 per
share.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
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 software application. A two-directional arrow points between
the computer screen and the server cabinet. Directly above the computer
screen is the following text: "APPLICATION DEVELOPMENT--The ability to build
applications that provide information access."
<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 19,633,381 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 September 30, 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:
- 3,192,384 shares of common stock issuable upon exercise of options and
warrants at a weighted average exercise price of $5.70 per share.
- 471,208 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 amounts presented
below reflect the outstanding preferred stock during each period presented on an
as converted basis. The adjusted balance sheet data presented below gives effect
to the receipt of the estimated net proceeds of $146.4 million from the sale of
shares of common stock offered by us at an assumed offering price of $88.13 per
share, after deducting $7.9 million for estimated underwriting discounts and
commissions and our estimated offering expenses.
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>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license fees..................................... $ 1,475 $ 2,337 $ 3,391 $ 2,546 $ 7,874
Services.................................................. 43 2,179 3,620 2,735 2,721
Third party products and related services................. 6,555 5,225 1,107 1,046 --
------- ------- -------- ------- --------
Total revenues........................................ 8,073 9,741 8,118 6,327 10,595
Cost of revenues:
Software license fees..................................... 113 202 259 209 210
Services.................................................. 305 2,516 4,433 3,270 3,412
Third party products and related services................. 4,261 2,798 643 607 --
------- ------- -------- ------- --------
Total cost of revenues................................ 4,679 5,516 5,335 4,086 3,622
------- ------- -------- ------- --------
Gross profit................................................ 3,394 4,225 2,783 2,241 6,973
Operating expenses:
Sales and marketing....................................... 3,005 5,131 9,551 6,678 10,701
Product development....................................... 702 1,295 2,474 1,608 3,087
General and administrative................................ 1,515 1,616 2,316 1,615 3,113
Amortization of stock-based compensation.................. -- -- -- -- 197
------- ------- -------- ------- --------
Total operating expenses.............................. 5,222 8,042 14,341 9,901 17,098
------- ------- -------- ------- --------
Loss from operations........................................ (1,828) (3,817) (11,558) (7,660) (10,125)
Interest income (expense), net.............................. (50) (80) (47) 9 (1,035)
------- ------- -------- ------- --------
Loss from continuing operations............................. (1,878) (3,896) (11,605) (7,651) (11,160)
Income (loss) from discontinued operations.................. (738) 99 -- -- --
------- ------- -------- ------- --------
Net loss.................................................... (2,616) (3,798) (11,605) (7,651) (11,160)
Accretion of preferred stock redemption value............... -- (240) (846) (577) (1,636)
------- ------- -------- ------- --------
Net loss available to common stockholders................... $(2,616) $(4,038) $(12,451) $(8,228) $(12,796)
======= ======= ======== ======= ========
Basic and diluted net income (loss) per share:
Continuing operations..................................... $ (0.67) $ (1.39) $ (4.12) $ (2.72) $ (3.48)
Discontinued operations................................... (0.26) 0.04 -- -- --
Accretion of preferred stock redemption value............. -- (0.09) (0.30) (0.20) (0.51)
------- ------- -------- ------- --------
$ (0.93) $ (1.44) $ (4.42) $ (2.92) $ (3.99)
======= ======= ======== ======= ========
Shares used in computing basic and diluted net income (loss)
per share................................................. 2,813 2,813 2,814 2,814 3,204
Pro forma basic and diluted net loss per share from
continuing operations..................................... $ (1.35) $ (0.94)
======== ========
Shares used in computing pro forma basic and diluted net
loss per share............................................ 8,619 11,896
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------------------------------
ACTUAL ADJUSTED
-------- -------------------------
(IN THOUSANDS, UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 71,197 $217,574
Working capital............................................. 67,782 214,159
Total assets................................................ 76.933 223,310
Long-term obligations, net of current portion............... 1,043 1,043
Total stockholders' equity.................................. 68,194 214,571
</TABLE>
RECENT OPERATING RESULTS
The following table sets forth certain unaudited financial information for
the three months and year ended December 31, 1999. Pro forma net loss per share
is presented assuming:
- the net loss prior to the accretion of preferred stock dividends, and
- the conversion of all the outstanding shares of preferred stock and
accrued dividends on preferred stock into common stock upon our initial
public offering using the as converted method from their respective dates
of issuance.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
--------------------------- ---------------------------
DECEMBER 31, DECEMBER 31,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Software license fees................................ $ 3,780 $ 845 $ 11,654 $ 3,391
Services............................................. 1,272 885 3,993 3,620
Third party products and related services............ -- 61 -- 1,107
------- ------- -------- --------
Total revenue...................................... 5,052 1,791 15,647 8,118
Cost of revenue:
Software license fees................................ 191 50 401 259
Services............................................. 1,379 1,163 4,791 4,433
Third party products and related services............ -- 35 -- 643
------- ------- -------- --------
Total cost of revenue.............................. 1,570 1,248 5,192 5,335
------- ------- -------- --------
Gross profit........................................... 3,482 543 10,455 2,783
------- ------- -------- --------
Operating expenses:
Sales and marketing.................................. 5,235 2,874 15,936 9,551
Product development.................................. 1,450 866 4,537 2,474
General and administrative........................... 1,299 701 4,412 2,316
Amortization of stock-based compensation............. 85 -- 282 --
------- ------- -------- --------
Total operating expenses........................... 8,069 4,441 25,167 14,341
------- ------- -------- --------
Operating loss..................................... (4,587) (3,898) (14,712) (11,558)
Interest income (expense), net......................... 629 (56) (406) (47)
------- ------- -------- --------
Net loss........................................... (3,958) (3,954) (15,118) (11,605)
Accretion of preferred stock redemption value.......... -- (269) (1,636) (846)
------- ------- -------- --------
Net loss available to common stockholders.............. $(3,958) $(4,223) $(16,754) $(12,451)
======= ======= ======== ========
Basic and diluted net loss per share................... $ (0.22) $ (1.50) $ (2.42) $ (4.42)
======= ======= ======== ========
Shares used in computing basic and diluted net loss per
share................................................ 17,979 2,815 6,928 2,814
------- ------- -------- --------
Pro forma basic and diluted net loss per share......... $ (0.22) $ (0.38) $ (1.13) $ (1.35)
======= ======= ======== ========
Shares used in computing pro forma basic and diluted
net loss per share................................... 17,979 10,403 13,429 8,619
======= ======= ======== ========
</TABLE>
5
<PAGE>
CONDENSED BALANCE SHEET
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
Current assets:
Cash and cash equivalents................................. $66,160
Accounts receivable, net.................................. 4,079
Prepaid expenses and other................................ 1,043
-------
Total current assets.................................... 71,282
Net property and equipment.................................. 2,495
Deposits.................................................... 363
-------
Total assets................................................ $74,140
-------
Current liabilities:
Current liabilities....................................... $ 5,771
Deferred revenues......................................... 1,966
-------
Total current liabilities............................... 7,737
Long-term debt.............................................. 439
-------
Total liabilities....................................... 8,176
-------
Total stockholders' equity.................................. 65,964
-------
Total liabilities and stockholders' equity.................. $74,140
=======
</TABLE>
Total revenue for the fourth quarter of 1999 was $5.1 million, a 192%
increase over proprietary software licensing and services revenue of
$1.7 million for the fourth quarter of 1998, and a 26% increase over the
$4.0 million for the third quarter of 1999. Net loss was $4.0 million, or $0.22
per share for the fourth quarter of 1999, as compared to a pro forma net loss of
$4.0 million, or $0.38 per share for the fourth quarter of 1998, and a pro forma
net loss of $3.7 million, or $0.27 per share for the third quarter of 1999.
Software license revenue for the fourth quarter of 1999 totaled
$3.8 million, an increase of 347% from $845,000 for the fourth quarter of 1998,
and a 20% increase from $3.1 million for the third quarter of 1999. Services
revenue for the fourth quarter of 1999 was $1.3 million, an increase of 44%
compared to $885,000 for the fourth quarter of 1998, and a 49% increase from
services revenue of $856,000 for the third quarter of 1999.
For the twelve months ended December 31, 1999, total revenue increased 123%
to $15.6 million over proprietary software licensing and services revenue of
$7.0 million for the twelve-months ended December 31 1998. Pro forma net loss
was $15.1 million, or $1.13 per share for the twelve months ended December 31,
1999, compared to a pro forma net loss of $11.6 million, or $1.35 per share for
the twelve months ended December 31, 1998.
6
<PAGE>
RISK FACTORS
THIS SECTION HIGHLIGHTS SPECIFIC RISKS WITH RESPECT TO AN INVESTMENT IN OUR
BUSINESS. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. WE ALSO
CAUTION YOU THAT THIS PROSPECTUS INCLUDES FORWARD-LOOKING STATEMENTS THAT ARE
BASED ON MANAGEMENT'S BELIEFS AND ASSUMPTIONS AND ON INFORMATION CURRENTLY
AVAILABLE TO MANAGEMENT. YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW
AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE PURCHASING THE COMMON STOCK.
WE HAVE HAD RECENT LOSSES AND MAY INCUR FUTURE LOSSES THAT MAY DEPRESS OUR STOCK
PRICE.
We have incurred significant net losses since 1996, including losses of
approximately $3.8 million and $11.6 million for the years ended December 31,
1997 and 1998, respectively and $11.2 million for the nine months ended
September 30, 1999. Our losses have resulted in an accumulated deficit of
approximately $31.0 million as of September 30, 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
7
<PAGE>
United States, decides to alter materially the current approach to, and level
of, regulation of the Internet, we may need to adapt our technology. Any
required adaptation could cause us to spend significant amounts of time and
money. If use of the Internet does not continue to grow or grows more slowly
than expected, if the infrastructure for the Internet does not effectively
support growth that may occur, if government regulations change or if the
Internet does not become a viable commercial marketplace, our business could
suffer.
WE DEPEND ON OUR SAPPHIRE/WEB 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 $7.9 million or 74% of total revenues in
the first nine months of 1999. We expect to continue to be dependent upon the
Sapphire/Web software products in the future, and any factor adversely affecting
the market for Web application server software in general, or our software in
particular, would adversely affect our ability to generate revenues. The market
for Web application server software is competitive, highly fragmented and
characterized by rapid technological change. Our future financial performance
will depend in large part on the successful development, introduction and
customer acceptance of our new products and product enhancements in a timely and
cost effective manner. 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
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Application Server. In addition, we face competition from in-house software
developers who may develop some or all of the functionality that our products
provide. Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, greater name
recognition, a broader range of products to offer and a larger installed base of
customers than us, any of which could provide them with a significant
competitive advantage.
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 year ended December 31, 1998 and the nine
months ended September 30, 1999 in the aggregate accounted for approximately 39%
and 60%, respectively, of our revenues. Hewlett-Packard accounted for more than
10% of our revenues for the year ended December 31, 1998 and Hewlett-Packard and
OpenConnect individually accounted for more than 10% of our revenues for the
nine months ended September 30, 1999. We expect that a small number of customers
will continue to account for a substantial portion of revenues in any given
quarter in the foreseeable future, although it is unusual for the same customer
to account for a substantial amount of revenues in each of several quarters. As
a result, our inability to secure major customers during a given period or the
loss of any one major customer could cause our revenues to drop quickly and
unexpectedly.
IF WE FAIL TO DEVELOP NEW PRODUCTS AND SERVICES IN THE FACE OF OUR INDUSTRY'S
RAPIDLY EVOLVING TECHNOLOGY, OUR FUTURE RESULTS MAY BE ADVERSELY AFFECTED.
Due to the recent emergence of the Internet and the Web as a forum for
conducting business, the market for Web application server systems in which we
participate is subject to rapid technological change, changing customer needs,
frequent new product introductions and evolving industry standards that may
render existing products and services obsolete. Our growth and future operating
results will depend in part upon our ability to enhance existing applications
and develop and introduce new applications or components that:
- meet or exceed technological advances in the marketplace;
- meet changing customer requirements;
- achieve market acceptance;
- integrate successfully with third party software; and
- respond to competitive products.
Our product development and testing efforts have required, and are expected
to continue to require, substantial investment. We may not possess sufficient
resources to continue to make the necessary investments in technology. In
addition, we may not successfully identify new software opportunities and
develop and bring new software to market in a timely and efficient manner. If we
are unable, for technological or other reasons, to develop and introduce new and
enhanced software in a timely manner, we may lose existing customers and fail to
attract new customers, resulting in a decline in revenues.
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<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;
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<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.
We derive over 75% of our license revenues through a limited number of
independent software vendors, systems integrators, distributors and resellers.
Although we intend to increase our marketing and direct sales efforts, we expect
that a limited number of these indirect channels will continue to account for a
significant portion of our revenues in any given quarter in the foreseeable
future. To be successful, we must continue to foster and maintain our existing
indirect channels, as well as develop
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<PAGE>
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.
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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.
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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 34.8% 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;
- approval of 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.
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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 $88.13 per share, the book value
of the common stock after the offering will be $10.93 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
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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 $88.13 per share, will be approximately $146.4
million after deducting $7.9 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 January 31, 2000).................. $130.50 $75.00
</TABLE>
As of January 31, 2000 there were 88 holders of record of our common stock.
On January 31, 2000, the last sale price reported on the Nasdaq National Market
for our common stock was $88.13 per share.
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CAPITALIZATION
The following table sets forth our unaudited total capitalization as of
September 30, 1999:
- on an actual basis;
- on an adjusted basis to give effect to the receipt of the net proceeds of
$146.4 million from our sale of 1,750,000 shares of common stock in this
offering at an assumed offering price of $88.13 per share, after deducting
$7.9 million for estimated underwriting discounts and commissions and
estimated offering expenses and the exercise of 277,842 stock options
outstanding on September 30, 1999 by certain selling stockholders but
excluding our receipt of the related proceeds from the exercise.
In the following table, stockholders' equity excludes:
- 2,882,063 shares of common stock issuable upon the exercise of stock
options outstanding as of September 30, 1999 under our 1996 Incentive and
Non-Qualified Stock Option Plan with a weighted average exercise price of
$5.33 per share and 327,457 shares reserved for issuance under the plan as
of September 30, 1999;
- 3,459,672 additional shares of common stock reserved for issuance under
our option plan as approved on January 31, 2000;
- 12,499 shares of common stock issuable upon the exercise of stock options
outstanding as of September 30, 1999 under our Director's Compensation
Plan with a weighted average exercise price of $23.13 per share and
143,751 shares reserved for issuance under this plan; and
- 297,822 shares of common stock issuable upon the exercise of warrants
outstanding as of September 30, 1999 with a weighted exercise price of
$8.61 per share.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------
ACTUAL ADJUSTED
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Short-term borrowings, including current portion of
long-term debt............................................ $ 949 $ 949
Long-term debt, less current portion........................ 1,043 1,043
-------- --------
Total debt................................................ 1,992 1,992
Stockholders' equity:
Common Stock, par value $0.001; 54,900,000 shares
authorized, 17,605,539 shares issued and outstanding
actual; 19,633,381 shares issued and outstanding
adjusted................................................ 18 20
Common stock warrants..................................... 1,900 1,900
Deferred compensation..................................... (1,218) (1,218)
Additional paid-in capital................................ 98,452 244,827
Accumulated deficit....................................... (30,958) (30,958)
-------- --------
Total stockholders' equity................................ 68,194 214,571
-------- --------
Total capitalization...................................... $ 70,186 $216,563
======== ========
</TABLE>
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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
$88.13 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 but excluding our receipt of the
related proceeds from the exercise, our net tangible book value as of
September 30, 1999 would have been $214.6 million or $10.93 per share of common
stock. This represents an immediate increase in net tangible book value of $7.06
per share to existing stockholders and an immediate dilution of $77.20 per share
to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $88.13
Net tangible book value per share as of September 30,
1999.................................................... $3.87
Increase per share attributable to new investors.......... 7.06
-----
Adjusted net tangible book value per share as of
September 30, 1999........................................ 10.93
------
Dilution per share to new investors......................... $77.20
======
</TABLE>
The table above assumes no further exercise of outstanding stock options or
warrants and excludes:
- 2,882,063 shares of common stock issuable upon the exercise of stock
options outstanding as of September 30, 1999 under our 1996 Incentive and
Non-Qualified Stock Option Plan with a weighted average exercise price of
$5.33 per share and 327,457 shares reserved for issuance under the plan as
of September 30, 1999;
- 3,459,672 additional shares of common stock reserved for issuance under
our option plan as approved on January 31, 2000;
- 12,499 shares of common stock issuable upon the exercise of stock options
outstanding as of September 30, 1999 under our Director's Compensation
Plan with a weighted average exercise price of $23.13 per share and
143,751 shares reserved for issuance under this plan; and
- 297,822 shares of common stock issuable upon the exercise of warrants
outstanding as of September 30, 1999 with a weighted exercise price of
$8.61 per share.
To the extent that outstanding options or warrants are exercised, there will
be further dilution to new investors.
18
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below as of December 31, 1997 and 1998 and
for each of the three years in the period ended December 31, 1998 have been
derived from our audited financial statements included elsewhere in this
prospectus. The selected financial data set forth below as of December 31, 1995
and 1996 and for the year ended December 31, 1995 have been derived from our
audited financial statements which are not included in this prospectus. The
selected financial data as of and for the year ended December 31, 1994, and as
of and for the nine months ended September 30, 1998 and 1999 have been derived
from unaudited financial statements which, in the opinion of management, include
all adjustments necessary for a fair presentation of our financial position and
results of operations. Operating results for the nine month period ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the entire year ended December 31, 1999. The pro forma net loss per
share amounts presented below reflect the outstanding preferred stock during
each period presented on an as converted basis. The 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>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license fees.............................. $ -- $ -- $ 1,475 $ 2,337 $ 3,391 $ 2,546 $ 7,874
Services........................................... -- -- 43 2,179 3,620 2,735 2,721
Third party products and related services.......... 6,074 6,950 6,555 5,225 1,107 1,046 --
------ ------ ------- ------- -------- ------- --------
Total revenues................................... 6,074 6,950 8,073 9,741 8,118 6,327 10,595
Cost of revenues:
Software license fees.............................. -- -- 113 202 259 209 210
Services........................................... -- -- 305 2,516 4,433 3,270 3,412
Third party products and related services.......... 3,502 3,975 4,261 2,798 643 607 --
------ ------ ------- ------- -------- ------- --------
Total cost of revenues........................... 3,502 3,975 4,679 5,516 5,335 4,086 3,622
------ ------ ------- ------- -------- ------- --------
Gross profit......................................... 2,572 2,975 3,394 4,225 2,783 2,241 6,973
Operating expenses:
Sales and marketing................................ 1,226 1,836 3,005 5,131 9,551 6,678 10,701
Product development................................ 246 458 702 1,295 2,474 1,608 3,087
General and administrative......................... 724 841 1,515 1,616 2,316 1,615 3,113
Amortization of stock-based compensation........... -- -- -- -- -- -- 197
------ ------ ------- ------- -------- ------- --------
Total operating expenses......................... 2,196 3,135 5,222 8,042 14,341 9,901 17,098
------ ------ ------- ------- -------- ------- --------
Income (loss) from operations........................ 376 (160) (1,828) (3,817) (11,558) (7,660) (10,125)
Interest income (expense), net....................... (30) (41) (50) (80) (47) 9 (1,035)
------ ------ ------- ------- -------- ------- --------
Income (loss) from continuing operations............. 346 (201) (1,878) (3,896) (11,605) (7,651) (11,160)
Income (loss) from discontinued operations........... 300 497 (738) 99 -- -- --
------ ------ ------- ------- -------- ------- --------
Net income (loss).................................... 646 296 (2,616) (3,798) (11,605) (7,651) (11,160)
Accretion of preferred stock redemption value........ -- -- -- (240) (846) (577) (1,636)
------ ------ ------- ------- -------- ------- --------
Net income (loss) available to common stockholders... $ 646 $ 296 $(2,616) $(4,038) $(12,451) $(8,228) $(12,796)
====== ====== ======= ======= ======== ======= ========
Basic and diluted net income (loss) per share:
Continuing operations.............................. $ 0.12 $(0.07) $ (0.67) $ (1.39) $ (4.12) $ (2.72) $ (3.48)
Discontinued operations............................ 0.11 0.18 (0.26) 0.04 -- -- --
Accretion of preferred stock redemption value...... -- -- -- (0.09) (0.30) (0.20) (0.51)
------ ------ ------- ------- -------- ------- --------
$ 0.23 $ 0.11 $ (0.93) $ (1.44) $ (4.42) $ (2.92) $ (3.99)
====== ====== ======= ======= ======== ======= ========
Shares used in computing net income (loss) per
share.............................................. 2,813 2,813 2,813 2,813 2,814 2,814 3,204
Pro forma basic and diluted net loss per share from
continuing operations.............................. $ (1.35) $ (0.94)
======== ========
Shares used in computing pro forma basic and diluted
net loss per share................................. 8,619 11,896
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
---------------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- --------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 120 $ 146 $ 1,086 $ 2,330 $ 2,535 $ 71,197
Working capital (deficit)............................. 1,119 1,205 (640) (48) (340) 67,782
Total assets.......................................... 3,303 4,888 6,734 5,815 7,536 76,933
Long-term obligations, net of current portion......... 519 518 1,289 1,270 1,876 1,043
Mandatorily redeemable convertible preferred stock.... -- -- -- 5,331 17,415 --
Total stockholders' equity (deficit).................. 1,098 1,375 (1,269) (5,703) (18,147) 68,194
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
We were incorporated in New Jersey in 1989 as Bluestone Consulting, Inc. Our
primary business initially consisted of general information technology
consulting on the UNIX platform and information technology staffing. In
January 1991, we entered the software business and became a value added reseller
of third party software products. We also began to develop software internally
for sale to customers as part of our software business. In October 1995, our
proprietary product, Sapphire/Web 1.0, was released.
In March 1997, we reincorporated in Delaware and changed our name to
"Bluestone Software, Inc." In April 1997, we spun off our consulting business to
Bluestone Consulting, Inc., a newly formed Delaware corporation. 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.
OVERVIEW
Our fiscal year end is December 31. References to 1996, 1997 or 1998 mean
the fiscal year ended December 31, unless otherwise indicated.
We generate revenue from two principal sources:
- license fees for our software products; and
- professional services and support revenue derived from consulting,
training and maintenance services related to our software products.
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 an
initial 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
20
<PAGE>
beyond one year are not deemed to be fixed and determinable and therefore are
deferred and recognized as revenue when the payments become due.
Prior to 1998, software licenses were principally the result of direct sales
to end-users. Beginning in 1998, we began to focus on channel marketing. This
has resulted in significant sales of products sold through independent software
vendors, resellers and systems integrators. We believe that these alliances have
helped to maximize our exposure in the marketplace. Furthermore, we have
experienced, and expect to continue to experience, significant variation in the
size of individual licensing transactions, ranging from small sales of perpetual
developer licenses to large, multi-year licensing arrangements with independent
software vendors.
We generally recognize license fee revenue when a formal agreement exists,
delivery of the product has occurred, no production, modification, customization
or implementation obligations remain, the license fee is deemed fixed and
determinable and collectibility is probable. Revenue from arrangements with
distributors and resellers is not recognized until our product is delivered to
the end-user.
In 1998, one customer accounted for 11% of our total product and services
revenues and during the nine months ended September 30, 1999, two of our
customers individually accounted for greater than 10% of our total product and
services revenues. Our top 10 customers represented 34%, 39% and 60% of total
revenues in 1997, 1998 and in the nine months ended September 30, 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.
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 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.
21
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses include our
personnel and other costs of our finance, human resources and information
services activities.
STOCK-BASED COMPENSATION. The amount by which the fair market value of our
common stock exceeded the exercise price of stock options on the date of grant
is recorded as deferred compensation and is amortized to stock-based
compensation expense as the options vest.
RESULTS OF OPERATIONS
The table below sets forth statement of operations data for the periods
indicated as a percentage of total revenues. Entries in the table containing an
asterisks mean that the figure for such entry was less than 1% of total
revenues.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED SEPTEMBER 30,
DECEMBER 31, --------------------
-------------------------------- --------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C>
Revenues:
Software license fees............................ 18% 24% 42% 40% 74%
Services......................................... 1 22 44 43 26
Third party products and related services........ 81 54 14 17 --
---- ---- ---- ---- ----
Total revenues............................... 100 100 100 100 100
Cost of revenues:
Software license fees............................ 1 2 3 3 2
Services......................................... 4 26 55 52 32
Third party products and related services........ 53 29 8 10 --
---- ---- ---- ---- ----
Total cost of revenues....................... 58 57 66 65 34
---- ---- ---- ---- ----
Gross profit....................................... 42 43 34 35 66
Operating expenses:
Sales and marketing.............................. 37 53 118 106 101
Product development.............................. 9 13 30 25 29
General and administrative....................... 19 17 29 25 29
Amortization of stock-based compensation......... -- -- -- -- 2
---- ---- ---- ---- ----
Total operating expenses..................... 65 83 177 156 161
---- ---- ---- ---- ----
Loss from operations............................... (23) (39) (142) (121) (95)
Interest expense, net.............................. (1) (1) (1) * (10)
---- ---- ---- ---- ----
Loss from continuing operations.................... (23)% (40)% (143)% (121)% (105)%
==== ==== ==== ==== ====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
SOFTWARE LICENSE FEES
License fees were $7.9 million and $2.5 million for the nine months ended
September 30, 1999 and 1998, respectively. This increase of 209.3% 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. In addition, we received payment under an extended license fee
arrangement with one customer in February 1999, which accounted for
approximately $1.9 million of our license fee revenue during the nine months
ended September 30, 1999. We also had another customer account for greater than
10% of our total product revenue during the nine months ended September 30,
1999.
22
<PAGE>
SERVICES REVENUE
Services revenue was $2.7 million for each of the nine months ended
September 30, 1999 and 1998. Services revenue remained relatively constant
between the two periods due to a strategic change in the use of our professional
staff. By the beginning of 1999, the main focus of the services organization had
shifted to concentrate on short-term, installation-type engagements, usually
less than two weeks in duration, rather than long-term implementation
activities. These 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 $1.0 million
for the nine months ended September 30, 1999 and 1998, respectively. This
decrease was due to our decision in 1998 to curtail the licensing and services
related to third party products so that we could focus on our proprietary
products.
GROSS MARGIN-LICENSE FEES
Our license fee gross margin increased to 97.3% for the nine months ended
September 30, 1999 from 91.8% for the same period in 1998. This increase was
primarily due to the increase in revenue per customer. Our focus on positioning
our Sapphire/Web product as an enterprise-wide solution 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.
GROSS MARGIN-SERVICES REVENUE
Our services gross margin decreased to (25.4)% for the nine months ended
September 30, 1999 from (19.6)% for the same period in 1998. This was primarily
due to the hiring and training of additional services personnel in advance of
anticipated services revenue growth.
SALES AND MARKETING
Sales and marketing expenses were $10.7 million and $6.7 million for the
nine months ended September 30, 1999 and 1998, respectively, representing an
increase of 60.2%. Of this increase, $1.4 million was due to increases in
payroll and related costs, $370,000 was due to recruiting costs and travel costs
as a result of the growth in the number of sales personnel, $678,000 was due to
increased advertising and trade show expenses, and $671,000 was due to increased
commissions expense as a result of higher sales volume. We have increased our
spending on sales and marketing because we believe that our sales and marketing
efforts are essential for us to increase our market position and our product
acceptance. The average number of sales and marketing employees for the nine
months ended September 30, 1999 was 54 compared to 46 for the nine months ended
September 30, 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 101.0%
and 105.5% for the nine months ended September 30, 1999 and 1998, respectively.
PRODUCT DEVELOPMENT
Product development expenses were $3.1 million and $1.6 million for the nine
months ended September 30, 1999 and 1998, respectively, representing an increase
of 92.0%. This increase is primarily due to increased payroll and related costs
of $1.2 million. These costs as a percentage of revenue were 29.1% and 25.4% for
the nine months ended September 30, 1999 and 1998, respectively. These increases
were associated with the development of our new products, Sapphire/Web Release 6
and
23
<PAGE>
Bluestone XML Suite. We believe that our product development investment is
essential for us to maintain our market and technological competitiveness.
Average development headcount for the nine months ended September 30, 1999 and
1998 was 30 and 19, respectively.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $3.1 million and $1.6 million for
the nine months ended September 30, 1999 and 1998, respectively. Included in
expenses for the nine months ended September 30, 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 $2.5 million, an increase of 57.0% over
the nine months ended September 30, 1998. This increase was primarily due to
payroll and related costs resulting from the addition of personnel to support
the growth of our business. General and administrative expenses as a percentage
of revenue were 29.4% and 25.5% for the nine months ended September 30, 1999 and
1998, respectively. Excluding these severance and consulting costs, the expenses
as a percentage of revenue decreased to 23.9%.
AMORTIZATION OF STOCK-BASED COMPENSATION
Amortization of stock-based compensation was $197,000 and zero for the nine
months ended September 30, 1999 and 1998, respectively. Deferred compensation of
$1.4 million arose due to the issuance of stock options at exercise prices below
the fair market value of our common stock for accounting purposes relative to
the hiring of key employees and 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 September 30, 1999, we had an aggregate of
$1.2 million of deferred compensation to be amortized through June 30, 2003.
INTEREST INCOME (EXPENSE), NET
Net interest expense was $1.0 million for the nine months ended
September 30, 1999 and net interest income was $9,000 for the nine months ended
September 30, 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.
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.
24
<PAGE>
THIRD PARTY PRODUCTS AND RELATED SERVICES REVENUE
Third party products and related services revenue was $1.1 million and
$5.2 million for 1998 and 1997, respectively. This decrease was due to our
decision in 1998 to curtail the sale of third party products and services.
GROSS MARGIN-LICENSE FEES
Our license fee gross margin was 92.4% in 1998 and 91.4% in 1997, remaining
relatively constant.
GROSS MARGIN-SERVICES REVENUE
Our services gross margin decreased to (22.5)% in 1998 from (15.5)% in 1997.
This decrease in the gross margin was primarily due to the hiring and training
of additional personnel to support our growing installed base of customers and
anticipated increase in future revenues.
SALES AND MARKETING
Sales and marketing expenses were $9.6 million and $5.1 million in 1998 and
1997, respectively, an increase of 86.1%. These costs as a percentage of revenue
increased to 117.7% in 1998 from 52.7% in 1997. These increases were primarily
due to an increase in the number of sales and marketing personnel between March
and September 1998, including the addition of a new Senior Vice President, Sales
and a Senior Vice President, Marketing, as well as three Sales Vice Presidents.
In 1998, we 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.
1997 COMPARED TO 1996
SOFTWARE LICENSE FEES
Sapphire/Web license revenue was $2.3 million and $1.5 million for 1997 and
1996, respectively. The increase of 58.4% was due to increased market acceptance
of the Sapphire/Web software suite.
SERVICES REVENUE
Sapphire/Web services revenue was $2.2 million and $43,000 for 1997 and
1996, respectively. This increase of $2.1 million was primarily due to an
increase in the number of consulting and training engagements associated with
our growing customer base.
25
<PAGE>
THIRD PARTY PRODUCTS AND RELATED SERVICES REVENUE
Third party products and related services revenue was $5.2 million and
$6.6 million for 1997 and 1996, respectively. This decrease was due to a shift
in our attention from third party products and services towards proprietary
products and services.
GROSS MARGIN LICENSE FEES
Our license fee gross margin was 91.4% in 1997 and 92.3% in 1996, remaining
relatively constant.
GROSS MARGIN SERVICES REVENUE
Our services gross margin increased to (15.5%) in 1997 from (609.3%) in
1996. This increase was primarily due to a significant increase in the sales of
our product and the related consulting, training and maintenance services. We
began to offer our maintenance services in 1996.
SALES AND MARKETING
Sales and marketing expenses were $5.1 million and $3.0 million for 1997 and
1996, respectively. This increase of 70.7% was primarily due to increases in the
number of sales and marketing personnel. These costs as a percentage of revenue
increased to 52.7% in 1997 from 37.2% in 1996.
PRODUCT DEVELOPMENT
Product development expenses were $1.3 million and $702,000 for 1997 and
1996, respectively, representing an increase of 84.5%. These costs as a
percentage of revenue increased to 13.3% in 1997 from 8.7% in 1996. These
increases were primarily due to the costs of hiring of additional developers.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $1.6 million and $1.5 million for
1997 and 1996, respectively. This increase of 6.7% was primarily due to
increases in staff to support our growth. These costs as a percentage of revenue
decreased to 16.6% in 1997 from 18.8% in 1996.
26
<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
------------------------------------------------------------------------------------------------
9/30/97 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98 3/31/99 6/30/99 9/30/99
-------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software license fees........ $ 523 $ 854 $ 432 $ 760 $ 1,354 $ 845 $ 2,257 $ 2,470 $ 3,147
Services..................... 624 708 937 769 1,029 885 1,020 845 856
Third party software and
related services........... 1,181 1,272 785 147 114 61 -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenues........... 2,328 2,834 2,154 1,676 2,497 1,791 3,277 3,315 4,003
Cost of revenues:
Software license fees........ 67 78 39 57 113 50 57 99 54
Services..................... 682 865 985 1,093 1,192 1,163 1,338 1,129 945
Third party software and
related services........... 621 683 436 98 73 35 -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenues... 1,370 1,626 1,460 1,248 1,378 1,248 1,395 1,228 999
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit................... 958 1,208 694 428 1,119 543 1,882 2,087 3,004
Operating expenses:
Sales and marketing.......... 1,398 1,598 1,545 2,203 2,930 2,874 2,826 3,360 4,515
Product development.......... 338 376 360 544 704 866 904 964 1,219
General and administrative... 434 439 447 502 666 701 635 1,489 989
Amortization of stock-based
compensation............... -- -- -- -- -- -- -- 112 85
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 2,170 2,413 2,352 3,249 4,300 4,441 4,365 5,925 6,808
------- ------- ------- ------- ------- ------- ------- ------- -------
Loss from operations........... (1,212) (1,205) (1,658) (2,821) (3,181) (3,898) (2,483) (3,838) (3,804)
Interest income (expense),
net.......................... 12 (29) (41) 8 42 (56) (48) (1,100) 113
------- ------- ------- ------- ------- ------- ------- ------- -------
Loss from continuing
operations................... $(1,200) $(1,234) $(1,699) $(2,813) $(3,139) $(3,954) $(2,531) $(4,938) $(3,691)
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------------------
9/30/97 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98 3/31/99 6/30/99 9/30/99
-------- -------- -------- -------- -------- -------- -------- -------- --------
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software license fees........ 22% 30% 20% 45% 54% 47% 69% 75% 79%
Services..................... 27 25 44 46 41 49 31 25 21
Third party software and
related services........... 51 45 36 9 5 3 -- -- --
--- --- --- ---- ---- ---- --- ---- ---
Total revenues........... 100 100 100 100 100 100 100 100 100
Cost of revenues:
Software license fees........ 3 3 2 3 5 3 2 3 1
Services..................... 29 31 46 65 48 65 41 34 24
Third party software and
related services........... 27 24 20 6 3 2 -- -- --
--- --- --- ---- ---- ---- --- ---- ---
Total cost of revenues... 59 57 68 74 55 70 43 37 25
--- --- --- ---- ---- ---- --- ---- ---
Gross profit................... 41 43 32 26 45 30 57 63 75
Operating expenses:
Sales and marketing.......... 60 56 72 131 117 160 86 101 113
Product development.......... 15 13 17 32 28 48 28 29 30
General and administrative... 19 15 21 30 27 39 19 45 25
Amortization of stock-based
compensation............... -- -- -- -- -- -- -- 3 2
--- --- --- ---- ---- ---- --- ---- ---
Total operating
expenses............... 93 85 109 194 172 248 133 179 170
--- --- --- ---- ---- ---- --- ---- ---
Loss from operations........... (52) (43) (77) (168) (127) (218) (76) (116) (95)
Interest income (expense),
net.......................... 1 (1) (2) -- 2 (3) (1) (33) 3
--- --- --- ---- ---- ---- --- ---- ---
Loss from continuing
operations................... (52)% (44)% (79)% (168)% (126)% (221)% (77)% (149)% (92)%
=== === === ==== ==== ==== === ==== ===
</TABLE>
27
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Our comparisons of operating results from 1996 to 1997 and from 1997 to
1998, and for the nine months ended September 30, 1998 to the nine months ended
September 30, 1999, generally apply to the comparison of the results of
operations for the nine quarters in the period ended September 30, 1999. Our
third party products and related services revenue decreased during the four
quarters of 1998 due to our decision to curtail the licensing of third party
products so that we could focus our resources on our proprietary products. Our
gross profit margin increased over the three quarters ended September 30, 1999
due to the increase in our proprietary software license revenue. The increase in
sales and marketing expenses for the three months ended September 30, 1999 was
due to increases in payroll and related costs, recruiting costs and travel costs
as a result of the growth in the number of sales personnel and also to increased
trade show and public relations expenses, and 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. Increases in
product development expenses were due primarily to increases in payroll and
related costs as a result of the growth in the number of employees in our
development group. We believe that our product development investment is
essential for us to maintain our market and technological competitiveness. We
expect to increase our product development, sales and marketing and general and
administrative expenses in future periods. The decrease in general and
administrative expenses for the three months ended September 30, 1999 compared
to the three months ended June 30, 1999 was primarily due to one-time charges to
general and administrative expenses during the second quarter of 1999 for
severance related to former officers and expenses related to consulting
services. Net interest income increased during the three months ended
September 30, 1999 due to higher than average cash balances resulting from our
Series C Preferred Stock financing in May 1999 yielding $25.0 million in gross
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
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borrowings of $3.0 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. Borrowings under the line of credit
were subject to a borrowing base of 80% of eligible domestic accounts receivable
and interest on our line of credit was payable monthly at rates of prime plus
.50%. 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 $500,000 line of credit facility. 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 for operating activities was $3.0 million, $10.3 million and
$8.7 million for the fiscal year ended December 31, 1997, 1998 and nine months
ended September 30, 1999 respectively. The cash used for operating activities
was attributable primarily to net losses $3.8 million, $11.6 million and
$11.2 million for the fiscal year ended December 31, 1997 and 1998 and the nine
months ended September 30, 1999, respectively.
Net cash used in investing activities was $872,000, $1.2 million and
$404,000 for the fiscal year ended December 31, 1997, 1998 and the nine months
ended September 30, 1999, respectively. The cash used in investing activities
related primarily to purchases of computers and software for internal use.
Net cash provided by financing activities amounted to $5.1 million,
$11.7 million and $77.7 million for the fiscal year ended December 31, 1997,
1998 and the nine months ended September 30, 1999, 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 $939,000 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 the nine months ended September 30, 1999 we
received proceeds of $222,000 from the exercise of common stock options and made
repayments of $253,000 of long-term debt and $161,000 to related parties.
On October 29, 1999, we entered into a seven and a one-half year lease with
a realty company for facilities 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 the operation of 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 we had assets under operating leases of $476,827 of the
available on the equipment lease line. Letters of credit totaling $286,097 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
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<PAGE>
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.
YEAR 2000 ISSUES
GENERAL. Year 2000 issues relate to computer programs or hardware that have
date-sensitive software or embedded chips that may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculation causing disruption of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in other normal business activities.
The term "computer programs and hardware" includes accounting, data
processing and telephone/ PBX systems, in addition to other miscellaneous
systems. These systems may contain imbedded technology, which complicates our
identification, assessment, remediation and testing efforts.
STATE OF READINESS. We have designed the current versions of our software
products to be Year 2000 compliant, and do not anticipate any Year 2000 issues
related to these products. However, some older versions of our software products
that we no longer sell may not be Year 2000 compliant. 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.
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<PAGE>
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. 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 plan to invest our excess cash in short-term,
investment-grade, interest-bearing securities and we have concluded that there
is no material market risk exposure relating to these investments.
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<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.
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<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;
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- 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.
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<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.
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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.
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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
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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.
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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.
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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
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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.
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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
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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 AND COPYRIGHTS
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.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
P. Kevin Kilroy........................ 45 President, Chief Executive Officer and Director
S. Craig Huke.......................... 38 Senior Vice President and Chief Financial Officer
Robert W. Bickel....................... 42 Senior Vice President, Products
John H. Capobianco..................... 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, Products since
January 1998. From April 1997 to January 1998, Mr. Bickel served as our Chief
Operating Officer, and from May 1992 to April 1997, as the Director of Products
at Bluestone Consulting, Inc., a New Jersey corporation and our predecessor.
JOHN H. CAPOBIANCO has served as our Senior Vice President, Marketing since
February 1998. Before joining Bluestone, Mr. Capobianco served as a Senior Vice
President of Marketing at SAP America from March 1997 to February 1998. From
1996 to March 1997, Mr. Capobianco served as the Vice President, Corporate
Marketing of Sybase, Inc., from 1995 to 1996 as Vice President, Marketing of
PRIMAVERA Systems, Inc. and from 1985 to 1995 as Vice President, Marketing of
Computer Associates International, Inc.
JOSEPH K. KRIVICKAS has served as our Senior Vice President, Worldwide Sales
since May 1999. From August 1998 to May 1999, Mr. Krivickas was Vice President,
Sales and Service for E-commerce products at Sanga International. From
January 1996 to July 1998, Mr. Krivickas was co-founder and 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.
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PAUL T. PORRINI has served as our Senior Vice President and General Counsel
since January 2000. 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.
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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.
46
<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.
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<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.
48
<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 the
nine months ended September 30, 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.
49
<PAGE>
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 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 September 30, 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
50
<PAGE>
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 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
51
<PAGE>
the ratio that a participant's total eligible compensation bears to the total
eligible compensation of all eligible participants for the applicable 401(k)
plan year. To be eligible for a discretionary profit sharing contribution, a
participant must be employed with Bluestone on the last day of the applicable
401(k) plan year and must have completed at least 500 hours of service for
Bluestone during that year.
The portion of a participant's account attributable to his or her own
contributions is 100% vested. The portion of the account attributable to our
contributions vests as to 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.
52
<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.
53
<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 in this prospectus under the
heading "Certain Transactions." 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.
54
<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
55
<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
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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
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<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 the
nine months ended September 30, 1999, we recorded $154,200 in general and
administrative expense associated with this severance agreement. On July 1,
1999, Mr. Baiada's shares of common stock deemed to be contingent under his
stock repurchase agreement dated April 18, 1997 became vested. For more
information about Mr. Baiada's stock repurchase agreement see "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 the nine
months ended September 30, 1999 in connection with this option.
FUTURE AFFILIATE TRANSACTIONS
We believe that all of the transactions described above were made on terms
no less favorable to us than would have been obtained from unaffiliated third
parties. All future transactions, including loans, between us and our officers,
directors, principal stockholders and their affiliates, will be approved by a
majority of the board of directors, including a majority of the independent and
disinterested outside directors on the board of directors, and will be on terms
no less favorable to us than could be obtained from unaffiliated third parties.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of 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 34,769 107,964 1.0
Gregory M. Case.................... 5,263,532(9) 28.9 735,630 4,527,902 22.3
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.................... 7,031(5) * -- 7,031 *
Enrico Ballezzi.................... 73,128(11) * -- 73,128 *
All directors and executive
officers as a group (11
persons)......................... 8,565,078(12) 45.4 7,179,684 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.
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Langone, Gertrude G. Michelson, Eugene F. Murphy, Sam Nunn, John D. Opie,
Roger S. Penske, Frank H. T. Rhodes, Andrew C. Sigler, Douglas A. Warner
III, and John F. Welch, Jr.
(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 3,906 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
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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 615,879 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.
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DESCRIPTION OF SECURITIES
Our authorized capital stock as of September 30, 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 September 30, 1999, there were 17,605,539 shares of common stock
outstanding held of record by 62 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;
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- 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."
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SHARES ELIGIBLE FOR FUTURE SALE
Based on the number of shares outstanding on September 30, 1999, upon
completion of this offering we will have outstanding an aggregate of 19,633,381
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 and Rule
701 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.
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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 196,336 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 90 days after the effective date of this
offering in reliance on Rule 144, but without compliance with some restrictions,
including the holding period, contained in Rule 144.
REGISTRATION RIGHTS
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.
65
<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 September 30, 1999, options to purchase 2,892,063 shares of common stock were
issued and outstanding under these plans, 1,309,868 of which are vested.
66
<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 $46.3 million
after the payment of $2.2 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
67
<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, 1997 and 1998, and for the years
ended December 31, 1996, 1997 and 1998 included in this prospectus and
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein upon the authority of said firm as experts in giving said
reports.
68
<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."
69
<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, 1997 and 1998, and the related statements of operations,
mandatorily redeemable convertible preferred stock and stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bluestone Software, Inc. as
of December 31, 1997 and 1998 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Philadelphia, PA
March 31, 1999 (except with
respect to matters discussed
in Note 2, as to which the
date is May 25, 1999
and Note 13, as to
which the date is September 23, 1999.)
F-2
<PAGE>
BLUESTONE SOFTWARE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1997 1998 1999
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,330,372 $ 2,534,819 $ 71,197,247
Restricted certificate of deposit......................... 400,000 -- --
Accounts receivable, net of allowance of $37,012, $44,473
and $250,314............................................ 1,747,672 3,369,514 3,957,721
Prepaid expenses and other................................ 312,011 149,318 323,820
Due from related party.................................... 79,011 -- --
----------- ----------- ------------
Total current assets.................................... 4,869,066 6,053,651 75,478,788
----------- ----------- ------------
Property and equipment:
Equipment................................................. 1,465,570 2,418,590 2,791,274
Furniture and fixtures.................................... 86,852 183,767 201,467
Leasehold improvements.................................... 20,552 131,845 145,045
----------- ----------- ------------
1,572,974 2,734,202 3,137,786
Less--Accumulated depreciation and amortization........... (640,741) (1,284,921) (1,732,221)
----------- ----------- ------------
Net property and equipment.............................. 932,233 1,449,281 1,405,565
----------- ----------- ------------
Deposits.................................................... 13,744 32,997 49,061
----------- ----------- ------------
$ 5,815,043 $ 7,535,929 $ 76,933,414
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit............................................ $ 1,610,561 $ 473,365 $ 512,366
Current portion of long-term debt......................... 83,971 356,728 436,649
Accounts payable.......................................... 781,703 1,094,286 1,194,538
Accrued wages............................................. 478,970 579,371 1,224,910
Other accrued expenses.................................... 401,468 477,246 2,808,628
Due to related parties.................................... -- 188,898 27,676
Deferred revenues......................................... 1,560,632 3,223,338 1,492,184
----------- ----------- ------------
Total current liabilities............................... 4,917,305 6,393,232 7,696,951
----------- ----------- ------------
Long-term debt.............................................. 269,676 875,642 542,871
----------- ----------- ------------
Subordinated notes due to related parties................... 1,000,000 1,000,000 500,000
----------- ----------- ------------
Mandatorily redeemable Series A convertible preferred
stock..................................................... 5,330,727 5,672,339 --
----------- ----------- ------------
Mandatorily redeemable Series B convertible preferred
stock..................................................... -- 11,742,212 --
----------- ----------- ------------
Mandatorily redeemable Series C convertible preferred
stock..................................................... -- -- --
----------- ----------- ------------
Commitments and contingencies (Note 12)
Stockholders' equity (deficit):
Common stock, $.001 par value, 54,900,000 shares
authorized, 2,812,500, 2,815,039 and 17,605,539 shares
issued and outstanding.................................. 2,813 2,816 17,606
Common stock warrants..................................... -- -- 1,900,000
Deferred stock-based compensation......................... -- -- (1,218,447)
Additional paid-in capital................................ 6,187 11,871 98,452,230
Accumulated deficit....................................... (5,711,665) (18,162,183) (30,957,797)
----------- ----------- ------------
Total stockholders' equity (deficit).................... (5,702,665) (18,147,496) 68,193,592
----------- ----------- ------------
$ 5,815,043 $ 7,535,929 $ 76,933,414
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
BLUESTONE SOFTWARE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- --------------------------
1996 1997 1998 1998 1999
----------- ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
Software license fees................................. $ 1,475,368 $ 2,337,199 $ 3,391,226 $ 2,546,534 $ 7,874,322
Services.............................................. 42,908 2,178,664 3,619,997 2,734,837 2,721,426
Third party products and related services............. 6,555,095 5,225,429 1,106,688 1,046,108 --
----------- ----------- ------------ ----------- ------------
Total revenues.................................. 8,073,371 9,741,292 8,117,911 6,327,479 10,595,748
Cost of revenues:
Software license fees................................. 112,732 202,219 258,572 208,819 210,729
Services.............................................. 305,109 2,516,451 4,433,309 3,270,310 3,411,682
Third party products and related services............. 4,261,078 2,797,656 643,120 607,805 --
----------- ----------- ------------ ----------- ------------
Total cost of revenues.......................... 4,678,919 5,516,326 5,335,001 4,086,934 3,622,411
----------- ----------- ------------ ----------- ------------
Gross profit...................................... 3,394,452 4,224,966 2,782,910 2,240,545 6,973,337
Operating expenses:
Sales and marketing................................... 3,004,760 5,130,799 9,551,284 6,677,477 10,700,338
Product development................................... 701,789 1,295,148 2,473,771 1,607,377 3,087,690
General and administrative............................ 1,515,456 1,615,787 2,316,017 1,615,223 3,113,423
Amortization of stock-based compensation.............. -- -- -- -- 197,101
----------- ----------- ------------ ----------- ------------
Total operating expenses........................ 5,222,005 8,041,734 14,341,072 9,900,077 17,098,552
----------- ----------- ------------ ----------- ------------
Operating loss.................................. (1,827,553) (3,816,768) (11,558,162) (7,659,532) (10,125,215)
Interest expense, net................................... (50,458) (79,701) (46,520) 8,323 (1,034,767)
----------- ----------- ------------ ----------- ------------
Loss from continuing operations......................... (1,878,011) (3,896,469) (11,604,682) (7,651,209) (11,159,982)
Income (loss) from discontinued operations.............. (737,699) 98,898 -- -- --
----------- ----------- ------------ ----------- ------------
Net loss................................................ (2,615,710) (3,797,571) (11,604,682) (7,651,209) (11,159,982)
Accretion of preferred stock redemption value........... -- (240,399) (845,836) (576,803) (1,635,632)
----------- ----------- ------------ ----------- ------------
Net loss available to common stockholders............... $(2,615,710) $(4,037,970) $(12,450,518) $(8,228,012) $(12,795,614)
=========== =========== ============ =========== ============
Basic and diluted net loss per share:
Continuing operations................................. $ (0.67) $ (1.39) $ (4.12) $ (2.72) $ (3.48)
Discontinued operations............................... (0.26) 0.04 -- -- --
Accretion of preferred stock redemption value......... -- (0.09) (0.30) (0.20) (0.51)
----------- ----------- ------------ ----------- ------------
$ (0.93) $ (1.44) $ (4.42) $ (2.92) $ (3.99)
=========== =========== ============ =========== ============
Shares used in computing net loss per share........... 2,812,500 2,812,500 2,814,105 2,813,923 3,203,975
=========== =========== ============ =========== ============
</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, 1995........ $ -- $ -- $ -- 2,812,500 $ 2,813 $ --
Distribution of foreign tax
credits....................... -- -- -- -- -- --
Net loss........................ -- -- -- -- -- --
----------- ------------ ------------ ---------- ------- ----------
Balance, December 31, 1996........ -- -- -- 2,812,500 2,813 --
Spin-off of consulting division
to majority stockholder....... -- -- -- -- -- --
Issuance of preferred stock, net
of financing costs............ 5,090,328 -- -- -- -- --
Accretion of preferred stock
redemption value.............. 240,399 -- -- -- -- --
Net loss........................ -- -- -- -- -- --
----------- ------------ ------------ ---------- ------- ----------
Balance, December 31, 1997........ 5,330,727 -- -- 2,812,500 2,813 --
Issuance of preferred stock, net
of financing costs............ -- 11,237,988 -- -- -- --
Accretion of preferred stock
redemption value.............. 341,612 504,224 -- -- -- --
Exercise of common stock
options....................... -- -- -- 2,539 3 --
Net loss........................ -- -- -- -- -- --
----------- ------------ ------------ ---------- ------- ----------
Balance, December 31, 1998........ 5,672,339 11,742,212 -- 2,815,039 2,816 --
Issuance of preferred stock, net
of financing costs
(unaudited)................... -- -- 22,260,099 -- -- --
Accretion of preferred stock
redemption value
(unaudited)................... 249,008 529,382 857,242 -- -- --
Issuance of options to purchase
common stock below fair market
value (unaudited)............. -- -- -- -- -- --
Amortization of stock-based
compensation (unaudited)...... -- -- -- -- -- --
Issuance of common stock options
to non-employees
(unaudited)................... -- -- -- -- -- --
Issuance of common stock
warrants
(unaudited)................... -- -- -- -- -- 1,900,000
Exercise of common stock options
(unaudited)................... -- -- -- 78,269 78 --
Conversion of preferrred stock
into common stock
(unaudited)................... (5,921,347) (12,271,594) (23,117,341) 10,493,481 10,493 --
Conversion of related-party
convertible subordinated note
into common stock
(unaudited)................... -- -- -- 218,750 219 --
Issuance of common stock, net of
offering expenses
(unaudited)................... -- -- -- 4,000,000 4,000 --
Net loss (unaudited)............ -- -- -- -- -- --
----------- ------------ ------------ ---------- ------- ----------
Balance, September 30, 1999
(unaudited)..................... $ -- $ -- $ -- 17,605,539 $17,606 $1,900,000
=========== ============ ============ ========== ======= ==========
<CAPTION>
STOCKHOLDERS' DEFICIT
-------------------------------------------------------------
DEFERRED ADDITIONAL ACCUMULATED
COMPENSATION PAID-IN-CAPITAL DEFICIT TOTAL
------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995........ $ -- $ 6,187 $ 1,366,254 $ 1,375,254
Distribution of foreign tax
credits....................... -- -- (28,501) (28,501)
Net loss........................ -- -- (2,615,710) (2,615,710)
----------- ------------ ------------ ------------
Balance, December 31, 1996........ -- 6,187 (1,277,957) (1,268,957)
Spin-off of consulting division
to majority stockholder....... -- -- (395,738) (395,738)
Issuance of preferred stock, net
of financing costs............ -- -- -- --
Accretion of preferred stock
redemption value.............. -- -- (240,399) (240,399)
Net loss........................ -- -- (3,797,571) (3,797,571)
----------- ------------ ------------ ------------
Balance, December 31, 1997........ -- 6,187 (5,711,665) (5,702,665)
Issuance of preferred stock, net
of financing costs............ -- -- -- --
Accretion of preferred stock
redemption value.............. -- -- (845,836) (845,836)
Exercise of common stock
options....................... -- 5,684 -- 5,687
Net loss........................ -- -- (11,604,682) (11,604,682)
----------- ------------ ------------ ------------
Balance, December 31, 1998........ -- 11,871 (18,162,183) (18,147,496)
Issuance of preferred stock, net
of financing costs
(unaudited)................... -- -- -- --
Accretion of preferred stock
redemption value
(unaudited)................... -- -- (1,635,632) (1,635,632)
Issuance of options to purchase
common stock below fair market
value (unaudited)............. (1,415,548) 1,415,548 -- --
Amortization of stock-based
compensation (unaudited)...... 197,101 -- -- 197,101
Issuance of common stock options
to non-employees
(unaudited)................... -- 190,954 -- 190,954
Issuance of common stock
warrants
(unaudited)................... -- -- -- 1,900,000
Exercise of common stock options
(unaudited)................... -- 221,935 -- 222,013
Conversion of preferrred stock
into common stock
(unaudited)................... -- 41,299,789 -- 41,310,282
Conversion of related-party
convertible subordinated note
into common stock
(unaudited)................... -- 499,781 -- 500,000
Issuance of common stock, net of
offering expenses
(unaudited)................... -- 54,812,352 -- 54,816,352
Net loss (unaudited)............ -- -- (11,159,982) (11,159,982)
----------- ------------ ------------ ------------
Balance, September 30, 1999
(unaudited)..................... $(1,218,447) $ 98,452,230 $(30,957,797) $ 68,193,592
=========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
BLUESTONE SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- --------------------------
1996 1997 1998 1998 1999
----------- ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss....................................... $(2,615,710) $(3,797,571) $(11,604,682) $(7,651,209) $(11,159,982)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization................ 302,010 239,835 656,654 486,070 447,300
Provision for doubtful accounts.............. 94,217 95,883 32,800 7,462 205,840
Accrued interest on subordinated notes....... 30,048 103,109 109,352 74,699 --
Issuance of bridge loan warrants............. -- -- -- -- 1,100,000
Amortization of stock-based compensation..... -- -- -- -- 197,101
Issuance of common stock options to non-
employees.................................. -- -- -- -- 190,954
Changes in operating assets and liabilities-
Accounts receivable........................ (975,630) (310,896) (1,654,641) (742,654) (794,047)
Prepaid expenses and other assets.......... (81,801) (84,169) 130,619 81,440 (190,566)
Accounts payable and accrued expenses...... 1,308,129 408,822 379,410 635,252 3,077,173
Deferred revenues.......................... 221,186 314,263 1,662,706 (634,568) (1,731,154)
----------- ----------- ------------ ----------- ------------
Net cash used in operating activities.... (1,717,551) (3,030,724) (10,287,782) (7,743,508) (8,657,381)
----------- ----------- ------------ ----------- ------------
Investing activities:
Purchases of property and equipment............ (273,936) (871,717) (1,160,882) (1,082,028) (403,584)
----------- ----------- ------------ ----------- ------------
Financing activities:
Net proceeds from (repayments of) line of
credit....................................... 2,190,000 604,311 (1,137,196) (888,489) 39,001
Proceeds from long-term debt................... 54,000 315,620 919,481 939,283 --
Proceeds from subordinated notes............... 750,000 250,000 -- -- --
Repayments of long-term debt................... (63,030) (122,056) (40,758) (56,627) (252,850)
Proceeds from issuance of preferred stock,
net.......................................... -- 4,840,328 11,237,988 11,237,988 23,060,099
Restricted cash................................ -- (400,000) 400,000 400,000 --
Spin-off of consulting division to sole
stockholder.................................. -- (274,538) -- -- --
Net advances from (repayments to) related
party........................................ -- (66,532) 267,909 343,099 (161,222)
Proceeds from exercise of common stock
options...................................... -- -- 5,687 -- 222,013
Proceeds from issuance of common stock, net of
offering expenses............................ -- -- -- -- 54,816,352
----------- ----------- ------------ ----------- ------------
Net cash provided by financing
activities............................... 2,930,970 5,147,133 11,653,111 11,975,254 77,723,393
----------- ----------- ------------ ----------- ------------
Net increase in cash and cash equivalents........ 939,483 1,244,692 204,447 3,149,718 68,662,428
Cash and cash equivalents, beginning of period... 146,197 1,085,680 2,330,372 2,330,372 2,534,819
----------- ----------- ------------ ----------- ------------
Cash and cash equivalents, end of period......... $ 1,085,680 $ 2,330,372 $ 2,534,819 $ 5,480,090 $ 71,197,247
=========== =========== ============ =========== ============
Supplemental cash flow information:
Cash paid for interest......................... $ 169,870 $ 133,409 $ 170,232 $ 108,542 $ 772,893
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
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
1. BACKGROUND:
Bluestone Software, Inc. (the "Company"), formerly Bluestone
Consulting, Inc., was incorporated in New Jersey on March 17, 1989. The Company
develops, markets and supports web application server software products that
enable its customers to deploy information across the Internet, intranets and
extranets. On April 17, 1997, in connection with the sale of Series A
Convertible Preferred Stock (see Note 7), the Company spun off its consulting
division to its then sole stockholder for no consideration. The Company
reincorporated in Delaware as Bluestone Software, Inc. The consulting division,
Bluestone Consulting, Inc. ("BCI") provides its clients information technology
staffing resources and in 1997 provided the Company with certain administrative
services under a shared services agreement (see Note 11). The consulting
division spin-off is reported in the accompanying financial statements as a
discontinued operation (see Note 3).
2. LIQUIDITY:
The Company has recurring operating losses that have continued subsequent to
year-end. The losses are primarily due to product development costs, marketing
expenditures and administrative infrastructure costs related to the expansion of
the Company's business.
On January 21, 1999, the Company and substantially all of the Series B
Preferred stockholders (collectively, the "Investors") entered into the Note and
Warrant Purchase Agreement, whereby the Company could, from time to time before
May 30, 1999, request that the Investors purchase 10% convertible subordinated
secured notes totaling an aggregate of $5 million. Upon the purchase of a note,
the Investors would be granted a warrant to purchase the number of shares of the
Company's Common stock equal to the note amount multiplied by .1008, at an
exercise price of $1.98 per share. The Company issued warrants to purchase an
aggregate of 136,088 shares of common stock in connection with notes purchased
in April 1999 and May 1999. The Company also issued warrants to purchase an
aggregate of 1,520 shares of common stock at an exercise price of $8.70 per
share related to interest on the notes. The warrants issued in connection with
the notes and related interest thereon were valued at $1,100,000 using the
black-scholes option pricing model and the following assumptions: volatility of
70%, risk-free interest rates of 5.2% to 5.3%, fair market value of a share of
common stock of $8.70 and a term of 10 years. The value of the warrants was
charged to operations during the nine months ended September 30, 1999. The notes
were converted into 496,322 shares of Series C Preferred stock on May 25, 1999
(see below).
On March 31, 1999, the Company amended its bank loan agreement, which had
expired on February 7, 1999. The amendment extended the Company's credit
facility through April 1, 2000 and reset certain financial covenants. The
amended agreement provides for the interest rate on the credit facility to
increase by 0.50% and for certain quarterly fees to be paid if the Company does
not meet certain quarterly net revenue requirements, as defined in the
amendment.
On May 25, 1999, the Company sold 9,191,176 shares of Series C Convertible
Preferred Stock to certain venture capital investors, including certain
Series B Preferred investors for $25 million in cash. The Series C Preferred
will be senior to the Series A Preferred and Series B Preferred and is
automatically convertible into Common stock upon a public stock offering, as
defined. Dividends on the Series C Preferred are cumulative at $0.1632 per share
per annum. The Series C Preferred stockholders participate in Common stock
dividends and have Common stock voting rights on an as converted basis.
F-7
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
2. LIQUIDITY: (CONTINUED)
In conjunction with the sale of the Series C Preferred, the Company issued a
warrant to purchase 150,448 shares of common stock at $8.70 to the placement
agent, valued at $800,000 using the black-scholes option pricing model and the
following assumptions: volatility of 70%, a risk-free interest rate of 5.2%,
fair market value of a share of common stock of $8.70 and a term of 5 years. The
value of the warrant was recorded as a cost of the Series C Preferred Stock sale
and, accordingly, deducted from the proceeds of the Series C Preferred Stock.
The Company believes that the proceeds from the sale of the Series C
Convertible Preferred Stock and borrowing availability under its amended credit
facility will provide adequate funding to sustain the Company's operations
through 1999. However, there is no assurance that the funding will be sufficient
to sustain operations until the Company begins generating positive cash flows.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL STATEMENTS
The financial statements as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 are unaudited and, in the opinion of
management, include adjustments necessary for a fair presentation of results for
those interim periods. The results of operations for the nine months ended
September 30, 1998 and 1999 are not necessarily indicative of the results to be
expected for the entire year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and related disclosures at the date of the financial statements and the reported
amounts of certain revenues and expenses during the reporting periods. Actual
results could differ from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
PREPAID EXPENSES AND OTHER
Prepaid expenses and other at December 31, 1997 includes $243,834 of
deferred costs related to support contracts purchased from third parties for
resale in connection with the sale of third party product.
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.
F-8
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PRODUCT DEVELOPMENT
Product development expenditures are charged to operations as incurred.
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed," requires
the capitalization of certain software development costs subsequent to the
establishment of technological feasibility. The Company has determined that
technological feasibility for its products is generally achieved upon completion
of a working model. Since software development costs have not been significant
after the completion of a working model, all such costs have been charged to
product development expense.
REVENUE RECOGNITION
The Company 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 and
determinable and collectibility is probable. License revenue from arrangements
with resellers and system integrators is not recognized until the product is
delivered to end-users. Maintenance revenue is recognized on a straight-line
basis over the term of the contract. Revenues from training and consulting
services are recognized as services are performed.
Deferred revenues generally consist of advance customer payments on
maintenance contracts. Certain of the Company's multi-year license agreements
provide for payment terms that extend beyond 12 months. Revenue on such
long-term arrangements are recognized when payments become due. Included in
accounts receivable and deferred revenues at December 31, 1998 is $1,865,294
related to an extended term license fee where the Company received payment and
recorded revenue in February 1999.
CONCENTRATION OF CREDIT RISK
One customer accounted for approximately 11% of the Company's net revenues
for the year ended December 31, 1998 and one customer accounted for
approximately 55% of net accounts receivable at December 31, 1998. Two customers
accounted for 11% and 18%, respectively, of net revenues for the nine months
ended September 30, 1999 and two customers accounted for approximately 18% and
14%, respectively, of net accounts receivable at September 30, 1999. No one
customer accounted for greater than 10% of net revenues for the years ended
December 31, 1996 and 1997 or greater than 10% of net accounts receivable at
December 31, 1996 and 1997.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense for
continuing operations for the years ended December 31, 1996, 1997 and 1998 and
the nine months ended September 30, 1998
F-9
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
and 1999 was $781,634, $615,374, $882,761, $526,998 and $1,172,274,
respectively, including $394,808, $251,640, $549,487, $302,952 and $593,939,
respectively, related to attending trade shows.
INCOME TAXES
Prior to April 17, 1997, the Company was taxed as a subchapter S corporation
under the Internal Revenue Code for federal and state income tax purposes.
Accordingly, all S Corporation taxable income or losses were included in the
sole stockholder's tax return. In connection with the Series A Convertible
Preferred Stock sale (see Note 7), the Company's subchapter S election was
terminated.
Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using enacted tax rates. The Company accounts for certain income and
expense items for financial reporting purposes differently than for income tax
purposes. The principal differences relate to the Company's conversion to the
accrual basis of accounting for income taxes and certain financial statement
reserves that are not currently deductible for income tax purposes.
STOCK COMPENSATION
The Company has elected to follow Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employee stock options. Under APB No. 25,
if the exercise price of the Company's employee stock options equals or exceeds
the market price of the underlying stock on the date of the grant, no
compensation expense is recognized. If the exercise price of an option is below
the market price of the underlying stock on the date of grant, compensation cost
is recorded and is recognized in the statements of operations over the vesting
period (see Note 9).
EARNINGS PER SHARE
The Company follows SFAS No. 128, "Earnings Per Share," which requires a
dual presentation of "basic" and "diluted" earnings per share ("EPS") on the
face of the statements of operations. Basic EPS is computed by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding for the period. Diluted EPS includes the dilutive effect, if any,
from the potential exercise or conversion of securities like stock options,
which would result in the issuance of additional shares of common stock. For
each of the three years in the period ended December 31, 1998 and the nine
months ended September 30, 1998 and 1999, the impact of stock options was not
considered as their effect on EPS would be anti-dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, prepaid expenses, accounts payable and accrued
expenses are reflected in the accompanying financial statements at fair value
due to the short-term nature of those instruments. The carrying amount of
long-term debt obligations approximate fair value at the balance sheet dates.
F-10
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 is effective for fiscal years
beginning December 31. 1997, SFAS No. 130 establishes standards for the
reporting and display of comprehensive income in a set of financial statements.
Comprehensive income is defined as the change in net assets of a business
enterprise during a period from transactions generated from non-owner sources.
It includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. The Company has no other
comprehensive income items, therefore, the adoption of SFAS No. 130 had no
impact on the financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 applies to all public companies and is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 requires that business segment
financial information be reported in the financial statements utilizing the
management approach. The management approach is defined as the manner in which
management organizes the segments within the enterprise for making operating
decisions and assessing performance. Subsequent to the spin-off of the
consulting segment, management believes the Company operates in one business
segment, therefore, the adoption of SFAS No. 131 had no impact on the financial
statements.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The Company adopted SOP 98-1
in January 1999. The adoption had no material effect on the Company's financial
position or results of operations.
DISCONTINUED OPERATIONS
On April 17, 1997, in connection with the sale of Series A Convertible
Preferred Stock (see Note 7), the Company spun off its consulting division,
which operated as a separate segment, to its then sole stockholder for no
consideration. The spin-off, which included cash of $274,538, has been recorded
as a deemed distribution in the accompanying financial statements. The
discontinued operation generated net revenues of $13,369,459 and $4,537,147 for
the years ended December 31, 1996 and 1997, respectively. The spin-off was
treated as a tax-free reorganization for federal and state income tax purposes.
RECLASSIFICATIONS
Prior year financial statements have been reclassified to conform with the
current year presentation.
4. LINE OF CREDIT:
On December 8, 1997, the Company entered into an agreement with a bank that
provides for a $1,750,000 revolving line of credit and a $500,000 equipment line
(see Note 5). The revolver is collateralized by substantially all of the
Company's assets and a $400,000 certificate of deposit at December 31, 1997.
Borrowings under the line are subject to a borrowing base of 80% of eligible
F-11
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
4. LINE OF CREDIT: (CONTINUED)
accounts receivable, as defined. The restricted certificate of deposit was sold
in 1998 as it was no longer required collateral. The line bore interest at prime
plus 1.5%, through August 16, 1998 at which date the interest rate was changed
to prime plus .75% in conjunction with the equipment line modification (see
Note 5), and expired on December 7, 1998. In December 1998, the Company and the
bank agreed to extend the term of the credit facility to February 7, 1999. The
line is cross-defaulted and cross-collateralized with the equipment line with
the bank (see Note 5). The loan agreement also requires the Company to maintain
certain financial and nonfinancial covenants, as defined.
On March 31, 1999, the Company amended its bank loan agreement. The
amendment extended the Company's credit facility through April 1, 2000 and reset
certain financial covenants. The amended agreement provides for the interest
rate on the credit facility to increase to prime plus 1.25% and for certain
quarterly fees to be paid if the Company does not meet certain quarterly net
revenue requirements, as defined in the amendment. At September 30, 1999,
borrowings of $1,237,634 were available under the line.
A warrant to purchase 9,766 shares of the Company's Common stock at $2.56
per share, as adjusted was issued to the bank in December 1997 in conjunction
with the loan agreement.
5. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1997 1998 1999
-------- ---------- --------------
<S> <C> <C> <C>
Equipment line with bank.................................. $237,620 $1,157,101 $937,736
Capital leases............................................ 116,027 75,269 41,784
-------- ---------- --------
353,647 1,232,370 979,520
Less- Current portion..................................... (83,971) (356,728) (436,649)
-------- ---------- --------
$269,676 $ 875,642 $542,871
======== ========== ========
</TABLE>
At December 31, 1997, the Company's equipment line provided for borrowings
of up to $500,000 for approved capital expenditures, as defined and interest
payable monthly on the outstanding balance at a rate of prime plus 1.5%. In
June 1998, the outstanding borrowings as of that date of $237,620 converted to a
term note payable in 36 monthly installments. On August 16, 1998, the Company
and the bank modified the equipment line to provide for additional borrowings of
up to $1,762,380 for approved capital expenditures, as defined. Interest is
payable monthly on the outstanding balance at a rate of prime plus 1.25%. On
March 31, 1999, in connection with the loan agreement amendment, the then
outstanding balance of $959,086 was converted to a term note payable in
36 monthly installments and no additional borrowings are available under the
equipment line. The equipment line is secured by equipment and is
cross-defaulted and cross-collateralized with the Company's line of credit (see
Note 4).
At December 31, 1997, 1998 and September 30, 1999, property under capital
leases totaled $130,897 with corresponding accumulated amortization of $30,908,
$90,900 and $110,897 respectively.
F-12
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
6. SUBORDINATED NOTES DUE TO RELATED PARTIES:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 AND 1998 1999
------------- -------------
<S> <C> <C>
Note payable to Bluestone Consulting, Inc................... $ 500,000 $500,000
Convertible subordinated note to related party.............. 500,000 --
---------- --------
$1,000,000 $500,000
========== ========
</TABLE>
In January 1996, the Company entered into a $1,000,000, subordinated 10%
loan agreement with the brother of the Company's founder. The agreement, as
amended in connection with the BCI spin-off, provided for BCI to assume $500,000
of the convertible note with the Company assuming the remaining $500,000 of the
convertible note. To achieve an equal distribution of debt between BCI and the
Company as part of the spin-off, the Company issued BCI a $500,000, 10% note.
Interest on both notes is payable annually. Principal on the convertible note is
due on December 31, 2002 and principal on the note with BCI is due on
December 31, 2005. At December 31, 1997 and 1998 and September 30, 1999 other
accrued expenses includes $97,526, $206,878 and $74,600, 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 option of the holder.
7. MANDATORILY REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK:
On April 18, 1997, the Company sold 5,526,316 shares of $0.001 par value
Series A Convertible Preferred Stock to certain venture capital investors, an
individual investor and the Company's former sole shareholder for $5,250,000.
This includes 263,158 shares sold to the former sole stockholder in exchange for
canceling a $250,000 note payable due him. The Series A Preferred stock is
convertible into 0.3125 shares of Common stock, subject to adjustment, as
defined, and is automatically convertible upon a public stock offering, as
defined.
Dividends on the Series A Preferred are cumulative at $0.057 per share per
annum and the Series A Preferred has a liquidation preference of $0.95 per
share. At December 31, 1997 and 1998 cumulative dividends accrued but not
declared were $222,658 and $537,658, respectively. Beginning in April 2003, the
holders may require the Company to redeem the Preferred at $0.95 per share plus
accrued dividends over a three-year period. The Series A Preferred stockholders
participate in Common stock dividends and have Common stock voting rights on an
as converted basis.
8. MANDATORILY REDEEMABLE SERIES B CONVERTIBLE PREFERRED STOCK:
On April 23, 1998, the Company sold 8,782,695 shares of Series B Convertible
Preferred Stock to certain venture capital investors, including its original
investors (see Note 7) for approximately $11.4 million in cash. The Series B
Preferred is senior to the Series A Preferred and was originally convertible
into 0.3125 shares of Common stock. In 1998, in accordance with the original
terms of the Series B Preferred stock purchase agreement, the conversion ratio
was adjusted so that each share of Series B Preferred is convertible into 0.6541
shares of Common stock. In addition, the Series B Preferred is automatically
convertible upon a public stock offering, as defined.
F-13
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
8. MANDATORILY REDEEMABLE SERIES B CONVERTIBLE PREFERRED STOCK: (CONTINUED)
Dividends on the Series B Preferred are cumulative at $0.078 per share per
annum and the Series B Preferred has a liquidation preference of $1.296 per
share. At December 31, 1998, cumulative dividends accrued but not declared were
$476,720. Beginning in October 2001, the holders may require the Company to
redeem the Preferred at $1.296 per share plus accrued dividends over an
eighteen-month period. The Series B Preferred stockholders participate in Common
stock dividends and have Common stock voting rights on an as converted basis.
9. STOCK OPTION AND EMPLOYEE BENEFIT PLANS:
STOCK OPTION PLANS
In 1996, the Company adopted the 1996 Incentive and Non-Qualified Stock
Option Plan (the "1996 Plan") under which incentive and nonstatutory stock
options to acquire shares of the Company's Common stock may be granted to
officers, employees and consultants of the Company. Incentive stock options must
be issued at an exercise price not less than the fair market value of the
underlying shares on the date of grant. Options granted under the 1996 Plan are
exercisable over a period of time, not to exceed ten years, and are subject to
other terms and conditions specified in the individual option grants. In
April 1997, in connection with the sale of Series A Convertible Preferred Stock
(see Note 7), the 1996 Plan was amended and restated, increasing the total
shares available under the plan to 781,250. On August 7, 1997, all outstanding
options granted under the 1996 Plan were canceled and 151,219 were reissued at
an exercise price of $2.24 per share. In April 1998, in connection with the sale
of Series B Convertible Preferred Stock (see Note 8), the 1996 Plan was amended
and restated, increasing the total shares available under the plan to 1,406,250.
In June 1999, the 1996 Plan was amended to increase the total shares available
under the plan to 2,946,578. In August 1999, the 1996 Plan was amended to
increase the total shares available under the plan to 3,290,328.
Information relative to the 1996 Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
RANGE OF AGGREGATE AVERAGE
EXERCISES EXERCISE EXERCISE
SHARES PRICES PRICE PRICE
--------- ------------ ----------- --------
<S> <C> <C> <C> <C>
Outstanding January 1, 1996.................... -- $ -- $ -- $ --
Granted at fair market value................. 238,156 6.40 1,524,200 6.40
--------- ------------ ----------- -----
Outstanding December 31, 1996.................. 238,156 6.40 1,524,200 6.40
Granted at fair market value................. 512,545 2.24-9.60 1,279,200 2.50
Canceled..................................... (334,688) 2.24-9.60 (1,871,530) 5.59
--------- ------------ ----------- -----
Outstanding December 31, 1997.................. 416,013 2.24 931,870 2.24
Granted at fair market value................. 787,118 2.24-3.07 2,249,416 2.86
Exercised.................................... (2,539) 2.24 (5,688) 2.24
Canceled..................................... (18,523) 2.24 (41,493) 2.24
--------- ------------ ----------- -----
Outstanding December 31, 1998.................. 1,182,069 2.24-3.07 3,134,105 2.65
Granted at fair market value................. 1,526,222 3.07-23.13 11,377,435 7.45
Granted below fair market value.............. 309,313 3.07-8.70 1,224,108 3.96
Exercised.................................... (78,269) 2.24-3.07 (222,013) 2.84
Canceled..................................... (57,272) 2.24-3.07 (160,021) 2.79
--------- ------------ ----------- -----
Outstanding September 30, 1999................. 2,882,063 $2.24-$23.13 $15,353,614 $5.33
========= ============ =========== =====
</TABLE>
F-14
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
9. STOCK OPTION AND EMPLOYEE BENEFIT PLANS: (CONTINUED)
The options under the 1996 Plan generally vest over a four-year period. At
September 30, 1999 there were options to purchase 1,297,369 shares of common
stock exercisable and options to purchase 327,457 shares of common stock were
available for future grant under the 1996 Plan. The weighted average remaining
contractual life of the outstanding options at September 30, 1999 was 9.34
years.
In connection with certain options granted to employees during the nine
months ended September 30, 1999, the Company recorded $1,415,548 of deferred
compensation. This amount represents the difference between the fair market
value of the Company's common stock on the date of grant and the exercise price
of options to purchase 284,313 shares of the Company's common stock. Deferred
compensation is amortized over the vesting periods of the options, which range
from immediate vesting to periods of up to four years. For the nine months ended
September 30, 1999, $197,101 of deferred compensation was charged to expense. At
September 30, 1999, the Company had $1,218,447 of deferred compensation to be
amortized over the remaining vesting periods of four years.
Included in options granted below fair market value during the nine months
ended September 30, 1999 are options to purchase 25,000 shares of common stock
issued to non-employees for consulting services. The Company recorded $190,954
in general and administrative expenses during the nine months ended
September 30, 1999 related to these options.
In 1999 the Company established an executive bonus pool for issuance of
common stock options to the Chairman and to certain officers of the Company
under the 1996 Plan. Grants of stock option awards under the bonus pool are
contingent upon the Company meeting certain performance goals. The Company
granted 52,657 options relating to the bonus pool for the Company's operating
results during the three months ended March 31, 1999. The Company granted 64,990
options relating to the bonus pool for the Company's operating results during
the three months ended June 30, 1999. The Company granted 65,161 options
relating to the bonus pool for the Company's operating results during the three
months ended September 30, 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 September 30,
1999, 12,499 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 plan. Had compensation cost for the 1996 Plan been
determined based upon the fair value of the options at the
F-15
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
9. STOCK OPTION AND EMPLOYEE BENEFIT PLANS: (CONTINUED)
date of grant, as prescribed under SFAS 123, the Company's net loss for the
years ended December 31, 1997 and 1998 would have increased to the following pro
forma amount:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998
----------- ------------
<S> <C> <C>
Net loss, as reported....................................... $(3,797,571) $(11,604,682)
=========== ============
Pro forma net loss.......................................... $(3,871,550) $(11,764,529)
=========== ============
</TABLE>
The weighted average fair value of the options granted are estimated as
$0.25 to $0.28 per share on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: no expected dividend yield,
a volatility of 0.0%, risk-free interest rates ranging from 4.514% to 6.738%
based on the rates in effect on the date of grant, and an expected life of seven
years.
RETIREMENT SAVINGS PLAN
The Company has a retirement savings plan (the "Plan") that qualifies under
Section 401(k) of the Internal Revenue Code. Eligible employees may contribute
up to 15% of their annual compensation, as defined by the Plan. The Company
contributes to the Plan at a rate of 10% of the employee's contributions up to a
maximum of 6% of the employee's salary. The Company's contributions to the Plan
were $10,452, $22,009, $31,807, $23,453 and $29,362 for the years ended
December 31, 1996, 1997 and 1998, and the nine months ended September 30, 1998
and 1999, respectively.
10. INCOME TAXES:
The income tax provision consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Current provision........................................... $ -- $ --
Deferred benefit............................................ (64,000) (81,000)
Net operating loss not benefited............................ (1,134,000) (4,410,000)
Termination of S corporation status......................... (121,000) --
Increase in valuation allowance............................. 1,319,000 4,491,000
---------- ----------
$ -- $ --
========== ==========
</TABLE>
F-16
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
10. INCOME TAXES: (CONTINUED)
The tax effect of the differences that give rise to deferred income taxes is
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Net operating loss carryforwards............................ $1,134,000 $5,544,000
Accounts receivable......................................... 15,000 18,000
Accrued expenses............................................ 71,000 174,000
Property and equipment...................................... 24,000 24,000
Deferred revenue adjustment................................. 315,000 252,000
Cash-to-accrual adjustment.................................. (240,000) (202,000)
---------- ----------
1,319,000 5,810,000
Less-Valuation allowance.................................... (1,319,000) (5,810,000)
---------- ----------
$ -- $ --
========== ==========
</TABLE>
The Company has established a valuation allowance for the full amount of the
net deferred tax asset due to the limited operating history of the Company and
uncertainty surrounding realizability. At December 31, 1998, the Company had a
net operating loss carryforward of approximately $14 million beginning to expire
in 2012 for federal tax purposes and in 2004 for state tax purposes.
11. TRANSACTIONS WITH BCI:
On April 17, 1997, in connection with the sale of the Series A Convertible
Preferred Stock (see Note 7), the Company spun off its consulting division, BCI,
to its then sole stockholder, who is currently a director of the Company.
In connection with the spin-off, the Company entered into the Intercompany
Services Agreement with BCI, whereby BCI provided the Company certain
administrative services at an allocated cost based on actual cost and usage. For
the year ended December 31, 1997, general and administrative expense includes
$871,784 for such services provided by BCI.
The Company also sells certain software products and services to BCI and
purchases certain consulting services from BCI. For the years ended
December 31, 1997 and 1998 and for the nine months ended September 30, 1998 and
1999, the Company's sales to BCI totaled $40,448, $58,607, $48,266 and $474,288,
respectively, and total purchases from BCI were $47,088, $351,739, $291,242 and
$52,725, respectively. At December 31, 1997 and 1998 and September 30, 1999,
accounts receivable includes $5,217, $23,299 and $282,623, respectively, due
from BCI and accounts payable includes $43,889, $77,097 and $0, respectively,
payable to BCI.
On March 31, 1998, the Company decided to no longer sell non-proprietary
software products. In addition, the Company agreed to allow BCI to commence the
sale and support of this product line, and sub-contracted support services to
BCI related to previously sold maintenance contracts. The Company paid BCI
$450,000 in 1998 and paid BCI $150,000 in 1999, for the sub-contracted support
services.
F-17
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
11. TRANSACTIONS WITH BCI: (CONTINUED)
The Company also sub-leases a portion of its operating facility to BCI (see
Note 12). Amounts charged to BCI, which reduced the Company's rent expense for
the years ended December 31, 1997 and 1998 and the nine months ended
September 30, 1998 and 1999, totaled $130,588, $74,165, $52,148 and $70,229,
respectively. During the year ended December 31, 1998 and the nine months ended
September 30, 1998 and 1999, the Company rented certain equipment from BCI,
totaling $89,489, $65,582 and $70,763, respectively.
In connection with the Series A Convertible Preferred Stock sale and
spin-off of BCI, the Company issued a $500,000, 10% note payable to BCI (see
Note 6).
12. COMMITMENTS AND CONTINGENCIES:
The Company has operating leases on its office facilities (see Note 11) and
certain equipment. Future minimum lease payments under such noncancelable
operating leases are summarized as follows, as of December 31, 1998:
<TABLE>
<S> <C>
1999........................................................ $739,851
2000........................................................ 598,608
2001........................................................ 502,980
2002........................................................ 502,980
2003........................................................ 454,662
----------
$2,799,081
==========
</TABLE>
Rent expense for continuing operations was $263,079, $551,832, $691,615,
$458,364 and $635,533 for the years ended December 31, 1996, 1997 and 1998 and
the nine months ended September 30, 1998 and 1999, respectively.
The Company is involved in certain legal actions arising in the ordinary
course of business. Management believes that the outcome of such actions will
not have a material adverse effect on the Company's financial position or
results of operations.
13. PUBLIC OFFERING SUBSEQUENT TO DECEMBER 31, 1998:
On June 10, 1999, the Company's Board of Directors authorized management to
file a Registration Statement with the SEC to permit the Company to commence an
initial public offering. In connection therewith, on August 13, 1999, the
Company's Board of Directors authorized a 1-for-3.2 reverse split of its common
stock to be effected immediately prior to the offering. The reverse stock split
was effected on September 23, 1999 and has been retroactively reflected in the
accompanying financial statements.
F-18
<PAGE>
You may rely only on the information contained in this prospectus. We have
not authorized anyone to provide information different from that contained in
this prospectus. Neither the delivery of this prospectus nor the sale of common
stock means that information contained in this prospectus is correct after the
date of the prospectus. This prospectus is not an offer to sell or solicitation
of an offer to buy these shares of common stock in any circumstances under which
the offer or solicitation is unlawful.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 7
Forward-looking Statements............ 15
Use of Proceeds....................... 16
Dividend Policy....................... 16
Price Range of Common Stock........... 16
Capitalization........................ 17
Dilution.............................. 18
Selected Financial Data............... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 32
Management............................ 44
Certain Transactions.................. 53
Principal and Selling Stockholders.... 59
Description of Securities............. 62
Shares Eligible For Future Sale....... 64
Plan of Distribution.................. 67
Legal Matters......................... 68
Experts............................... 68
Where You Can Find More Information... 69
Index to Financial Statements......... F-1
</TABLE>
------------------------
3,500,000 Shares
[LOGO]
Common Stock
---------------------
PROSPECTUS
---------------------
Deutsche Banc Alex. Brown
Wit SoundView Group
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............................. 95,000
Miscellaneous............................................... 24,998
--------
Total Expenses.............................................. $525,000
========
</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).
</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.
** To be filed by amendment.
+ 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 1st
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>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints P. Kevin Kilroy and S. Craig Huke, and each or
any of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Registration Statement and other registration
statements and amendments thereto relating to the offering contemplated by this
Registration Statement (including registration statements under Rule 462
promulgated under the Securities Act of 1933, as amended), and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their, his substitutes or substitute, may lawfully do
or cause to be done by virtue hereof.
II-6
<PAGE>
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ P. MELAN BAIADA Chairman of the Board of
------------------------------------------- Directors February 1, 2000
P. Melan Baiada
President and Chief
/s/ P. KEVIN KILROY Executive Officer and
------------------------------------------- Director (Principal February 1, 2000
P. Kevin Kilroy Executive Officer)
Senior Vice President Chief
/s/ S. CRAIG HUKE Financial Officer
------------------------------------------- (Principal Financial and February 1, 2000
S. Craig Huke Accounting Officer)
/s/ GREGORY M. CASE Director
------------------------------------------- February 1, 2000
Gregory M. Case
/s/ WILLIAM C. HULLEY Director
------------------------------------------- February 1, 2000
William C. Hulley
/s/ ANDREW J. FILIPOWSKI Director
------------------------------------------- February 1, 2000
Andrew J. Filipowski
/s/ PAUL E. BLONDIN Director
------------------------------------------- February 1, 2000
Paul E. Blondin
</TABLE>
II-7
<PAGE>
EXHIBITS INDEX
(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.
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.
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
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).
</TABLE>
II-9
<PAGE>
3,500,000 Shares
BLUESTONE SOFTWARE, INC.
Common Stock
($0.001 Par Value)
UNDERWRITING AGREEMENT
____________, 2000
Deutsche Bank Securities Inc.
As Representative of the
Several Underwriters
c/o Deutsche Bank Securities Inc.
One South Street
Baltimore, MD 21202
Ladies and Gentlemen:
Bluestone Software, Inc. a Delaware corporation (the "COMPANY"), and
certain shareholders of the Company (the "SELLING SHAREHOLDERS") propose to sell
to the several underwriters (the "UNDERWRITERS") named in Schedule I hereto for
whom you are acting as representative (the "REPRESENTATIVE") an aggregate of
3,500,000 shares of the Company's Common Stock, $0.001 par value (the "FIRM
SHARES"), of which 1,750,000 shares will be sold by the Company and 1,750,000
shares will be sold by the Selling Shareholders. The respective amounts of the
Firm Shares to be so purchased by the several Underwriters are set forth
opposite their names in Schedule I hereto, and the respective amounts to be sold
by the Selling Shareholders are set forth opposite their names in Schedule II
hereto. The Company and the Selling Shareholders are sometimes referred to
herein collectively as the "SELLERS." Certain of the Selling Shareholders
also proposes to sell at the Underwriters' option an aggregate of up to
525,000 additional shares of the Company's Common Stock (the "OPTION SHARES")
as set forth below.
<PAGE>
As the Representative, you have advised the Company and the Selling
Shareholders (a) that you are authorized to enter into this Agreement on behalf
of the several Underwriters, and (b) that the several Underwriters are willing,
acting severally and not jointly, to purchase the numbers of Firm Shares set
forth opposite their respective names in SCHEDULE I, plus their pro rata portion
of the Option Shares, if you elect to exercise the over-allotment option in
whole or in part for the accounts of the several Underwriters. The Firm Shares
and the Option Shares (to the extent the aforementioned option is exercised) are
herein collectively called the "SHARES."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SHAREHOLDERS.
(a) The Company represents and warrants to each of the Underwriters
as follows:
(a)(i) A registration statement on Form S-1 (File No. 33-________)
with respect to the Shares has been carefully prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended
(the "ACT"), and the Rules and Regulations (the "RULES AND REGULATIONS") of
the Securities and Exchange Commission (the "COMMISSION") thereunder and
has been filed with the Commission. The Company has complied with the
conditions for the use of Form S-1. Copies of such registration statement,
including any amendments thereto, the preliminary prospectuses (meeting the
requirements of the Rules and Regulations) contained therein and the
exhibits, financial statements and schedules, as finally amended and
revised, have heretofore been delivered by the Company to you. Such
registration statement, together with any registration statement filed by
the Company pursuant to Rule 462(b) of the Act, herein referred to as the
"REGISTRATION STATEMENT," which shall be deemed to include all information
omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, has become effective under the Act and no
post-effective amendment to the Registration Statement has been filed as of
the date of this Agreement. "PROSPECTUS" means (a) the form of prospectus
first filed with the Commission pursuant to Rule 424(b). Each preliminary
prospectus included in the Registration Statement prior to the time it
becomes effective is herein referred to as a "PRELIMINARY PROSPECTUS." Any
reference herein to the Registration Statement, any Preliminary Prospectus
or to the Prospectus shall be deemed to refer to and include any documents
incorporated by reference therein, and, in the case of any reference herein
to any Prospectus, also shall be deemed to include any documents
incorporated by reference therein, and any supplements or amendments
thereto, filed with the Commission after the date of filing of the
Prospectus under Rules 424(b) or 430A, and prior to the termination of the
offering of the Shares by the Underwriters.
(a)(ii) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of Delaware,
with corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement. The
Company has no direct or indirect subsidiaries and is
-2-
<PAGE>
duly qualified to transact business in all jurisdictions in which the
conduct of its business requires such qualification, except where the
failure to so qualify or be in good standing would not result in a
material adverse effect on the earnings, business, management,
properties, assets, rights, operations, condition (financial or
otherwise), or prospects of the Company, or a material adverse effect on
the ability of the Company to consummate the transactions contemplated
hereby (a "MATERIAL ADVERSE EFFECT").
(a)(iii) The outstanding shares of Common Stock of the Company,
including all shares to be sold by the Selling Shareholders, have been duly
authorized and validly issued and are fully paid and non-assessable; the
portion of the Shares to be issued and sold by the Company have been duly
authorized and, when issued and paid for as contemplated herein, will be
validly issued, fully paid and non-assessable; and no preemptive rights of
stockholders exist with respect to any of the Shares or the issue and sale
thereof. Neither the filing of the Registration Statement nor the offering
or sale of the Shares as contemplated by this Agreement gives rise to any
rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Common Stock.
(a)(iv) The information set forth under the caption "Capitalization"
in the Prospectus is true and correct. All of the Shares conform to the
description thereof contained in the Registration Statement. The form of
certificates for the Shares conforms to the requirements of the corporate
law of the jurisdiction of the Company's incorporation. Except as
described in or contemplated by the Registration Statement, there are no
outstanding securities of the Company convertible or exchangeable into or
evidencing the right to purchase or subscribe for any shares of capital
stock of the Company and there are no outstanding or authorized options,
warrants or rights of any character obligating the Company to issue any
shares of its capital stock or any securities convertible or exchangeable
into or evidencing the right to purchase or subscribe for any shares of
such stock.
(a)(v) The Commission has not issued an order preventing or
suspending the use of any Prospectus relating to the proposed offering of
the Shares nor instituted proceedings for that purpose. The Registration
Statement contains, and the Prospectus and any amendments or supplements
thereto will contain, all statements which are required to be stated
therein by, and will conform to, the requirements of the Act and the Rules
and Regulations. The Registration Statement and any amendment thereto do
not contain, and will not contain, any untrue statement of a material fact
and do not omit, and will not omit, to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading. The Prospectus and any amendments and supplements thereto do
not contain, and will not contain, any untrue statement of material fact;
and do not omit, and will not omit, to state any material fact required to
be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading; PROVIDED,
HOWEVER, that the Company makes no representations or warranties as to
information contained in or omitted from the Registration Statement or the
Prospectus, or any such amendment or supplement, in
-3-
<PAGE>
reliance upon, and in conformity with, written information furnished to
the Company by or on behalf of any Underwriter through the
Representative, specifically for use in the preparation thereof.
(a)(vi) The financial statements of the Company, together with
related notes and schedules as set forth in the Registration Statement,
present fairly the financial position and the results of operations and
cash flows of the Company, at the indicated dates and for the indicated
periods. Such financial statements and related schedules have been
prepared in accordance with generally accepted principles of accounting,
consistently applied throughout the periods involved, except as disclosed
therein, and all adjustments necessary for a fair presentation of results
for such periods have been made. The summary financial and statistical
data included in the Registration Statement presents fairly the information
shown therein and such data has been compiled on a basis consistent with
the financial statements presented therein and the books and records of the
Company. The pro forma financial statements and other pro forma financial
information included in the Registration Statement and the Prospectus
present fairly the information shown therein, have been prepared in
accordance with the Commission's rules and guidelines with respect to pro
forma financial statements, have been properly compiled on the pro forma
bases described therein, and, in the opinion of the Company, the
assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the transactions
or circumstances referred to therein.
(a)(vii) Arthur Andersen LLP, who have certified certain of the
financial statements filed with the Commission as part of the Registration
Statement, are independent public accountants as required by the Act and
the Rules and Regulations.
(a)(viii) There is no action, suit, claim, investigation or
proceeding pending or, to the knowledge of the Company, threatened against
the Company before any court, administrative agency, self-regulatory body
or otherwise which if determined adversely to the Company might result in
any material adverse change in the earnings, business, management,
properties, assets, rights, operations, or condition (financial or
otherwise) of the Company or prevent the consummation of the transactions
contemplated hereby, except as set forth in the Registration Statement.
(a)(ix) The Company has good and marketable title to all of the
properties and assets reflected in the financial statements (or as
described in the Registration Statement) hereinabove described, subject to
no lien, mortgage, pledge, charge or encumbrance of any kind except those
reflected in such financial statements and the related notes thereto (or as
described in the Registration Statement) or which are not material in
amount. The Company occupies its leased properties under valid and binding
leases conforming in all material respects to the description thereof set
forth in the Registration Statement.
(a)(x) The Company has filed all Federal, State, local and foreign
income tax returns which have been required to be filed and have paid all
taxes indicated by said returns and all assessments received by them to the
extent that such taxes have become
-4-
<PAGE>
due and are not being contested in good faith and for which an adequate
reserve for accrual has been established in accordance with generally
accepted accounting principles. All tax liabilities have been
adequately provided for in the financial statements of the Company, and
the Company does not know of any actual or proposed additional material
tax assessments.
(a)(xi) Since the respective dates as of which information is given
in the Registration Statement, as it may be amended or supplemented, there
has not been any material adverse change or any development involving a
prospective material adverse change in or affecting the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects, of the Company, whether or not occurring in the
ordinary course of business, and there has not been any material
transaction entered into or any material transaction that is probable of
being entered into by the Company other than transactions in the ordinary
course of business and changes and transactions described in the
Registration Statement, as it may be amended or supplemented. The Company
has no material contingent obligations which are not disclosed in the
Company's financial statements which are included in the Registration
Statement.
(a)(xii) The Company is not or with the giving of notice or lapse of
time or both, will not be, in violation of or in default under its Charter
or By-Laws or under any agreement, lease, contract, indenture or other
instrument or obligation to which it is a party or by which it, or any of
its properties, is bound and which default is of material significance in
respect of the business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the
Company. The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated and the
fulfillment of the terms hereof will not conflict with or result in a
breach of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust or other agreement or
instrument to which the Company is a party, or of the Charter or By-Laws
of the Company or any order, rule or regulation applicable to the Company
of any court or of any regulatory body or administrative agency or other
governmental body having jurisdiction.
(a)(xiii) Each approval, consent, order, authorization, designation
designation, declaration or filing by or with any regulatory,
administrative or other governmental body necessary in connection with
the execution and delivery by the Company of this Agreement and the
consummation of the transactions herein contemplated (except such
additional steps as may be required by the Commission, the National
Association of Securities Dealers, Inc. (the "NASD") or such additional
steps as may be necessary to qualify the Shares for public offering by
the Underwriters under state securities or Blue Sky laws) has been
obtained or made and is in full force and effect.
(a)(xiv) The Company holds all material approvals, licenses,
certificates and permits from governmental authorities or self-regulatory
body which are necessary to the conduct of its businesses; and the Company
has not infringed any patents, patent rights, trade names, trademarks or
copyrights, which infringement is material to the
-5-
<PAGE>
business of the Company. The Company knows of no material infringement
by others of patents, patent rights, trade names, trademarks or
copyrights owned by or licensed to the Company.
(a)(xv) Neither the Company, nor to the Company's knowledge, any of
its affiliates, has taken or may take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of the shares of Common Stock to facilitate the sale or resale of
the Shares. The Company acknowledges that the Underwriters may engage in
passive market making transactions in the Shares on The NASDAQ Stock Market
in accordance with Regulation M under the Exchange Act.
(a)(xvi) The Company is not an "investment company" within the
meaning of such term under the Investment Company Act of 1940 (as amended,
the "1940 ACT") and the rules and regulations of the Commission thereunder.
(a)(xvii) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions
are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii)
access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets
is compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(a)(xviii) The Company carries, or is covered by, insurance in
such amounts and covering such risks as is adequate for the conduct of
their respective businesses and the value of their respective properties
and as is customary for companies engaged in similar industries.
(a)(xix) The Company is in compliance in all material respects
with all presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"CODE"); and each "pension plan" for which the Company would have any
liability that is intended to be qualified under Section 401(a) of the Code
is so qualified in all material respects and nothing has occurred, whether
by action or by failure to act, which would cause the loss of such
qualification.
-6-
<PAGE>
(a)(xx) To the Company's knowledge, there are no affiliations or
associations between any member of the NASD and any of the Company's
officers, directors or 5% or greater securityholders, except as set forth
in the Registration Statement.
(a)(xxi) Other than as disclosed in the Registration Statement,
there are no contracts, agreements or understandings between the Company
and any person granting such person the right (other than rights which have
been waived or satisfied) to require the Company to file a registration
statement under the Act with respect to any securities of the Company owned
or to be owned by such person or to require the Company to include such
securities in the securities registered pursuant to the Registration
Statement or in any securities being registered pursuant to any other
registration statement filed by the Company under the Act.
(a)(xxii) The Company has not been advised, and has no reason to
believe, that it is not conducting business in compliance with all
applicable laws, rules and regulations, of the jurisdictions in which it is
conducting business including, without limitation, all applicable local,
state and Federal laws and regulations, except where the failure to so
comply would not have a Material Adverse Effect.
(b) Each of the Selling Shareholders severally represents and
warrants as follows:
(b)(i) Such Selling Shareholder now has and at the Closing Date
[and the Option Closing Date, as the case may be] (as such date[s] [is]
[are] hereinafter defined) will have good and marketable title to the Firm
Shares [and the Option Shares] to be sold by such Selling Shareholder, free
and clear of any liens, encumbrances, equities and claims, and full right,
power and authority to effect the sale and delivery of such Firm Shares
[and Option Shares]; and upon the delivery of, against payment for, such
Firm Shares [and Option Shares] pursuant to this Agreement, the
Underwriters will acquire good and marketable title thereto, free and clear
of any liens, encumbrances, equities and claims.
(b)(ii) Such Selling Shareholder has full right, power and authority
to execute and deliver this Agreement, the Power of Attorney, and the
Custodian Agreement referred to below and to perform its obligations under
such Agreements. The execution and delivery of this Agreement and the
consummation by such Selling Shareholder of the transactions herein
contemplated and the fulfillment by such Selling Shareholder of the terms
hereof will not require any consent, approval, authorization, or other
order of any court, regulatory body, administrative agency or other
governmental body (except as may be required under the Act, state
securities laws or Blue Sky laws) and will not result in a breach of any of
the terms and provisions of, or constitute a default under, organizational
documents of such Selling Shareholder, if not an individual, or any
indenture, mortgage, deed of trust or other agreement or instrument to
which such Selling Shareholder is a party, or of any order, rule or
regulation applicable to such Selling Shareholder of any court or of any
regulatory body or administrative agency or other governmental body having
jurisdiction.
-7-
<PAGE>
(b)(iii) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to, or which has constituted,
or which might reasonably be expected to cause or result in the
stabilization or manipulation of the price of the Common Stock of the
Company and, other than as permitted by the Act, the Selling Shareholder
will not distribute any prospectus or other offering material in connection
with the offering of the Shares.
(b)(iv) Without having undertaken to determine independently the
accuracy or completeness of either the representations and warranties of
the Company contained herein or the information contained in the
Registration Statement, such Selling Shareholder has no reason to believe
that the representations and warranties of the Company contained in this
Section 1 are not true and correct, is familiar with the Registration
Statement and has no knowledge of any material fact, condition or
information not disclosed in the Registration Statement which has adversely
affected or may adversely affect the business of the Company; and the sale
of the Firm Shares [and the Option Shares] by such Selling Shareholder
pursuant hereto is not prompted by any information concerning the Company
which is not set forth in the Registration Statement or the documents
incorporated by reference therein. The information pertaining to such
Selling Shareholder under the caption "Principal and Selling Stockholders"
in the Prospectus is complete and accurate in all material respects.
2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES.
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the
Sellers agree to sell to the Underwriters and each Underwriter agrees,
severally and not jointly, to purchase, at a price of $_____ [net price]
per share, the number of Firm Shares set forth opposite the name of each
Underwriter in Schedule I hereof, subject to adjustments in accordance with
Section 9 hereof. The number of Firm Shares to be purchased by each
Underwriter from each Seller shall be as nearly as practicable in the same
proportion to the total number of Firm Shares being sold by each Seller as
the number of Firm Shares being purchased by each Underwriter bears to the
total number of Firm Shares to be sold hereunder. The obligations of the
Company and of each of the Selling Shareholders shall be several and not
joint.
(b) Certificates in negotiable form for the total number of the
Shares to be sold hereunder by the Selling Shareholders have been placed in
custody with [StockTrans, Inc.] as custodian (the "CUSTODIAN") pursuant to
the Custodian Agreement executed by each Selling Shareholder for delivery
of all Firm Shares [and any Option Shares] to be sold hereunder by the
Selling Shareholders. Each of the Selling Shareholders specifically agrees
that the Firm Shares [and any Option Shares] represented by the
certificates held in custody for the Selling Shareholders under the
Custodian Agreement are subject to the interests of the Underwriters
hereunder, that the arrangements made by the Selling Shareholders for such
custody are to that extent irrevocable, and that the obligations of the
Selling Shareholders hereunder shall not be terminable by any act or deed
of the Selling Shareholders (or by any other person, firm or corporation
including the Company, the Custodian or the Underwriters) or by operation
of law (including the death of an individual
-8-
<PAGE>
Selling Shareholder or the dissolution of a corporate Selling
Shareholder) or by the occurrence of any other event or events, except
as set forth in the Custodian Agreement. If any such event should occur
prior to the delivery to the Underwriters of the Firm Shares
[or the Option Shares] hereunder, certificates for the Firm Shares
[or the Options Shares, as the case may be,] shall be delivered by the
Custodian in accordance with the terms and conditions of this Agreement
as if such event has not occurred. The Custodian is authorized to
receive and acknowledge receipt of the proceeds of sale of the Shares
held by it against delivery of such Shares.
(c) Payment for the Firm Shares to be sold hereunder is to be made in
Federal (same day) funds to an account designated by the Company for the
shares to be sold by it and to an account designated by the Custodian for
the shares to be sold by the Selling Shareholders, in each case against
delivery of certificates therefor to the Representative for the several
accounts of the Underwriters. Such payment and delivery are to be made
through the facilities of the Depository Trust Company at 10:00 a.m., New
York time, on the third business day after the date of this Agreement or at
such other time and date not later than five business days thereafter as
you and the Company shall agree upon, such time and date being herein
referred to as the "CLOSING DATE." As used herein, "BUSINESS DAY" means a
day on which the New York Stock Exchange is open for trading and on which
banks in New York are open for business and not permitted by law or
executive order to be closed.
(d) [In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth,
the Company and the Selling Shareholders listed on Schedule III hereto
hereby grant an option to the several Underwriters to purchase the Option
Shares at the price per share as set forth in the first paragraph of this
Section 2. The maximum number of Option Shares to be sold by the Company
and the Selling Shareholders is set forth opposite their respective names
on Schedule III hereto. The option granted hereby may be exercised in whole
or in part by giving written notice (i) at any time before the Closing Date
and (ii) from time to time thereafter within 30 days after the date of this
Agreement, by you, as Representative of the several Underwriters, to the
Company, the Attorney-in-Fact and the Custodian setting forth the number of
Option Shares as to which the several Underwriters are exercising the
option, the names and denominations in which the Option Shares are to be
registered and the time and date at which such certificates are to be
delivered. If the option granted hereby is exercised in part, the
respective number of Option Shares to be sold by the Company and each of
the Selling Shareholders listed in SCHEDULE III hereto shall be determined
on a pro rata basis in accordance with the percentages set forth opposite
their names on SCHEDULE II hereto, adjusted by you in such manner as to
avoid fractional shares. The time and date at which certificates for
Option Shares are to be delivered shall be determined by the Representative
but shall not be earlier than three nor later than 10 full business days
after the exercise of such option, nor in any event prior to the Closing
Date (such time and date being herein referred to as the "OPTION CLOSING
DATE"). If the date of exercise of the option is three or more days before
the Closing Date, the notice of exercise shall set the Closing Date as the
Option Closing Date. The number of Option
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<PAGE>
Shares to be purchased by each Underwriter shall be in the same
proportion to the total number of Option Shares being purchased as the
number of Firm Shares being purchased by such Underwriter bears to the
total number of Firm Shares purchased, adjusted by you in such manner as
to avoid fractional shares. The option with respect to the Option
Shares granted hereunder may be exercised only to cover over-allotments
in the sale of the Firm Shares by the Underwriters. You, as
Representative of the several Underwriters, may cancel such option at
any time prior to its expiration by giving written notice of such
cancellation to the Company and the Attorney-in-Fact. To the extent, if
any, that the option is exercised, payment for the Option Shares shall
be made on the option Closing Date in Federal (same day) funds drawn to
the order of the Company [for the Option Shares to be sold by it and to
the order of "[STOCKTRANS, INC.], AS CUSTODIAN" for the Option Shares to
be sold by the Selling Shareholders against delivery of certificates
therefor through the facilities of the Depository Trust Company, New York,
New York.
(e) If on the Closing Date [or Option Closing Date, as the case may
be,] any Selling Shareholder fails to sell the Firm Shares [or Option
Shares] which such Selling Shareholder has agreed to sell on such date as
set forth in SCHEDULE II hereto, the Company agrees that it will sell or
arrange for the sale of that number of shares of Common Stock to the
Underwriters which represents Firm Shares [or the Option Shares] which such
Selling Shareholder has failed to so sell, as set forth in SCHEDULE II
hereto, or such lesser number as may be requested by the Representatives.
3. OFFERING BY THE UNDERWRITERS.
It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representative deems it
advisable to do so. The Firm Shares are to be initially offered to the
public at the public offering price set forth in the Prospectus. The
Representative may from time to time thereafter change the public offering
price and other selling terms. To the extent, if at all, that any Option
Shares are purchased pursuant to Section 2 hereof, the Underwriters will
offer them to the public on the foregoing terms.
It is further understood that you will act as the Representative for
the Underwriters in the offering and sale of the Shares in accordance with
a Master Agreement Among Underwriters entered into by you and the several
other Underwriters.
4. COVENANTS OF THE COMPANY AND THE SELLING SHAREHOLDERS.
(a) The Company covenants and agrees with the several Underwriters
that:
(a)(i) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule
430A of the Rules and Regulations is followed, to prepare and timely file
with the Commission under Rule 424(b) of the Rules and Regulations a
Prospectus in a form approved by the Representative containing information
previously omitted at the time of effectiveness of the Registration
Statement in reliance on Rule 430A of the Rules and Regulations, (B)
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not file any amendment to the Registration Statement or supplement to
the Prospectus (or document incorporated by reference therein) of which
the Representative shall not previously have been advised and furnished
with a copy or to which the Representative shall have reasonably
objected in writing or which is not in compliance with the Rules and
Regulations and (C) file on a timely basis all reports and any
definitive proxy or information statements required to be filed by the
Company with the Commission subsequent to the date of the Prospectus and
prior to the termination of the offering of the Shares by the
Underwriters.
(a)(ii) The Company will advise the Representative promptly (A) when
the Registration Statement or any post-effective amendment thereto shall
have become effective, (B) of receipt of any comments from the Commission,
(C) of any request of the Commission for amendment of the Registration
Statement or for supplement to the Prospectus or for any additional
information, and (D) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the use of
the Prospectus or of the institution of any proceedings for that purpose.
The Company will use its best efforts to prevent the issuance of any such
stop order preventing or suspending the use of the Prospectus and to obtain
as soon as possible the lifting thereof, if issued.
(a)(iii) The Company will cooperate with the Representative in
endeavoring to qualify the Shares for sale under the securities laws of
such jurisdictions as the Representative may reasonably have designated in
writing and will make such applications, file such documents, and furnish
such information as may be reasonably required for that purpose, provided
the Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction where it
is not now so qualified or required to file such a consent. The Company
will, from time to time, prepare and file such statements, reports, and
other documents, as are or may be required to continue such qualifications
in effect for so long a period as the Representative may reasonably request
for distribution of the Shares.
(a)(iv) The Company will deliver to, or upon the order of, the
Representative, from time to time, as many copies of any Preliminary
Prospectus as the Representative may reasonably request. The Company will
deliver to, or upon the order of, the Representative during the period when
delivery of a Prospectus is required under the Act, as many copies of the
Prospectus in final form, or as thereafter amended or supplemented, as the
Representative may reasonably request. The Company will deliver to the
Representative at or before the Closing Date, four signed copies of the
Registration Statement and all amendments thereto including all exhibits
filed therewith, and will deliver to the Representative such number of
copies of the Registration Statement (including such number of copies of
the exhibits filed therewith that may reasonably be requested), and of all
amendments thereto, as the Representative may reasonably request.
(a)(v) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT"), and the rules and regulations of the Commission
thereunder, so as to permit the completion of the
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distribution of the Shares as contemplated in this Agreement and the
Prospectus. If during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer, any event shall occur
as a result of which, in the judgment of the Company or in the
reasonable opinion of the Underwriters, it becomes necessary to amend or
supplement the Prospectus in order to make the statements therein, in
the light of the circumstances existing at the time the Prospectus is
delivered to a purchaser, not misleading, or, if it is necessary at any
time to amend or supplement the Prospectus to comply with any law, the
Company promptly will either (A) prepare and file with the Commission an
appropriate amendment to the Registration Statement or supplement to the
Prospectus or (B) prepare and file with the Commission an appropriate
filing under the Exchange Act which shall be incorporated by reference
in the Prospectus so that the Prospectus as so amended or supplemented
will not, in the light of the circumstances when it is so delivered, be
misleading, or so that the Prospectus will comply with the law.
(a)(vi) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later
than 15 months after the effective date of the Registration Statement, an
earnings statement (which need not be audited) in reasonable detail,
covering a period of at least 12 consecutive months beginning after the
effective date of the Registration Statement, which earnings statement
shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of
the Rules and Regulations and will advise you in writing when such
statement has been so made available.
(a)(vii) Prior to the Closing Date, the Company will furnish to the
Underwriters, as soon as they have been prepared by or are available to the
Company, a copy of any unaudited interim financial statements of the
Company for any period subsequent to the period covered by the most recent
financial statements appearing in the Registration Statement and the
Prospectus.
(a)(viii) No offering, sale, short sale or other disposition of any
shares of Common Stock of the Company or other securities convertible
into or exchangeable or exercisable for shares of Common Stock or
derivative of Common Stock (or agreement for such) will be made for a
period of 90 days after the date of this Agreement, directly or
indirectly, by the Company otherwise than hereunder or with the prior
written consent of Deutsche Bank Securities Inc., nor shall the Company
file any registration statement with respect to the proposed sale of its
Shares except that the Company may file one or more registration
statements on Form S-4 registering shares of common stock issued in
acquisitions or on Form S-8 relating to shares issued pursuant to
options and employee benefit plans.
(a)(ix) The Company will use its best efforts to list, subject to
notice of issuance, the Shares on The NASDAQ National Market.
(a)(x) The Company has caused each officer and director of the
Company, and certain shareholders of the Company listed on SCHEDULE IV
hereto, to furnish to you, on or prior to the date of this agreement, a
letter or letters, in form and substance satisfactory to the Underwriters,
pursuant to which each such person shall agree not to offer, sell, sell
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short or otherwise dispose of any shares of Common Stock of the Company or
other capital stock of the Company, or any other securities convertible,
exchangeable or exercisable for Common Shares or derivative of Common
Shares owned by such person or request the registration for the offer or
sale of any of the foregoing (or as to which such person has the right to
direct the disposition of) for a period of 90 days after the date of
this Agreement, directly or indirectly, except with the prior written
consent of Deutsche Bank Securities Inc. ("LOCKUP AGREEMENTS").
(a)(xi) The Company shall apply the net proceeds of its sale of the
Shares as set forth in the Prospectus and shall file such reports with the
Commission with respect to the sale of the Shares and the application of
the proceeds therefrom as may be required in accordance with Rule 463 under
the Act.
(a)(xii) The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Shares in such a manner as
would require the Company to register as an investment company under the
1940 Act.
(a)(xiii) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a
registrar for the Common Stock.
(a)(xiv) The Company will not take, directly or indirectly, any
action designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation of
the price of any securities of the Company.
(b) Each of the Selling Shareholders covenants and agrees, severally
and not jointly, with the several Underwriters that:
(b)(i) No offering, sale, short sale or other disposition of any
shares of Common Stock of the Company or other capital stock of the Company
or other securities convertible, exchangeable or exercisable for Common
Stock or derivative of Common Stock owned by the Selling Shareholder or
request the registration for the offer or sale of any of the foregoing (or
as to which the Selling Shareholder has the right to direct the disposition
of) will be made for a period of 90 days after the date of this
Agreement, directly or indirectly, by such Selling Shareholder otherwise
than hereunder or with the prior written consent of Deutsche Bank
Securities Inc.
(b)(ii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 and the Interest and Dividend Tax Compliance Act
of 1983 with respect to the transactions herein contemplated, each of the
Selling Shareholders agrees to deliver to you prior to or at the Closing
Date a properly completed and executed United States Treasury Department
Form W-8 or W-9 (or other applicable form or statement specified by
Treasury Department regulations in lieu thereof).
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(b)(iii) Such Selling Shareholder will not take, directly or
indirectly, any action designed to cause or result in, or that has
constituted or might reasonably be expected to constitute, the
stabilization or manipulation of the price of any securities of the
Company.
5. COSTS AND EXPENSES.
The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Sellers under this Agreement,
including, without limiting the generality of the foregoing, the following:
accounting fees of the Company and the Selling Shareholders; the fees and
disbursements of counsel for the Company; the cost of printing and
delivering to, or as requested by, the Underwriters copies of the
Registration Statement, Preliminary Prospectuses, the Prospectus, this
Agreement, the Underwriters' Selling Memorandum, the Underwriters'
Invitation Letter, the Listing Application, the Blue Sky Survey and any
supplements or amendments thereto; the filing fees of the Commission; the
filing fees and expenses (including reasonable legal fees and
disbursements) incident to securing any required review by the NASD of the
terms of the sale of the Shares; the listing fee of the NASDAQ Stock
Market; and the expenses, including the reasonable fees and disbursements
of counsel for the Underwriters, incurred in connection with the
qualification of the Shares under State securities or Blue Sky laws. [The
Selling Shareholders have agreed with the Company to reimburse the Company
for a portion of such expenses. To the extent, if at all, that any of the
Selling Shareholders engage special legal counsel to represent them in
connection with this offering, the fees and expenses of such counsel shall
be borne by such Selling Shareholder. Any transfer taxes imposed on the
sale of the Shares to the several Underwriters will be paid by the Sellers
pro rata.] The Company agrees to pay all costs and expenses of the
Underwriters, including the fees and disbursements of counsel for the
Underwriters, incident to the offer and sale of directed shares of the
Common Stock by the Underwriters to employees and persons having business
relationships with the Company and its Subsidiaries. The [Sellers]
[Company] shall not, however, be required to pay for any of the
Underwriters expenses (other than those related to qualification unde NASD
regulation and State securities or Blue Sky laws) except that, if this
Agreement shall not be consummated because the conditions in Section 6
hereof are not satisfied, or because this Agreement is terminated by the
Representative[s] pursuant to Section 11 hereof, or by reason of any
failure, refusal or inability on the part of the Company [or the Selling
Shareholders] to perform any undertaking or satisfy any condition of this
Agreement or to comply with any of the terms hereof on [its] [their] part
to be performed, unless such failure to satisfy said condition or to comply
with said terms be due to the default or omission of any Underwriter, then
the Company and each of the Selling Shareholders pro rata (based on the
number of Shares to be sold by the Company and such Selling Stockholder
hereunder) shall reimburse the several Underwriters for reasonable
out-of-pocket expenses, including fees and disbursements of counsel,
reasonably incurred in connection with investigating, marketing and
proposing to market the Shares or in contemplation of performing their
obligations hereunder; PROVIDED, HOWEVER, that the Company and the Selling
Shareholders shall not in any event be liable to any of the several
Underwriters for damages on account of loss of anticipated profits from
the sale by them of the Shares.
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6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
The several obligations of the Underwriters to purchase the Firm
Shares on the Closing Date and the Option Shares, if any, on the Option
Closing Date are subject to the accuracy, as of the Closing Date or the
Option Closing Date, as the case may be, of the representations and
warranties of the Company and the Selling Shareholders contained herein,
and to the performance by the Company and the Selling Shareholders of their
covenants and obligations hereunder and to the following additional
conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by
Rule 424 and Rule 430A of the Rules and Regulations shall have been made,
and any request of the Commission for additional information (to be
included in the Registration Statement or otherwise) shall have been
disclosed to the Representative and complied with to their reasonable
satisfaction. No stop order suspending the effectiveness of the
Registration Statement, as amended from time to time, shall have been
issued and no proceedings for that purpose shall have been taken or, to the
knowledge of the Company or the Selling Shareholders, shall be contemplated
by the Commission and no injunction, restraining order, or order of any
nature by a Federal or state court of competent jurisdiction shall have
been issued as of the Closing Date which would prevent the issuance of the
Shares.
(b) The Representative shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Pepper Hamilton
LLP, counsel for the Company, dated the Closing Date or the Option Closing
Date, as the case may be, addressed to the Underwriters (and stating that
it may be relied upon by counsel to the Underwriters) to the effect that:
(i) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement; and the Company is duly qualified to transact business in
all jurisdictions in which the conduct of their business requires such
qualification, or in which the failure to qualify would have a
materially adverse effect upon the business of the Company.
(ii) The Company has authorized and outstanding capital stock
as set forth (under the caption "Capitalization") in the Prospectus;
the authorized shares of the Company's Common Stock have been duly
authorized; the outstanding shares of the Company's Common Stock,
including the Shares to be sold by the Selling Shareholders, have been
duly authorized and validly issued and are fully paid and
non-assessable; all of the Shares conform to the description thereof
contained in the Prospectus; the certificates for the Shares, assuming
they are in the form filed with the Commission, are in due and proper
form; the shares of Common Stock, including the Option Shares, if any,
to be sold by the Company pursuant to this Agreement have been duly
authorized and will be validly issued, fully paid and non-assessable
when issued and paid for as contemplated by this
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Agreement; and no preemptive rights of stockholders exist with
respect to any of the Shares or the issue or sale thereof.
(iii) Except as described in or contemplated by the Prospectus,
to the knowledge of such counsel, there are no outstanding securities
of the Company convertible or exchangeable into or evidencing the
right to purchase or subscribe for any shares of capital stock of the
Company and there are no outstanding or authorized options, warrants
or rights of any character obligating the Company to issue any shares
of its capital stock or any securities convertible or exchangeable
into or evidencing the right to purchase or subscribe for any shares
of such stock; and except as described in the Prospectus, to the
knowledge of such counsel, no holder of any securities of the Company
or any other person has the right, contractual or otherwise, which has
not been satisfied or effectively waived, to cause the Company to sell
or otherwise issue to them, or to permit them to underwrite the sale
of, any of the Shares or the right to have any Common Shares or other
securities of the Company included in the Registration Statement or
the right, as a result of the filing of the Registration Statement, to
require registration under the Act of any shares of Common Stock or
other securities of the Company.
(iv) They have been advised by the Commission that the
Registration Statement has become effective under the Act and, to best
knowledge of such counsel, no stop order proceedings with respect
thereto have been instituted or are pending or threatened under the
Act.
(v) The Registration Statement, the Prospectus and each
amendment or supplement thereto comply as to form in all material
respects with the requirements of the Act or the Exchange Act, as
applicable and the applicable rules and regulations thereunder (except
that such counsel need express no opinion as to the financial
statements and related schedules therein). The conditions for the use
of Form S-1, set forth in the General Instructions thereto, have been
satisfied.
(vi) The statements under the captions "Business Properties,"
"Business--Legal Proceedings," and "Description of Capital Stock" in
the Prospectus, insofar as such statements constitute a summary of
documents referred to therein or matters of law, fairly summarize in
all material respects the information called for with respect to such
documents and matters.
(vii) Such counsel does not know of any contracts or documents
required to be filed as exhibits to the Registration Statement or
described in the Registration Statement or the Prospectus which are
not so filed or described as required, and such contracts and
documents as are summarized in the Registration Statement or the
Prospectus are fairly summarized in all material respects.
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(viii) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company except as set
forth in the Prospectus.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will
not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, the Charter or bylaws of
the Company, or any material agreement or instrument known to such
counsel to which the Company is a party or by which the Company may be
bound.
(x) This Agreement has been duly authorized, executed and
delivered by the Company.
(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or
other governmental body is necessary in connection with the execution
and delivery of this Agreement and the consummation of the
transactions herein contemplated (other than as may be required by the
NASD or as required by state securities and Blue Sky laws as to which
such counsel need express no opinion) except such as have been
obtained or made, specifying the same.
(xii) The Company is not, and will not become, as a result of
the consummation of the transactions contemplated by this Agreement,
and application of the net proceeds therefrom as described in the
Prospectus, required to register as an investment company under the
1940 Act.
(xiii) This Agreement has been duly authorized, executed and
delivered on behalf of the Selling Shareholders.
(xiv) Each Selling Shareholder has full legal right, power and
authority, and any approval required by law (other than as required by
State securities and Blue Sky laws as to which such counsel need
express no opinion), to sell, assign, transfer and deliver the portion
of the Shares to be sold by such Selling Shareholder.
(xv) The Custodian Agreement and the Power of Attorney executed
and delivered by each Selling Shareholder is valid and binding.
(xvi) The Underwriters (assuming that they are bona fide
purchasers within the meaning of the Uniform Commercial Code) have
acquired good and marketable title to the Shares being sold by each
Selling Shareholder on the Closing Date, and the Option Closing Date,
as the case may be, free and clear of all liens, encumbrances,
equities and claims.
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In rendering such opinion Pepper Hamilton LLP may rely as to matters
of fact upon certificates of officers of the Company, and as to matters
governed by the laws of states other than Delaware or Federal laws on local
counsel in such jurisdictions, and as to the matters set forth in
subparagraphs (xiii), (xiv), and (xv) on opinions of other counsel
representing the respective Selling Shareholders, provided that in each
case Pepper Hamilton LLP shall state that they believe that they and the
Underwriters are justified in relying on such other counsel. In addition
to the matters set forth above, such opinion shall also include a statement
to the effect that nothing has come to the attention of such counsel which
leads them to believe that (i) the Registration Statement, at the time it
became effective under the Act (but after giving effect to any
modifications incorporated therein pursuant to Rule 430A under the Act) and
as of the Closing Date or the Option Closing Date, as the case may be,
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and (ii) the Prospectus, or any
supplement thereto, on the date it was filed pursuant to the Rules and
Regulations and as of the Closing Date or the Option Closing Date, as the
case may be, contained an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements, in the
light of the circumstances under which they are made, not misleading
(except that such counsel need express no view as to financial statements,
schedules and statistical information therein). With respect to such
statement, such counsel may state that their belief is based upon the
procedures set forth therein, including reliance upon certificates of
officers of the Company, but is without independent check and verification.
(c) The Representative shall have received from Willkie Farr &
Gallagher, counsel for the Underwriters, an opinion dated the Closing Date
or the Option Closing Date, as the case may be, substantially to the effect
specified in subparagraphs (ii), (iii) and (iv) of Paragraph (b) of this
Section 6, and that the Company is a duly organized and validly existing
corporation under the laws of the State of Delaware. In rendering such
opinion Willkie Farr & Gallagher may rely as to all matters governed other
than by the laws of the State of New York or Federal laws on the opinion of
counsel referred to in Paragraph (b) of this Section 6. In addition to the
matters set forth above, such opinion shall also include a statement to the
effect that nothing has come to the attention of such counsel which leads
them to believe that (i) the Registration Statement, or any amendment
thereto, as of the time it became effective under the Act (but after giving
effect to any modifications incorporated therein pursuant to Rule 430A
under the Act) as of the Closing Date or the Option Closing Date, as the
case may be, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and (ii) the Prospectus, or any
supplement thereto, on the date it was filed pursuant to the Rules and
Regulations and as of the Closing Date or the Option Closing Date, as the
case may be, contained an untrue statement of a material fact or omitted to
state a material fact, necessary in order to make the statements, in the
light of the circumstances under which they are made, not misleading
(except that such counsel need express no view as to financial statements,
schedules and statistical information therein). With respect to such
statement, such
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counsel may state that their belief is based upon the procedures set forth
therein, but is without independent check and verification.
(d) The Representative shall have received at or prior to the Closing
Date from Willkie Farr & Gallagher a memorandum or summary, in form and
substance satisfactory to the Representative, with respect to the
qualification for offering and sale by the Underwriters of the Shares under
the State securities or Blue Sky laws of such jurisdictions as the
Representative may reasonably have designated to the Company.
(e) You shall have received, on each of the dates hereof, the Closing
Date and the Option Closing Date, as the case may be, a letter dated the
date hereof, the Closing Date or the Option Closing Date, as the case may
be, in form and substance satisfactory to you, of Arthur Andersen LLP,
confirming that they are independent public accountants within the meaning
of the Act and the applicable published Rules and Regulations thereunder
and stating that in their opinion the financial statements and schedules
examined by them and included in the Registration Statement comply in form
in all material respects with the applicable accounting requirements of the
Act and the related published Rules and Regulations; and containing such
other statements and information as is ordinarily included in accountants'
"comfort letters" to Underwriters with respect to the financial statements
and certain financial and statistical information contained in the
Registration Statement and Prospectus.
(f) The Representative shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of
the Chief Executive Officer and the Chief Financial Officer of the Company
to the effect that, as of the Closing Date or the Option Closing Date, as
the case may be, each of them severally represents as follows:
(i) The Registration Statement has become effective under the
Act and no stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for such purpose have
been taken or are, to his knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company
contained in Section 1 hereof are true and correct as of the Closing
Date or the Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules
424 or 430A under the Act have been made;
(iv) He or she has carefully examined the Registration
Statement and the Prospectus and, in his or her opinion, as of the
effective date of the Registration Statement, the statements contained
in the Registration Statement were true and correct, and such
Registration Statement and Prospectus did not omit to state a material
fact required to be stated therein or necessary in order to make the
statements therein not misleading, and since the effective date of the
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Registration Statement, no event has occurred which should have been
set forth in a supplement to or an amendment of the Prospectus which
has not been so set forth in such supplement or amendment; and
(v) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been
any material adverse change or any development involving a prospective
material adverse change in or affecting the condition, financial or
otherwise, of the Company or the earnings, business, management,
properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company, whether or not arising in the
ordinary course of business.
(g) The Company and the Selling Shareholders shall have furnished to
the Representative such further certificates and documents confirming the
representations and warranties, covenants and conditions contained herein
and related matters as the Representative may reasonably have requested.
(h) The Firm Shares and Option Shares, if any, have been approved for
designation upon notice of issuance on the NASDAQ National Market.
(i) The Lockup Agreements described in Section 4(a)(x) are in full
force and effect.
The opinions and certificates mentioned in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in
all material respects reasonably satisfactory to the Representative and to
counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated
by the Representative by notifying the Company and the Selling Shareholders
of such termination in writing or by telegram at or prior to the Closing
Date or the Option Closing Date, as the case may be.
In such event, the Company, the Selling Shareholders and the
Underwriters shall not be under any obligation to each other (except to the
extent provided in Sections 5 and 8 hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE SELLERS.
The obligations of the Sellers to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing
Date, as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
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8. INDEMNIFICATION.
(a) The Company agrees:
(i) to indemnify and hold harmless each Underwriter and each person,
if any, who controls any Underwriter within the meaning of the Act, against
any losses, claims, damages or liabilities to which such Underwriter or any
such controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon (A) any
untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement, any Preliminary Prospectus, the Prospectus
or any amendment or supplement thereto, (B) the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading any act or failure
to act, or (C) any alleged act or failure to act by any Underwriter in
connection with, or relating in any manner to, the Shares or the offering
contemplated hereby, and which is included as part of or referred to in any
loss, claim, damage, liability or action arising out of or based upon
matters covered by clause (A) or (B) above provided, that the Company shall
not be liable under this clause (C) to the extent that it is determined in
a final judgment by a court of competent jurisdiction that such loss,
claim, damage, liability or action resulted directly from any such acts or
failures to act undertaken or omitted to be taken by such Underwriter
through its gross negligence or willful misconduct; provided, however, that
the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement, or omission or alleged omission made
in the Registration Statement, any Preliminary Prospectus, the Prospectus,
or such amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by or through the
Representative specifically for use in the preparation thereof. This
indemnity oligation will be in addition to any liability which the Company
may otherwise have.
(ii) to reimburse each Underwriter and each such controlling person
upon demand for any legal or other out-of-pocket expenses reasonably
incurred by such Underwriter or such controlling person in connection with
investigating or defending any such loss, claim, damage or liability,
action or proceeding or in responding to a subpoena or governmental inquiry
related to the offering of the Shares, whether or not such Underwriter or
controlling person is a party to any action or proceeding. In the event
that it is finally judicially determined that the Underwriters were not
entitled to receive payments for legal and other expenses pursuant to this
subparagraph, the Underwriters will promptly return all sums that had been
advanced pursuant hereto.
(b) The Selling Shareholders agree to indemnify the Underwriters and
each person, if any, who controls any Underwriter within the meaning of the
Act, against any losses, claims, damages or liabilities to which such
Underwriter or controlling person may become subject under the Act or
otherwise to the same extent as indemnity is provided by the Company
pursuant to Section 8(a) above. In no event, however, shall the liability
of any Selling Shareholder for indemnification under this Section 10(b)
exceed
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<PAGE>
the proceeds received by such Selling Shareholder from the Underwriters in
the offering. This indemnity obligation will be in addition to any
liability which the Selling Shareholders may otherwise have.
(c) Each Underwriter severally and not jointly will indemnify and
hold harmless the Company, each of its directors, each of its officers who
have signed the Registration Statement, the Selling Shareholders and each
person, if any, who controls the Company or the Selling Shareholders within
the meaning of the Act, against any losses, claims, damages or liabilities
to which the Company or any such director, officer, Selling Shareholder or
controlling person may become subject under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions or proceedings
in respect thereof) arise out of or are based upon (i) any untrue statement
or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made; and will reimburse any legal or
other expenses reasonably incurred by the Company or any such director,
officer, Selling Shareholder or controlling person in connection with
investigating or defending any such loss, claim, damage, liability, action
or proceeding; provided, however, that each Underwriter will be liable in
each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission has been made
in the Registration Statement, any Preliminary Prospectus, the Prospectus
or such amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by or through the
Representative specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which such
Underwriter may otherwise have.
(d) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may
be sought pursuant to this Section 8, such person (the "INDEMNIFIED PARTY")
shall promptly notify the person against whom such indemnity may be sought
(the "INDEMNIFYING PARTY") in writing. No indemnification provided for in
Section 8(a), (b) or (c) shall be available to any party who shall fail to
give notice as provided in this Section 8(d) if the party to whom notice
was not given was unaware of the proceeding to which such notice would have
related and was materially prejudiced by the failure to give such notice,
but the failure to give such notice shall not relieve the indemnifying
party or parties from any liability which it or they may have to the
indemnified party for contribution or otherwise than on account of the
provisions of Section 8(a), (b) or (c). In case any such proceeding shall
be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party
shall be entitled to participate therein and, to the extent that it shall
wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party and shall pay as incurred the fees and disbursements of
such counsel related to such proceeding. In any such proceeding, any
indemnified party shall have the
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<PAGE>
right to retain its own counsel at its own expense. Notwithstanding the
foregoing, the indemnifying party shall pay as incurred (or within 30
days of presentation) the fees and expenses of the counsel retained by
the indemnified party in the event (i) the indemnifying party and the
indemnified party shall have mutually agreed to the retention of such
counsel, (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel
would be inappropriate due to actual or potential differing interests
between them or (iii) the indemnifying party shall have failed to assume
the defense and employ counsel acceptable to the indemnified party
within a reasonable period of time after notice of commencement of the
action. It is understood that the indemnfying party shall not, in
connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the reasonable fees and expenses of more
than one separate firm for all such indemnified parties. Such firm
shall be designated in writing by you in the case of parties indemnified
pursuant to Section 8(a) or (b) and by the Company and the Selling
Shareholders in the case of parties indemnified pursuant to Section
8(c). The indemnifying party shall not be liable for any settlement of
any proceeding effected without its written consent but if settled with
such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and
against any loss or liability by reason of such settlement or judgment.
In addition, the indemnifying party will not, without the prior written
consent of the indemnified party, settle or compromise or consent to the
entry of any judgment in any pending or threatened claim, action or
proceeding of which indemnification may be sought hereunder (whether or
not any indemnified party is an actual or potential party to such claim,
action or proceeding) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all
liability arising out of such claim, action or proceeding.
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) in
such proportion as is appropriate to reflect the relative benefits received
by the Company and the Selling Shareholders on the one hand and the
Underwriters on the other from the offering of the Shares. If, however,
the allocation provided by the immediately preceding sentence is not
permitted by applicable law then each indemnifying party shall contribute
to such amount paid or payable by such indemnified party in such proportion
as is appropriate to reflect not only such relative benefits but also the
relative fault of the Company and the Selling Shareholders on the one hand
and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities,
(or actions or proceedings in respect thereof), as well as any other
relevant equitable considerations. The relative benefits received by the
Company and the Selling Shareholders on the one hand and the Underwriters
on the other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting
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<PAGE>
expenses) received by the Company and the Selling Shareholders bear to
the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page
of the Prospectus. The relative fault shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or
theSelling Shareholders on the one hand or the Underwriters on the
other, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission.
The Company, the Selling Shareholders and the Underwriters agree that
it would not be just and equitable if contributions pursuant to this
Section 8(e) were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to above in this Section 8(e). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages
or liabilities (or actions or proceedings in respect thereof) referred to
above in this Section 8(e) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection 8(e), (i) no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts and
commissions applicable to the Shares purchased by such Underwriter (ii) no
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation , and (iii) no
Selling Shareholder shall be required to contribute any amount in excess of
proceeds received by such Selling Shareholder from the Underwriters in the
offering. The Underwriters' obligations in this Section 8(e) to contribute
are several in proportion to their respective underwriting obligations and
not joint.
(f) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment
thereto, each party against whom contribution may be sought under this
Section 8 hereby consents to the jurisdiction of any court having
jurisdiction over any other contributing party, agrees that process issuing
from such court may be served upon him or it by any other contributing
party and consents to the service of such process and agrees that any other
contributing party may join him or it as an additional defendant in any
such proceeding in which such other contributing party is a party.
(g) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company and the Selling Shareholders
set forth in this Agreement shall remain operative and in full force and
effect, regardless of (i) any investigation made by or on behalf of any
Underwriter or any person controlling any Underwriter, the Company, its
directors or officers or any
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<PAGE>
persons controlling the Company (ii) acceptance of any Shares and
payment therefor hereunder, and (iii) any termination of this Agreement.
A successor to any Underwriter, or to the Company, its directors or
officers, or any person controlling the Company, shall be entitled to
the benefits of the indemnity, contribution and reimbursement agreements
contained in this Section 8.
9. DEFAULT BY UNDERWRITERS.
If on the Closing Date or the Option Closing Date, as the case may be,
any Underwriter shall fail to purchase and pay for the portion of the
Shares which such Underwriter has agreed to purchase and pay for on such
date (otherwise than by reason of any default on the part of the Company or
a Selling Shareholder), you, as Representative of the Underwriters, shall
use your reasonable efforts to procure within 36 hours thereafter one or
more of the other Underwriters, or any others, to purchase from the Company
and the Selling Shareholders such amounts as may be agreed upon and upon
the terms set forth herein, the Firm Shares or Option Shares, as the case
may be, which the defaulting Underwriter or Underwriters failed to
purchase. If during such 36 hours you, as such Representative, shall not
have procured such other Underwriters, or any others, to purchase the Firm
Shares or Option Shares, as the case may be, agreed to be purchased by the
defaulting Underwriter or Underwriters, then (a) if the aggregate number of
shares with respect to which such default shall occur does not exceed 10%
of the Firm Shares or Option Shares, as the case may be, covered hereby,
the other Underwriters shall be obligated, severally, in proportion to the
respective numbers of Firm Shares or Option Shares, as the case may be,
which they are obligated to purchase hereunder, to purchase the Firm Shares
or Option Shares, as the case may be, which such defaulting Underwriter or
Underwriters failed to purchase, or (b) if the aggregate number of shares
of Firm Shares or Option Shares, as the case may be, with respect to which
such default shall occur exceeds 10% of the Firm Shares or Option Shares,
as the case may be, covered hereby, the Company and the Selling
Shareholders or you as the Representative of the Underwriters will have the
right, by written notice given within the next 36-hour period to the
parties to this Agreement, to terminate this Agreement without liability on
the part of the non-defaulting Underwriters, the Company or of the Selling
Shareholders except to the extent provided in Section 8 hereof. In the
event of a default by any Underwriter or Underwriters, as set forth in this
Section 9, the Closing Date or Option Closing Date, as the case may be, may
be postponed for such period, not exceeding seven days, as you, as
Representative, may determine in order that the required changes in the
Registration Statement or in the Prospectus or in any other documents or
arrangements may be effected. The term "Underwriter" includes any person
substituted for a defaulting Underwriter. Any action taken under this
Section 9 shall not relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.
10. NOTICES.
All communications hereunder shall be in writing and, except as
otherwise provided herein, will be mailed, delivered, telecopied or
telegraphed and confirmed as
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<PAGE>
follows: if to the Underwriters, to Deutsche Bank Securities Inc., One
South Street, Baltimore, Maryland 21202,
Attention:_____________________; with a copy to Deutsche Bank Securities
Inc., One Bankers Trust Plaza, 130 Liberty Street, New York, New York
10006, Attention: General Counsel; with a copy to Willkie Farr &
Gallagher, 787 Seventh Avenue, New York, New York 10019, Attention:
William J. Grant, Jr.; if to the Company, to Bluestone Software, Inc.,
300 Stevens Drive, Philadelphia, Pennsylvania 19113, Attention: Chief
Financial Officer; with a copy to Pepper Hamilton LLP, 1235 Westlakes
Drive, Suite 400, Berwyn, Pennsylvania 19312, Attention: William A.
Scari, Jr.
11. TERMINATION.
This Agreement may be terminated by you by notice to the Sellers as
follows:
(a) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse
change or any development involving a prospective material adverse change
in or affecting the earnings, business, management, properties, assets,
rights, operations, condition (financial or otherwise) or prospects of the
Company, whether or not arising in the ordinary course of business, (ii)
any outbreak or escalation of hostilities or declaration of war or national
emergency or other national or international calamity or crisis or change
in economic or political conditions if the effect of such outbreak,
escalation, declaration, emergency, calamity, crisis or change on the
financial markets of the United States would, in your reasonable judgment,
make it impracticable or inadvisable to market the Shares or to enforce
contracts for the sale of the Shares, or (iii) suspension of trading in
securities generally on the New York Stock Exchange or the American Stock
Exchange or limitation on prices (other than limitations on hours or
numbers of days of trading) for securities on either such Exchange, (iv)
the enactment, publication, decree or other promulgation of any statute,
regulation, rule or order of any court or other governmental authority
which in your opinion materially and adversely affects or may materially
and adversely affect the business or operations of the Company, (v)
declaration of a banking moratorium by United States or New York State
authorities, (vi) any downgrading, or placement on any watch list for
possible downgrading, in the rating of the Company's debt securities by any
"nationally recognized statistical rating organization" (as defined for
purposes of Rule 436(g) under the Exchange Act); (vii) the suspension of
trading of the Company's common stock by the NASDAQ Stock Market, the
Commission, or any other governmental authority; or (viii) the taking of
any action by any governmentalbody or agency in respect of its monetary or
fiscal affairs which in your reasonable opinion has a material adverse
effect on the securities markets in the United States; or
(b) as provided in Sections 6 and 9 of this Agreement.
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<PAGE>
12. SUCCESSORS.
This Agreement has been and is made solely for the benefit of the
Underwriters, the Company and the Selling Shareholders and their respective
successors, executors, administrators, heirs and assigns, and the officers,
directors and controlling persons referred to herein, and no other person
will have any right or obligation hereunder. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign merely
because of such purchase.
13. INFORMATION PROVIDED BY UNDERWRITERS.
The Company, the Selling Shareholders and the Underwriters acknowledge
and agree that the only information furnished or to be furnished by any
Underwriter to the Company for inclusion in any Prospectus or the
Registration Statement consists of the information set forth in the last
paragraph on the front cover page (insofar as such information relates to
the Underwriters), legends required by Item 502(d) of Regulation S-K under
the Act and the information under the caption "Underwriting" in the
Prospectus.
14. MISCELLANEOUS.
(a) The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect
regardless of (i) any termination of this Agreement, (ii) any investigation
made by or on behalf of any Underwriter or controlling person thereof, or
by or on behalf of the Company or its directors or officers or the Selling
Shareholders and (iii) delivery of and payment for the Shares under this
Agreement.
(b) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
(c) This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Maryland.
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<PAGE>
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company, the Selling
Shareholders and the several Underwriters in accordance with its terms.
Any person executing and delivering this Agreement as Attorney-in-Fact for
a Selling Shareholder represents by so doing that he has been duly appointed as
Attorney-in-Fact by such Selling Shareholder pursuant to a validly existing and
binding Power of Attorney which authorizes such Attorney-in-Fact to take such
action.
Very truly yours,
BLUESTONE SOFTWARE, INC.
By:
--------------------------------
[SELLING SHAREHOLDERS]
By:
--------------------------------
Attorney-in-Fact
The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the date first
above written.
DEUTSCHE BANK SECURITIES INC.
As Representative of the several
Underwriters listed on Schedule I
By: DEUTSCHE BANK SECURITIES INC.
By:
-------------------------------
Authorized Officer
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<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
Number of Firm Shares
Underwriter to be Purchased
----------- -----------------------
Deutsche Bank Securities Inc.
SoundView Technology Group, Inc.
C.E. Unterberg, Towbin
Legg Mason Wood Walker, Incorporated
Total 3,500,000
=========
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<PAGE>
SCHEDULE II
SCHEDULE OF SELLING SHAREHOLDERS
Selling Shareholder Number of Firm Shares to be Sold
------------------- --------------------------------
Total 1,750,000
---------
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<PAGE>
SCHEDULE III
SCHEDULE OF OPTION SHARES
Number of Maximum Number Percentage of
Name of Seller of Option Shares Total Option Shares
Total ----- 100%
----
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<PAGE>
SCHEDULE IV
LOCK-UP AGREEMENTS
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<PAGE>
Exhibit 3.1
BLUESTONE SOFTWARE, INC.
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
SEPTEMBER 29, 1999
<PAGE>
BLUESTONE SOFTWARE, INC.
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
Bluestone Software, Inc., a Delaware corporation (the "Corporation"),
does hereby certify that:
FIRST: The present name of the Corporation is "Bluestone Software,
Inc.," which is the name under which the Corporation was originally
incorporated. The date of filing of the original Certificate of Incorporation of
the Corporation with the Secretary of State of the State of Delaware was March
13, 1997.
SECOND: This Amended and Restated Certificate of Incorporation (this
"Certificate") amends and restates in its entirety the present Third Amended and
Restated Certificate of Incorporation of the Corporation, as amended. This
Certificate has been duly adopted and approved by the board of directors of the
Corporation and the stockholders of the Corporation in accordance with the
provisions of Section 141(f), 228 and 242 of the General Corporation Law of the
State of Delaware.
THIRD: This Certificate shall become effective immediately upon its
filing with the Secretary of State of the State of Delaware.
FOURTH: Upon the filing with the Secretary of State of the State of
Delaware of this Certificate, the Third Amended and Restated Certificate of
Incorporation of the Corporation, as amended, shall be amended and restated in
its entirety to read as set forth in Exhibit "A" hereto.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed by a duly authorized officer this 29th day of September, 1999.
BLUESTONE SOFTWARE, INC.
By: /s/ S. Craig Huke
------------------------------------------
S. Craig Huke, Sr. Vice President
<PAGE>
Exhibit A
BLUESTONE SOFTWARE, INC.
FORM OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
ARTICLE I
NAME. The name of the corporation is Bluestone Software, Inc.
(the "Corporation").
ARTICLE II
REGISTERED OFFICE AND AGENT. The address of the registered office of
the Corporation in the State of Delaware is 1201 Market Street, Suite 1600,
Wilmington, DE 19801. The name of its registered agent at such address is PHS
Corporate Services, Inc.
ARTICLE III
PURPOSE. The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of Delaware.
ARTICLE IV
AUTHORIZED CAPITAL STOCK. The Corporation shall have the authority to
issue an aggregate of 54,900,000 shares of common stock, par value $.001 per
share ("Common Stock"), as more fully described below.
1. DIVIDEND RIGHTS. The holders of the Common Stock shall be
entitled to receive, when and as declared by the Board of Directors of the
Corporation (the "Board of Directors" or "Board"), out of any assets of the
Corporation legally available therefor, such dividends as may be declared from
time to time by the Board.
2. LIQUIDATION RIGHTS. Upon the liquidation, dissolution or
winding up of the Corporation, the holders of shares of Common Stock shall be
entitled to receive the remaining assets and funds of the Corporation available
for distribution to its stockholders ratably in proportion to the number of
shares of Common Stock held by such stockholders.
3. REDEMPTION. The Common Stock is not redeemable.
4. VOTING RIGHTS. The holder of each share of Common Stock
shall have the right to one vote, and shall be entitled to notice of any
stockholders' meeting in accordance with the bylaws of
<PAGE>
the Corporation (the "Bylaws"), and shall be entitled to vote upon such matters
and in such manner as may be provided by law.
5. SPECIAL MEETINGS. Special meetings of the stockholders, for
any purpose or purposes, unless otherwise prescribed by statute, may be called
only in accordance with the Bylaws.
6. ADVANCE NOTICE PROVISIONS. Advance notice of stockholder
nominations for the election of directors of the Corporation and of business to
be brought by stockholders before any meeting of stockholders of the Corporation
shall be given in the manner provided in the Bylaws.
ARTICLE V
BOARD OF DIRECTORS.
1. NUMBER; ELECTION. The Board of Directors of the Corporation
shall consist of such number of the directors as shall be fixed from time to
time by resolution of the Board of Directors. The Board of Directors shall be
divided into three classes, which shall be as nearly equal in number as
possible. Directors of each class shall serve for a term of three years and
until their successors shall have been elected and qualified. The three initial
classes of directors shall be comprised as follows:
(a) Class I shall be comprised of directors who shall serve
until the annual meeting of stockholders held in the first year following the
year in which the initial classes of directors were established and until their
successors shall have been elected and qualified.
(b) Class II shall be comprised of directors who shall
serve until the annual meeting of stockholders held in the second year following
the year in which the initial classes of directors were established and until
their successors shall have been elected and qualified.
(c) Class III shall be comprised of directors who shall
serve until the annual meeting of stockholders held in the third year following
the year in which the initial classes of directors were established and until
their successors shall have been elected and qualified.
2. TERM. After the initial term, at each annual meeting of
stockholders of the Corporation, directors of classes, the terms of which expire
at such annual meeting, shall be elected for terms of three years by a plurality
vote of all votes cast at such meeting. Notwithstanding the foregoing, a
director whose term shall expire at any annual meeting shall continue to serve
until such time as his successor shall have been duly elected and qualified
unless his or her position on the Board of Directors shall have been abolished
by action taken to reduce the size of the Board of Directors prior to said
meeting. Furthermore, any vacancy in directorship prior to the expiration of
such director's term caused by the death, removal or resignation of such
director or by an increase in the number of directors of the Corporation shall
be filled by a majority of the remaining directors.
3. INCREASE OR DECREASE IN NUMBER. Should the number of
directors of the Corporation be reduced, the directorship(s) eliminated shall be
allocated among classes as appropriate so that the number of directors in each
class is as specified in Section 1 of this Article V. The Board of Directors
shall designate, by the name of the incumbent(s), the position(s) to be
abolished. Notwithstanding the foregoing, no decrease in the number of directors
shall have the effect of shortening
2
<PAGE>
the term of any incumbent director. Should the number of directors of the
Corporation be increased, the additional directorships shall be allocated among
classes as appropriate so that the number of directors in each class is as
specified in Section 1 of this Article V. With respect to newly created or
eliminated directorships resulting from an increase or decrease, respectively,
in the number of directors, the Board shall determine and designate to which
class of directorships each director belongs, but in no case shall a decrease in
the number of directors shorten the term of an incumbent director.
4. VACANCIES. Vacancies and newly created directorships
resulting from any increase in the number of directors constituting the whole
Board may be filled only by the affirmative vote of a majority of the directors
then in office, although fewer than a quorum, or by a sole remaining director.
Whenever the holders of any class or classes of stock or series thereof are
entitled to elect one or more directors by the provisions of this Certificate,
vacancies and newly created directorships of such class or classes or series may
be filled by the affirmative vote of a majority of the directors elected by such
class or classes or series thereof then in office, or by a sole remaining
director so elected. Each director so chosen shall hold office until the next
election of directors of the class to which such director was appointed, and
until such director's successor is elected and qualified, or until the
director's earlier death, resignation or removal.
5. RESIGNATION OF DIRECTORS. A director may resign at any time
upon written notice to the Corporation, and the resignation shall take effect at
the time it specifies, without any need for acceptance by the Board. In the
event that one or more directors resigns from the Board, effective at a future
date, a majority of the directors then in office, including those who have so
resigned, shall have power to fill such vacancy or vacancies, with the vote
thereon to take effect when such resignation or resignations becomes effective.
6. REMOVAL OF DIRECTORS. No director of the Corporation may be
removed at any time unless for cause and by the affirmative vote of the holders
of a majority of the outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors, considered for this
purpose as one class, except as otherwise required by law.
ARTICLE VI
BYLAWS. In furtherance and not in limitation of the powers conferred by
statute, the Board shall have the power to adopt, amend, repeal or otherwise
alter the Bylaws of the Corporation without any action on the part of the
stockholders; provided, however, that the grant of such power to the Board shall
not divest the stockholders of nor limit their power, to adopt, amend, repeal or
otherwise alter the Bylaws.
ARTICLE VII
ELECTION OF DIRECTORS. Elections of directors need not be by written
ballot unless the Bylaws of the Corporation shall so provide.
3
<PAGE>
ARTICLE VIII
AMENDMENT AND REPEAL. The Corporation reserves the right to adopt,
repeal, rescind or amend in any respect any provisions contained in this
Certificate in the manner now or hereafter prescribed by applicable law, and all
rights conferred on stockholders herein are granted subject to this reservation.
ARTICLE IX
DIRECTOR LIABILITY. A director of the Corporation shall, to the full
extent permitted by the General Corporation Law of Delaware as it now exists or
as it may hereafter be amended, not be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Neither any amendment nor repeal of this Article IX, nor the adoption of any
provisions of this Certificate inconsistent with this Article IX, shall
eliminate or reduce the effect of this Article IX in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article IX,
would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
4
<PAGE>
Exhibit 3.2
BYLAWS OF
BLUESTONE SOFTWARE, INC.
ARTICLE 1
MEETING OF STOCKHOLDERS
Section 1.1. OFFICES. The Corporation may have an office or
offices at such places as the Board of Directors may from time to time
designate.
Section 1.2. ANNUAL MEETINGS. An annual meeting of
stockholders shall be held for the election of directors at such date, time and
place, either within or without the State of Delaware, as may be designated by
resolution of the Board of Directors from time to time. Any other proper
business may be transacted at the annual meeting.
1.2.1. The Corporation shall hold annual meetings
of stockholders on such date and at such time as shall be designated from time
to time by the Board of Directors, the Chairman of the Board of Directors, the
Chief Executive Officer or the President. At each annual meeting, the
stockholders shall elect, by a plurality vote, directors to succeed those whose
terms expire at the time of the annual meeting. The nomination of persons for
election to the Board and the proposal of any other business to be transacted at
an annual meeting may be made only (i) by or at the direction of the Board or
(ii) by any stockholder of record who gives notice in accordance with the
procedures set forth in Section 1.2.2 and who is a stockholder of record both on
the date of giving such notice and on the record date for the determination of
stockholders entitled to vote at such annual meeting. Only persons thereby
nominated shall be eligible to serve as directors and only business thereby
proposed shall be transacted at an annual meeting. The presiding officer of the
annual meeting shall determine whether a nomination or any proposal of business
complies or complied with this Section 1.2.
1.2.2. For nominations and other business to be
brought properly before an annual meeting by a stockholder pursuant to clause
(ii) of Section 1.2.1, the stockholder must deliver notice to the Secretary of
the Corporation at the principal executive offices of the Corporation in
accordance with this Section 1.2.2. The notice must be received by the Secretary
not less than 90 days nor more than 120 days prior to the first anniversary of
the preceding year's annual meeting; PROVIDED, HOWEVER, that in the event that
the date of the annual meeting is advanced by more than 30 days or delayed by
more than 60 days from such anniversary date, the stockholder must so deliver
the notice not earlier than the 120th day prior to such annual meeting and not
later than the close of business on the later of the 90th day prior to such
annual meeting or the tenth day following the day on which public announcement
of the date of such meeting is first made; PROVIDED FURTHER, HOWEVER, that in
the event that the number of directors to be elected to the Board is increased
and there is no public announcement naming all of the nominees for director or
specifying the size
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of the increased Board made by the Corporation at least 70 days prior to the
first anniversary of the preceding annual meeting, with respect to nominees for
any new position created by the increase, the stockholder must so deliver the
notice not later than the close of business on the tenth day following the day
on which such public announcement is first made. The stockholder's notice must
set forth: (i) as to each person whom the stockholder proposes to nominate for
election or reelection as a director, all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors pursuant to Section 14(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules and regulations thereunder (together
with such person's written consent to being named in the proxy statement as a
nominee and to serving as a director if elected), whether or not the Corporation
is then subject to Section 14(a) and such rules and regulations; (ii) as to any
other business that the stockholder proposes to transact at the meeting, a brief
description of the business desired to be brought before the meeting, the
reasons for conducting the business at the meeting and any material interest in
the business of the stockholder and of the beneficial owner, if any, on whose
behalf the proposal is made; and (iii) as to the stockholder giving the notice
and the beneficial owner, if any, on whose behalf the nomination or proposal is
made, the name and address of the stockholder, as they appear on the
Corporation's books, and of such beneficial owner, the class and number of
shares of the Corporation that are owned beneficially and of record by such
stockholder and such beneficial owner and a representation that the stockholder
intends to appear in person or by proxy at the annual meeting to bring such
business before the meeting. For purposes of this Section 1.2, a "public
announcement," means disclosure in a press release reported by the Dow Jones
News Service, Associated Press or comparable news service, in a document
publicly filed with the Securities and Exchange Commission pursuant to Section
13, 14 or 15(d) of the Exchange Act (or their successor provisions), or in a
notice of meeting or proxy statement mailed generally to the Corporation's
stockholders. In giving notice under this Section 1.2, a stockholder must also
comply with state law and the Exchange Act (and the rules and regulations
thereunder). Nothing in this Section 1.2 shall be deemed to affect the rights of
a stockholder to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 (or its successor provision) under the Exchange
Act.
Section 1.3. SPECIAL MEETINGS. Special meetings of the
stockholders may be called at any time by the Chief Executive Officer or
President and shall be called by the President or Secretary on the request in
writing or by vote of a majority of the directors or at the request in writing
of stockholders of record owning seventy-five percent (75%) in amount of the
capital stock outstanding and entitled to vote.
1.3.1. Business transacted at any special meeting
of stockholders shall be limited to the purposes stated in the notice relating
to such meeting (or to the purposes for which the meeting is called if such
notice is waived or is not required as provided in the General Corporation Law
of the State of Delaware (the "Delaware General Corporation Law") or these
bylaws). In the case of a special meeting of stockholders called for the purpose
of electing directors, nominations may be made only (i) by or at the direction
of the Board or (ii) by any stockholder of
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record who delivers to the Secretary, no later than the tenth day following the
day on which public announcement of the special meeting is made, a notice that
complies with and is delivered in accordance with Section 1.2.2 above.
Section 1.4. LOCATION. All meetings of the stockholders shall
be held at such place or places, within or without the State of Delaware, as may
from time to time be fixed by the Board of Directors or as shall be specified
and fixed in the respective notices or waiver of notice thereof.
Section 1.5. NOTICE OF MEETINGS. Whenever stockholders are
required or permitted to take any action at a meeting, a written notice of the
meeting shall be given that shall state the place, date and hour of the meeting
and, in the case of a special meeting, the purpose or purposes for which the
meeting is called. Unless otherwise provided by law, the certificate of
incorporation or these bylaws, the written notice of any meeting shall be given
not less than ten (10) nor more than sixty (60) days before the date of the
meeting to each stockholder entitled to vote at such meeting. If mailed, such
notice shall be deemed to be given when deposited in the United States mail,
postage prepaid, directed to the stockholder at his address as it appears on the
records of the Corporation.
Section 1.6. WAIVERS OF NOTICE. Whenever the giving of any
notice is required by statute, the certificate of incorporation or these bylaws,
a waiver thereof, in writing and delivered to the Corporation, signed by the
person or persons entitled to said notice, whether before or after the event as
to which such notice is required, shall be deemed equivalent to notice.
Attendance of a stockholder at a meeting shall constitute a waiver of notice (1)
of such meeting, except when the stockholder at the beginning of the meeting
objects to holding the meeting or transacting business at the meeting and (2)
(if it is a special meeting) of consideration of a particular matter at the
meeting that is not within the purpose or purposes described in the meeting
notice, unless the stockholder objects to considering the matter at the
beginning of the meeting.
Section 1.7. ADJOURNMENTS. Any meeting of stockholders, annual
or special, may adjourn from time to time to reconvene at the same or some other
place, and notice need not be given of any such adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the Corporation may transact any business which
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, notice of the adjourned meeting shall be given
to each stockholder of record entitled to vote at the meeting.
Section 1.8. QUORUM. Except as otherwise provided by law, the
certificate of incorporation or these bylaws, at each meeting of stockholders
the presence in person or by proxy of the holders of a majority in voting power
of the outstanding shares of stock entitled to vote at the meeting shall be
necessary and sufficient to constitute a quorum. In the absence of a quorum, the
stockholders so present may, by a majority in voting power thereof, adjourn the
meeting from time to time in the manner provided in Section 1.7 of these bylaws
until a quorum shall attend. Shares
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of its own stock belonging to the Corporation or to another corporation, if a
majority of the shares entitled to vote in the election of directors of such
other corporation is held, directly or indirectly, by the Corporation, shall
neither be entitled to vote nor be counted for quorum purposes; PROVIDED,
HOWEVER, that the foregoing shall not limit the right of the Corporation or any
subsidiary of the Corporation to vote stock, including but not limited to its
own stock, held by it in a fiduciary capacity.
Section 1.9. ORGANIZATION. Meetings of stockholders shall be
presided over by the Chairman of the Board, if any, or in his absence by the
Vice Chairman of the Board, if any, or in his absence by the President, or in
his absence by a Vice President, or in the absence of the foregoing persons by a
chairman designated by the Board of Directors, or in the absence of such
designation by a chairman chosen at the meeting. The Secretary shall act as
secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
Section 1.10. VOTING; PROXIES. Except as otherwise provided by
or pursuant to the provisions of the certificate of incorporation, each
stockholder entitled to vote at any meeting of stockholders shall be entitled to
one vote for each share of stock held by such stockholder which has voting power
upon the matter in question. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for such
stockholder by proxy, but no such proxy shall be voted or acted upon after three
(3) years from its date, unless the proxy provides for a longer period. A proxy
shall be irrevocable if it states that it is irrevocable and if, and only as
long as, it is coupled with an interest sufficient in law to support an
irrevocable power. A stockholder may revoke any proxy which is not irrevocable
by attending the meeting and voting in person or by filing an instrument in
writing revoking the proxy or by delivering a proxy in accordance with
applicable law bearing a later date to the Secretary of the Corporation. Voting
at meetings of stockholders need not be by written ballot. At all meetings of
stockholders for the election of directors, a plurality of the votes cast shall
be sufficient to elect. All other elections and questions shall, unless
otherwise provided by the certificate of incorporation, these bylaws, the rules
or regulations of any stock exchange applicable to the Corporation, as otherwise
provided by law or pursuant to any regulation applicable to the Corporation, be
decided by the affirmative vote of the holders of a majority in voting power of
the shares of stock of the Corporation which are present in person or by proxy
and entitled to vote thereon.
Section 1.11. FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF
RECORD. In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or to express consent to corporate action in writing without a meeting, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is
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adopted by the Board of Directors, and which record date: (i) in the case of
determination of stockholders entitled to vote at any meeting of stockholders or
adjournment thereof, shall, unless otherwise required by law, not be more than
sixty (60) nor less than ten (10) days before the date of such meeting; (ii) in
the case of determination of stockholders entitled to express consent to
corporate action in writing without a meeting, shall not be more than ten (10)
days from the date upon which the resolution fixing the record date is adopted
by the Board of Directors; and (iii) in the case of any other action, shall not
be more than sixty (60) days prior to such other action. If no record date is
fixed: (a) the record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held; (b) the record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
of the Board of Directors is required by law, shall be the first date on which a
signed written consent setting forth the action taken or proposed to be taken is
delivered to the Corporation in accordance with applicable law, or, if prior
action by the Board of Directors is required by law, shall be at the close of
business on the day on which the Board of Directors adopts the resolution taking
such prior action; and (c) the record date for determining stockholders for any
other purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; PROVIDED, HOWEVER,
that the Board of Directors may fix a new record date for the adjourned meeting.
Section 1.12. LIST OF STOCKHOLDERS ENTITLED TO VOTE. The
Secretary shall prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each stock
holder and the number of shares registered in the name of each stockholder. Such
list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof and may be inspected by any stockholder who is
present. Upon the willful neglect or refusal of the directors to produce such a
list at any meeting for the election of directors, they shall be ineligible for
election to any office at such meeting. Except as otherwise provided by law, the
stock ledger shall be the only evidence as to who are the stockholders entitled
to examine the stock ledger, the list of stockholders or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
Section 1.13. ACTION BY WRITTEN CONSENT OF STOCKHOLDERS.
Unless otherwise restricted by the certificate of incorporation, any action
required or permitted to be taken at any annual or special meeting of the
stockholders may be taken without a meeting, without prior notice and without a
vote, if a consent or consents in writing, setting forth the action so taken,
shall be
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signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted and
shall be delivered to the Corporation by delivery to its registered office in
the State of Delaware, its principal place of business, or an officer or agent
of the Corporation having custody of the book in which minutes of proceedings of
stockholders are recorded. Delivery made to the Corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
Prompt notice of the taking of the corporate action without a meeting by less
than unanimous written consent shall, to the extent required by law, be given to
those stockholders who have not consented in writing and who, if the action had
been taken at a meeting, would have been entitled to notice of the meeting if
the record date for such meeting had been the date that written consents signed
by a sufficient number of holders to take the action were delivered to the
Corporation.
Section 1.14. INSPECTORS OF ELECTION. The Corporation may, and
shall if required by law, in advance of any meeting of stockholders, appoint one
or more inspectors of election, who may be employees of the Corporation, to act
at the meeting or any adjournment thereof and to make a written report thereof.
The Corporation may designate one or more persons as alternate inspectors to
replace any inspector who fails to act. In the event that no inspector so
appointed or designated is able to act at a meeting of stockholders, the person
presiding at the meeting shall appoint one or more inspectors to act at the
meeting. Each inspector, before entering upon the discharge of his or her
duties, shall take and sign an oath to execute faithfully the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspector or inspectors so appointed or designated shall (i)
ascertain the number of shares of capital stock of the Corporation outstanding
and the voting power of each such share, (ii) determine the shares of capital
stock of the Corporation represented at the meeting and the validity of proxies
and ballots, (iii) count all votes and ballots, (iv) determine and retain for a
reasonable period a record of the disposition of any challenges made to any
determination by the inspectors, and (v) certify their determination of the
number of shares of capital stock of the Corporation represented at the meeting
and such inspectors' count of all votes and ballots. Such certification and
report shall specify such other information as may be required by law. In
determining the validity and counting of proxies and ballots cast at any meeting
of stockholders of the Corporation, the inspectors may consider such information
as is permitted by applicable law. No person who is a candidate for an office at
an election may serve as an inspector at such election.
Section 1.15. CONDUCT OF MEETINGS. The date and time of the
opening and the closing of the polls for each matter upon which the stockholders
will vote at a meeting shall be announced at the meeting by the person presiding
over the meeting. The Board of Directors may adopt by resolution such rules and
regulations for the conduct of the meeting of stockholders as it shall deem
appropriate. Except to the extent inconsistent with such rules and regulations
as adopted by the Board of Directors, the chairman of any meeting of
stockholders shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts as, in the judgment of such
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chairman, are appropriate for the proper conduct of the meeting. Such rules,
regulations or pro cedures, whether adopted by the Board of Directors or
prescribed by the chairman of the meeting, may include, without limitation, the
following: (i) the establishment of an agenda or order of business for the
meeting; (ii) rules and procedures for maintaining order at the meeting and the
safety of those present; (iii) limitations on attendance at or participation in
the meeting to stockholders of record of the Corporation, their duly authorized
and constituted proxies or such other persons as the chairman of the meeting
shall determine; (iv) restrictions on entry to the meeting after the time fixed
for the commencement thereof; and (v) limitations on the time allotted to
questions or comments by participants. Unless and to the extent determined by
the Board of Directors or the chairman of the meeting, meetings of stockholders
shall not be required to be held in accordance with the rules of parliamentary
procedure.
ARTICLE 2
BOARD OF DIRECTORS
Section 2.1. MANAGEMENT. The property and business of the
Corporation shall be managed by or under the direction of its Board of
Directors, consisting of one or more directors, as determined from time to time
by resolution of the Board of Directors.
Section 2.2. NUMBER AND TERM. Within the limits set forth in
the certificate of incorporation, the number of directors shall be determined by
resolution of the Board. Unless the certificate of incorporation provides
otherwise, the directorships (i.e., the particular seats on the Board) shall be
classified into three classes (designated as Class I, Class II and Class III) as
nearly equal in number as possible. Vacancies on the Board shall be filled in
accordance with the certificate of incorporation. Once elected or chosen
pursuant to the certificate of incorporation, a director shall hold office until
the director's successor is elected and qualified or until the director dies,
resigns or is removed; PROVIDED, HOWEVER, that if the Board decreases the number
of directors constituting the whole Board and designates a particular
directorship to be eliminated due to the decrease, a director in the eliminated
directorship shall cease to hold office after the next election of directors,
unless the director is nominated and elected to another directorship on the
Board.
Section 2.3. POWERS. The business and affairs of the
Corporation shall be managed by or under the direction of the Board, which may
exercise all such powers of the Corporation and do all such lawful acts and
things, subject to any limitation set forth in the certificate of incorporation
or as otherwise may be provided in the Delaware General Corporation Law.
Section 2.4. MEETINGS. After each annual election of
directors, the newly elected directors may meet for the purpose of organization,
the election of officers, and the transaction of other business, at such place
and time as shall be fixed by the stockholders at the annual meeting,
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and if a majority of the directors be present at such place and time, no prior
notice of such meeting shall be required to be given to the directors. The place
and time of such meeting may also be fixed by written consent of the directors.
Regular meetings of the directors may be held without notice at such time and at
such place as shall from time to time be determined by the Board of Directors.
Section 2.5. SPECIAL MEETINGS. Special meetings of the
directors may be called by the President on five (5) days notice in writing or
on two (2) days notice by telephone to each director and shall be called by the
President in like manner on the written request of two (2) directors. Special
meetings of the directors may be held within or without the State of Delaware at
such place as is indicated in the notice or waiver of notice thereof.
Section 2.6. PRESENCE AT MEETINGS. Members of the Board may
participate in a meeting of the Board by any communication by means of which all
participating directors can simultaneously hear each other during the meeting. A
director participating in a meeting by this means is deemed to be present in
person at the meeting.
Section 2.7. ACTION WITHOUT MEETING. Any action required or
permitted to be taken at any meeting of the Board may be taken without a meeting
if the action is taken by all members of the Board. The action must be evidenced
by one (1) or more written consents describing the action taken, signed by each
director, and delivered to the Corporation for inclusion in the minute book.
Section 2.8. QUORUM. A majority of the directors shall
constitute a quorum, but a smaller number may adjourn from time to time, without
further notice, until a quorum is secured.
Section 2.9. WAIVER OF NOTICE OF MEETING. A director may waive
any notice required by statute, the certificate of incorporation or these bylaws
before or after the date and time (i) stated in the notice or (ii) of the
meeting. Except as set forth below, the waiver must be in writing, signed by the
director entitled to the notice, and delivered to the Corporation for inclusion
in the minute book. Notwithstanding the foregoing, a director's attendance at or
participation in a meeting waives any required notice to the director of the
meeting unless the director at the beginning of the meeting objects to holding
the meeting or transacting business at the meeting and does not thereafter vote
for or assent to action taken at the meeting.
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ARTICLE 3
COMMITTEES
Section 3.1. COMMITTEES. The Board of Directors may, by
resolution or resolutions passed by a majority of the whole Board, designate an
executive committee and one or more other committees each to consist of two (2)
or more of the directors of the Corporation.
Section 3.2. POWER. The executive committee shall not have
authority to make, alter or amend the bylaws, but shall exercise all other
powers of the Board of Directors between the meetings of said Board, except the
power to fill vacancies in their own membership, which vacancies shall be filled
by the Board of Directors.
Section 3.3. MEETING. The executive committee and such other
committees shall meet at stated times or on notice to all by any of their own
number. They shall fix their own rules of procedure. A majority shall constitute
a quorum, but the affirmative vote of a majority of the whole committee shall be
necessary in every case.
Section 3.4. OTHER POWERS. Such other committees shall have
and may exercise the powers of the Board of Directors to the extent as provided
in such resolution or resolutions.
ARTICLE 4
OFFICERS
Section 4.1. EXECUTIVE OFFICERS. The officers of the
Corporation may be a President, one or more Vice Presidents, Secretary,
Treasurer, and such other officers as may from time to time be chosen by the
Board of Directors.
Section 4.2. TERM. The officers of the Corporation shall hold
office until their successors are chosen and qualify in their stead. Any officer
chosen or appointed by the Board of Directors may be removed either with or
without cause at any time by the affirmative vote of a majority of the whole
Board of Directors. If the office of any officer or officers becomes vacant for
any reason, the vacancy shall be filled by the affirmative vote of a majority of
the whole Board of Directors.
Section 4.3. DUTIES OF THE PRESIDENT.
4.3.1. The President shall be the Chief
Executive Officer of the Corporation. It shall be his duty to preside at all
meetings of the stockholders, to have general and
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active management of the business and the Corporation, to see that all orders
and resolutions of the Board of Directors are carried into effect and to execute
all contracts, agreements, deeds, bonds, mortgages and other obligations and
instruments, in the name of the Corporation, and to affix the corporate seal
thereto when authorized by the Board of Directors or the executive committee.
4.3.2. He shall have the general supervision and
direction of the other officers of the Corporation and shall see that their
duties are properly performed.
4.3.3. He shall be ex-officio a member of all
standing committees and shall have the general duties and powers of supervision
and management usually vested in the office of the President of a Corporation.
Section 4.4. VICE PRESIDENT. The Vice Presidents, in the order
designated by the Board of Directors, shall be vested with all powers and
required to perform all the duties of the President in his absence or disability
and shall perform such other duties as may be prescribed by the Board of
Directors.
Section 4.5. PRESIDENT PRO TEM. In the absence or disability
of the President and any Vice President, the Board may appoint from their own
number a president pro tem.
Section 4.6. SECRETARY. The Secretary shall attend all
meetings of the Corporation, the Board of Directors, the executive committee and
standing committees. He shall act as clerk thereof and shall record all of the
proceedings of such meetings in a book kept for that purpose. He shall give
proper notice of meetings of stockholders and directors and shall perform such
other duties as shall be assigned to him by the President or the Board of
Directors.
Section 4.7. TREASURER.
4.7.1. The Treasurer shall have custody of the
funds and securities of the Corporation and shall keep full and accurate
accounts of receipts and disbursements in books belonging to the Corporation and
shall deposit all moneys and other valuable effects in the name and to the
credit of the Corporation in such depositories as may be designated by the Board
of Directors.
4.7.2. He shall disburse the funds of the
Corporation as may be ordered by the Board, executive committee or President,
taking proper vouchers for such disbursements, and shall render to the President
and directors, whenever they may require it, an account of all his transactions
as treasurer, and of the financial condition of the Corporation, and at the
regular meeting of the Board next preceding the annual stockholders' meeting, a
like report for the preceding year.
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4.7.3. He shall keep an account of stock
registered and transferred in such manner and subject to such regulations as the
Board of Directors may prescribe.
4.7.4. He shall give the Corporation a bond, if
required by the Board of Directors, in such sum and in form and with security
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and the restoration to the Corporation, in case of his
death, resignation or removal from office, of all books, papers, vouchers, money
and other property of whatever kind in his possession, belonging to the
Corporation. He shall perform such other duties as the Board of Directors or
executive committee may from time to time prescribe or require.
Section 4.8. DUTIES OF OFFICERS MAY BE DELEGATED. In case of
the absence or disability of any officer of the Corporation or for any other
reason deemed sufficient by a majority of the Board, the Board of Directors may
delegate his powers or duties to any other officer or to any director for the
time being.
ARTICLE 5
STOCK
Section 5.1. CERTIFICATES OF STOCK. Certificates of stock
shall be signed by the President or a Vice President and either the treasurer,
assistant treasurer, secretary or assistant secretary. If a certificate of stock
be lost or destroyed, another may be issued in its stead upon proof of loss or
destruction and the giving of a satisfactory bond of indemnity in an amount
sufficient to indemnify the Corporation against any claim. A new certificate may
be issued without requiring bond when, in the judgment of the directors, it is
proper to do so.
Section 5.2. TRANSFER OF STOCK. Upon surrender to the
Corporation or the transfer agent of the Corporation of a certificate for shares
duly endorsed or accompanied by proper evidence of succession, assignation or
authority to transfer, it shall be the duty of the Corporation to issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction on its books.
Section 5.3. STOCKHOLDERS OF RECORD. The Corporation shall be
entitled to treat the holder of record of any share or shares of stock as the
holder in fact thereof and accordingly shall not be bound to recognize any
equitable or other claim to or interest in such share on the part of any other
person whether or not it shall have express or other notice thereof, save as
expressly provided by the laws of Delaware.
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ARTICLE 6
INDEMNIFICATION
Section 6.1. RIGHT TO INDEMNIFICATION. Each person who was or
is a party or is threatened to be made a party to or is involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative
("Proceeding"), including without limitation Proceedings by or in the right of
the Corporation to procure a judgment in its favor, by reason of the fact that
he or she or a person for whom he or she is the legal representative is or was a
director or officer, employee or agent of the Corporation or is or was serving
at the request of the Corporation as a director or officer, employee or agent of
another corporation, or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such Proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless by
the Corporation to the fullest extent authorized by the General Corporation Law
of the State of Delaware, as the same exists or may hereafter be amended (but,
in the case of any such amendment, only to the extent such amendment permits the
Corporation to provide broader indemnification rights than said law permitted
the Corporation to provide prior to such amendment) against all expenses,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered by such person in connection therewith. Such right shall be
a contract right and shall include the right to be paid by the Corporation for
expenses incurred in defending any such Proceeding in advance of its final
disposition; PROVIDED, HOWEVER, that the payment of such expenses incurred by a
director or officer of the Corporation in his or her capacity as a director or
officer (and not in any other capacity in which service was or is rendered by
such person while a director or officer, including, without limitation, service
to an employee benefit plan) in advance of the final disposition of such
Proceeding, shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such director or officer, to repay all amounts
so advanced if it should be determined ultimately that such director or officer
is not entitled to be indemnified under this section or otherwise.
Section 6.2. RIGHT OF CLAIMANT TO BRING SUIT. If a claim under
Section 6.1 is not paid in full by the Corporation within ninety (90) days after
a written claim has been received by the Corporation, the claimant may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim, and if successful in whole or in part, the claimant shall be
entitled to be paid also the expense of prosecuting such claim. It shall be a
defense to any such action (other than an action brought to enforce a claim for
expenses incurred in defending any Proceeding in advance of its final
disposition where the required undertaking has been tendered to the Corporation)
that the claimant has not met the standards of conduct which make it permissible
under the General Corporation Law of the State of Delaware for the Corporation
to indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
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<PAGE>
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
General Corporation Law of the State of Delaware, nor an actual determination by
the Corporation (including its Board of Directors, independent legal counsel, or
its stockholders) that the claimant had not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that claimant
had not met the applicable standard of conduct.
Section 6.3. NON-EXCLUSIVITY OF RIGHTS. The rights conferred
by Sections 6.1 and 6.2 shall not be exclusive of any other right which such
person may have or hereafter acquire under any statute, provision of the
certificate of incorporation, bylaw, agreement, vote of stockholders or
disinterested directors or otherwise.
Section 6.4. INSURANCE. The Corporation may maintain
insurance, at its expense, to protect itself and any such director, officer,
employee or agent of the Corporation or another corporation, partnership, joint
venture, trust or other enterprise against any such expense, liability or loss,
whether or not the Corporation would have the power to indemnify such person
against such expense, liability or loss under the Delaware General Corporation
Law.
Section 6.5. OTHER SOURCES. The Corporation's obligation, if
any, to indemnify or to advance expenses to any indemnitee who was or is serving
at its request as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, enterprise or nonprofit entity shall be
reduced by any amount such indemnitee may collect as indemnification or
advancement of expenses from such other corporation, partnership, joint venture,
trust, enterprise or non-profit enterprise.
Section 6.6. AMENDMENT OR REPEAL. Any repeal or modification
of the foregoing provisions of this Article VI shall not adversely affect any
right or protection hereunder of any indemnitee in respect of any act or
omission occurring prior to the time of such repeal or modification.
Section 6.7. OTHER INDEMNIFICATION AND PREPAYMENT OF EXPENSES.
This Article VI shall not limit the right of the Corporation, to the extent and
in the manner permitted by law, to indemnify and to advance expenses to persons
other than indemnitees when and as authorized by appropriate corporate action.
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<PAGE>
ARTICLE 7
MISCELLANEOUS
Section 7.1. FISCAL YEAR. The fiscal year of the Corporation
shall be determined by the Board of Directors.
Section 7.2. DIVIDENDS. Dividends upon the capital stock may
be declared by the Board of Directors at any regular or special meeting and may
be paid in cash or property or in shares of the capital stock. The directors may
set apart out of any of the funds of the Corporation available for dividends a
reserve or reserves for any proper purposes and may alter or abolish any such
reserve or reserves.
Section 7.3. CHECKS FOR MONEY. All checks, drafts or orders
for the payment of money shall be signed by the treasurer or by such other
officer or officers as the Board of Directors may from time to time designate.
No check shall be signed in blank.
Section 7.4. BOOKS AND RECORDS. The books, records and
accounts of the Corporation except as otherwise required by the laws of the
State of Delaware, may be kept within or without the State of Delaware, at such
place or places as may from time to time be designated by the bylaws or by
resolution of the directors.
Section 7.5. NOTICES. Except as otherwise specifically
provided herein or required by law, all notices required to be given to any
stockholder, director, officer, employee or agent shall be in writing and may in
every instance be effectively given by hand delivery to the recipient thereof,
by depositing such notice in the mails, postage paid, or by sending such notice
by facsimile transmission. Any such notice shall be addressed to such
stockholder, director, officer, employee or agent at his or her last known
address as the same appears on the books of the Corporation. The time when such
notice is received, if hand delivered, or dispatched, if delivered through the
mails or by facsimile transmission, shall be the time of the giving of the
notice.
Section 7.6. WAIVER OF NOTICE. A written waiver of any notice,
signed by a stockholder, director, officer, employee or agent, whether before or
after the time of the event for which notice is to be given, shall be deemed
equivalent to the notice required to be given to such stockholder, director,
officer, employee or agent. Neither the business nor the purpose of any meeting
need be specified in such a waiver.
DATED: September 29, 1999
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Exhibit 10.40
LEASE
FROM:
CALI AIRPORT REALTY ASSOCIATES, L.P.
LESSOR
TO:
BLUESTONE SOFTWARE, INC.
LESSEE
BUILDING:
AIRPORT BUSINESS CENTER
300 STEVENS DRIVE
LESTER, PENNSYLVANIA
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. DESCRIPTION 3
2. TERM 3
3. BASIC RENT 4
4. USE AND OCCUPANCY 4
5. CARE AND REPAIR OF PREMISES 4
6. ALTERATIONS, ADDITIONS OR IMPROVEMENTS 5
7. ACTIVITIES INCREASING FIRE INSURANCE RATES 7
8. ASSIGNMENT AND SUBLEASE 7
9. COMPLIANCE WITH RULES AND REGULATIONS 10
10. DAMAGES TO BUILDING/WAIVER OF SUBROGATION 10
11. EMINENT DOMAIN 11
12. INSOLVENCY OF LESSEE 11
13. LESSEE'S DEFAULT 11
14. LESSOR'S REMEDIES ON DEFAULT 11
15. SUBORDINATION OF LEASE 15
16. SECURITY DEPOSIT 15
17. RIGHT TO CURE LESSEE'S BREACH 17
18. MECHANIC'S LIENS 17
19. RIGHT TO INSPECT AND REPAIR 17
20. SERVICES TO BE PROVIDED BY LESSOR/LESSOR'S EXCULPATION 17
21. INTERRUPTION OF SERVICES OR USE 18
22. BUILDING STANDARD OFFICE ELECTRICAL SERVICE 18
23. ADDITIONAL RENT 20
24. LESSEE'S ESTOPPEL 23
25. HOLDOVER TENANCY 23
26. RIGHT TO SHOW PREMISES 23
27. LESSOR'S WORK - LESSEE'S DRAWINGS 23
28. WAIVER OF TRIAL BY JURY 23
29. LATE CHARGE 24
30. LESSEE'S INSURANCE 24
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
31. NO OTHER REPRESENTATIONS 26
32. QUIET ENJOYMENT 26
33. INDEMNITY 26
34. PARAGRAPH HEADINGS 26
35. APPLICABILITY TO HEIRS AND ASSIGNS 26
36. OUTSIDE PARKING SPACES 26
37. LESSOR'S LIABILITY FOR LOSS OF PROPERTY 26
38. PARTIAL INVALIDITY 27
39. LESSEE'S BROKER 27
40. PERSONAL LIABILITY 27
41. NO OPTION 27
42. DEFINITIONS 27
43. LEASE COMMENCEMENT 28
44. NOTICES 28
45. ACCORD AND SATISFACTION 29
46. EFFECT OF WAIVERS 29
47. LEASE CONDITION 29
48. MORTGAGEE'S NOTICE AND OPPORTUNITY TO CURE 29
49. LESSOR'S RESERVED RIGHT 29
50. CORPORATE AUTHORITY 29
51. INTENTIONALLY OMITTED 29
52. LESSEE'S RELOCATION 29
53. BUILDING PERMIT 30
54. INTENTIONALLY OMITTED 30
55. USE AND OCCUPANCY TAX AND MISCELLANEOUS TAXES 30
56. APPRAISAL, FAIR MARKET VALUE 31
57. RIGHT OF FIRST OFFER 31
58. ARBITRATION 32
</TABLE>
<PAGE>
THIS LEASE is made the 29 day of October, 1999, between CALI AIRPORT
REALTY ASSOCIATES, L.P. ("Lessor") whose address is c/o Mack-Cali Realty
Corporation, 11 Commerce Drive, Cranford, New Jersey 07016 and BLUESTONE
SOFTWARE, INC. ("Lessee") whose address is 100 Briggs Road, Mt. Laurel, New
Jersey 08054.
PREAMBLE
BASIC LEASE PROVISIONS AND DEFINITIONS
In addition to other terms elsewhere defined in this Lease, the following terms
whenever used in this Lease shall have only the meanings set forth in this
section, unless such meanings are expressly modified, limited or expanded
elsewhere herein.
1. ADDITIONAL RENT shall mean all sums in addition to Fixed Basic Rent
payable by Lessee to Lessor pursuant to the provisions of the Lease.
2. BASE PERIOD COSTS shall mean the following:
A. Base Operating Costs: Those Operating Costs incurred during
Calendar Year 1999.
B. Base Real Estate Taxes: Those Real Estate Taxes incurred during
Calendar Year 1999.
C. Base Utility and Energy Costs: 0. See Section 22.a.
3. BUILDING shall mean 300 Stevens Drive.
4. BUILDING HOLIDAYS shall be those shown on Exhibit E.
5. BUILDING HOURS shall be Monday through Friday, 8:00 a.m. to 6:00 p.m.,
and on Saturdays from 8:00 a.m. to 1:00 p.m., but excluding those
holidays as set forth on Exhibit E attached hereto and made a part
hereof, except that Common Facilities, lighting in the Building and
Office Building Area shall be maintained for such additional hours as,
in Lessor's sole judgement, is necessary or desirable to insure proper
operating of the Building and Office Building Area.
6. COMMENCEMENT DATE is January 1, 2000, and shall for purposes hereof be
subject to Articles 27 and 43 hereof.
7. CONSTRUCTION ALLOWANCE shall mean Four Hundred Seventy-Nine Thousand
One Hundred Forty Dollars ($479,140) which amount is the product of
Twenty Dollars ($20) multiplied by the gross rentable square feet in
the Premises, which is stipulated by the parties to be 23,957 gross
rentable square feet.
8. DEMISED PREMISES OR PREMISES shall from the Commencement Date through
midnight on May 31, 2000, be deemed to be 15,000 gross rentable square
feet on the 3rd floor of the Building identified and shown as Phase 1
on Exhibit A-1 hereto (such space is sometimes hereinafter referred to
as the "Phase 1 Space"). From 12:01 a.m. on June 1, 2000, through the
end of the Term, "Demised Premises" or "Premises" shall mean the Phase
1 Space plus 8,957 gross rentable square feet on the 3rd floor of the
Building identified and shown as Phase 2 on Exhibit A-1 hereto (such
space is sometimes hereinafter referred to as the "Phase 2 Space"). The
combined gross rentable square feet of the Phase 1 Space and the Phase
2 Space is 23,957, all more fully shown on Exhibit A hereto. The
Demised Premises or Premises includes an allocable share of the Common
Facilities as defined in Article 42(b).
9. EXHIBITS shall be the following, attached to this Lease and
incorporated herein and made a part hereof.
Exhibit A Location of Premises
Exhibit A-1 Phase 1 Space and Phase 2 Space
Exhibit A-2 Office Building Area
<PAGE>
Exhibit B Rules and Regulations
Exhibit C Lessor's Work
Exhibit C-1 Air Conditioning &
Heating Design Standards
Exhibit D Cleaning Services
Exhibit E Building Holidays
Exhibit F Tenant Estoppel Certificate
Exhibit G Commencement Date Agreement
Exhibit H Form of Letter of Credit
Schedule 1 Rent Schedule
10. EXPIRATION DATE shall be the last day of the month that is the
ninetieth (90th) month after the month in which the Commencement Date
occurs.
11. FIXED BASIC RENT shall mean: FOUR MILLION FIVE HUNDRED SIXTEEN THOUSAND
ONE HUNDRED SIXTY-THREE DOLLARS AND TWENTY-FIVE CENTS ($4,516,163.25)
for the Term payable as shown on Schedule 1 hereto.
12. LESSEE'S BROKER shall mean Insignia/ESG Jackson-Cross Company.
13. LESSEE'S PERCENTAGE shall be (i) from the Commencement Date through May
31, 2000, 22.06%; and (ii) from 12:01 on June 1, 2000 through the end
of the Term, 35.23%, subject to adjustment as provided for in Article
42(d).
14. OFFICE BUILDING AREA is as set forth on Exhibit A-2.
15. PARKING SPACES shall mean a total of ninety-eight (98) spaces as
follows:
Assigned: N/A
Unassigned: Ninety-eight (98)
Garage: N/A
16. PERMITTED USE shall be general office use and for no other purpose.
17. SECURITY DEPOSIT shall be as defined in Article 16.
18. TERM shall mean seven (7) years and six (6) months from the
Commencement Date, plus the number of days to have the lease expire on
the last day of a calendar month, unless extended pursuant to any
option contained herein.
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<PAGE>
W I T N E S S E T H
For and in consideration of the covenants herein contained, and
upon the terms and conditions herein set forth, Lessor and Lessee agree as
follows:
1. DESCRIPTION: Lessor hereby leases to Lessee, and Lessee hereby hires
from Lessor, the Premises as defined in the Preamble which includes an
allocable share of the Common Facilities, as shown on the plan or
plans, initialed by the parties hereto, marked Exhibit A attached
hereto and made part of this Lease in the Building as defined in the
Preamble, (hereinafter called the "Building") which is situated on that
certain parcel of land (hereinafter called "Office Building Area") as
described on Exhibit A-2 attached hereto and made part of this Lease,
together, with the right to use in common with other lessees of the
Building, their invitees, customers and employees, those public areas
of the Common Facilities as hereinafter defined.
2. TERM:
a. The Phase 1 Space is leased for a term to commence on the
Commencement Date, and to end at 12:00 midnight on the Expiration
Date, all as defined in the Preamble. The Phase 2 Space is leased
for a term to commence on June 1, 2000 (the "Phase 2 Commencement
Date"), and to end at 12:00 midnight on the Expiration Date, all
as defined in the Preamble. Lessee agrees not to occupy the Phase
2 Space until the Phase 2 Commencement Date. On the Phase 2
Commencement Date the Phase 2 Space shall become part of the
Demised Premises and the rights, duties and obligations of the
parties with respect to the Phase 2 Space shall be governed by the
terms of this Lease, without the need for any further instrument
or action by the parties. Lessee acknowledges that it is obligated
by this Lease to take and let from Lessor the Phase 1 Space and
the Phase 2 Space.
b. Provided Lessee is not in default under this Lease (after any
applicable notice and lapse of applicable cure periods) and
provided that Lessee has not subleased more than twenty-five
percent (25%) of the Demised Premises or assigned this Lease, as
of the date of exercise or the commencement of the renewal term
("Renewal Term Commencement Date"), Lessee shall have the option
to renew this Lease ("Renewal Option") for the entire Demised
Premises not previously subleased by Lessee for one period of five
(5) years ("Renewal Term"), exercisable by giving written notice
("Renewal Notice") to Lessor of its exercise of the Renewal Option
at least twelve (12) months prior to the Expiration Date. Upon
receiving the Renewal Notice, Lessor shall determine the Fair
Market Rental Rate (as defined in Article 56) for the Premises as
of the Renewal Term Commencement Date in accordance with Section
2.c and shall notify Lessee of such Fair Market Rental Rate at
least nine (9) months prior to the expiration of the initial Term
of this Lease. The Renewal Option is and shall be limited to those
portions of the Demised Premises physically occupied by Lessee and
shall not cover, extend to or be applicable with respect to any
portion of the Demised Premises subleased by Lessee at either the
date of the Renewal Notice or on the Renewal Term Commencement
Date (the "Excluded Space"). Notwithstanding any exercise of the
Renewal Option by Lessee, the Term of this Lease with respect to
the Excluded Space shall end and terminate on the Expiration Date.
c. The initial annual Fixed Basic Rent payable hereunder for the
Premises during the Renewal Term shall be the Fair Market Rental
Rate (as defined in SECTION 56.A) as of the Renewal Term
Commencement Date. The Fair Market Rental Rate shall be initially
reasonably determined by Lessor in accordance with the standards
set forth in Article 56.
d. The Fixed Basic Rent during the Renewal Term shall be adjusted
annually by fifty cents ($.50) per rentable square feet of space
then comprising the Demised Premises.
e. The Renewal Option set forth in this Article 2 is personal to
Tenant and may not be assigned, transferred or conveyed to any
party without the prior written consent of
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<PAGE>
Lessor.
f. Notwithstanding the grant of the Renewal Option set forth in this
Article 2, Lessor shall have the right and option following
receipt of a Renewal Notice to relocate Lessee and change the
location of the Premises in accordance with the provisions of
Article 52 ("Relocation Option"), or, if in Lessor's sole judgment
alternative space within the Airport Business Center is not
available for such relocation, to revoke, rescind and terminate
the Renewal Option and any exercise thereof by Lessee ("Revocation
Option"), exercisable by giving written notice ("Lessor's Notice")
to Lessee of its exercise of the Relocation Option or the
Revocation Option, as the case may be, at least eleven (11) months
prior to the Expiration Date. In the event Lessor exercises its
Relocation Option, Lessee may elect to reject the proposed
Substituted Leased Premises by giving written notice to Lessor of
such rejection within fifteen (15) days after Lessee's receipt of
Lessor's Notice ("Lessee's Rejection Notice"). In the event Lessor
exercises its Revocation Option, or if Lessee timely provides to
Lessor a Lessee's Rejection Notice, then Lessor shall pay to
Lessee, within sixty (60) days after the issuance by Lessor to
Lessee of the Revocation Notice a fee in the amount of One Hundred
Fifty Thousand Dollars ($150,000).
3. BASIC RENT: The Lessee shall pay to the Lessor during the Term, the
Fixed Basic Rent as defined in the Preamble (hereinafter called "Fixed
Basic Rent") payable in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment
of public and private debts. The Fixed Basic Rent shall accrue at the
Yearly Rate as shown on Schedule 1 and shall be payable, in advance, on
the first day of each calendar month during the Term at the Monthly
Installments as shown on Schedule 1, except that a proportionately
lesser sum may be paid for the first and last months of the Term of
this Lease if the Term commences on a day other than the first day of
the month, in accordance with the provisions of this Lease herein set
forth. Lessor acknowledges receipt from Lessee of the first monthly
installment by check, subject to collection, for Fixed Basic Rent for
the first month of the Lease Term. Lessee shall pay Fixed Basic Rent,
and any Additional Rent as hereinafter provided, to Lessor at Lessor's
above stated address, or at such other place as Lessor may designate in
writing, without demand and without counterclaim, deduction or set off.
4. USE AND OCCUPANCY: Lessee shall use and occupy the Premises for the
Permitted Use as defined in the Preamble.
If at any time during the Term of this Lease, Lessee adopts a policy
prohibiting Lessee, its employees, agents or invitees from smoking
within the Premises, Lessee shall establish a designated area with in
the Premises where Lessee shall permit smoking. Lessee shall establish
such designated area at Lessee's sole expense in accordance with
Article 6 of this Lease. Such designated area shall include, among
other things, adequate area, ventilation and fire safety equipment.
Lessee hereby acknowledges that such designated area is necessary and
reasonable to prevent smoking by Lessee, Lessee's employees, agents and
invitees in unauthorized areas of the Building or Common Facilities in
violation of relevant fire and safety laws and regulations and to
prevent fire hazards within the Premises.
5. CARE AND REPAIR OF PREMISES: Lessee shall commit no act of waste and
shall take good care of the Premises and the fixtures and appurtenances
therein, and shall, in the use and occupancy of the Premises, conform
to all laws, orders and regulations of the federal, state and municipal
governments or any of their departments affecting the Premises and with
any and all environmental requirements resulting from the Lessee's use
of the Premises, this covenant to survive the expiration or sooner
termination of the Lease. Lessor shall, subject to the same being
included in Operating Costs, make all necessary repairs to the
Premises, Common Facilities and to the assigned parking areas, if any,
except where the repair has been made necessary by misuse or neglect by
Lessee or Lessee's agents, servants, visitors or licensees, in which
event Lessor shall nevertheless make the repair but Lessee shall pay to
Lessor, as Additional Rent, immediately upon demand, the costs
therefor. All improvements made by Lessee to the Premises, which are so
attached to the Premises, shall become the property of Lessor upon
installation. Not later than the last day of the Term, Lessee shall, at
Lessee's expense, remove all Lessee's personal property and those
improvements made by
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<PAGE>
Lessee which have not become the property of Lessor, including trade
fixtures, cabinetwork, movable paneling, partitions and the like;
repair all injury done by or in connection with the installation or
removal of said property and improvements; and surrender the Premises
in as same condition as they were at the beginning of the Term,
reasonable wear and damage by fire, the elements, casualty or other
cause not due to the misuse or neglect by Lessee, Lessee's agents,
servants, visitors or licensees excepted. All other property of Lessee
remaining on the Premises after the last day of the Term of this Lease
shall be conclusively deemed abandoned and may be removed by Lessor,
and Lessee shall reimburse Lessor for the cost of such removal. Lessor
may have any such property stored at Lessee's risk and expense.
Lessee shall not generate, handle, dispose, bring, store or discharge
or permit the generation, handling, disposal, bringing, storage or
discharge of any hazardous substances or wastes (collectively,
"Hazardous Materials") in, upon or about the Premises, the Building or
the Office Building Area in violation of any laws and/or requirements
of public authorities (hereinafter collectively referred to as
"Prohibited Actions"). Lessee shall indemnify and hold Lessor harmless
against any and all loss, cost, damage, liability or expense (including
without limitation, attorney's fees, and disbursements) which Lessor
may sustain or incur as a result of any Prohibited Actions. Lessee
shall have no liability with respect to any Prohibited Action that
occurred, or the presence of any Hazardous Materials in the Premises,
Building or Office Building Area which existed, prior to the
Commencement Date, unless caused by the acts or omissions of Lessee,
its employees, agents or contractors.
6. ALTERATIONS, ADDITIONS OR IMPROVEMENTS:
a. Lessee shall not, without first obtaining the written consent of
Lessor, make any alterations, additions or improvements in, to or
about the Premises.
b. Provided that the proposed alteration, addition or improvement
does not in Landlord's judgment involve any modification to the
Building's exterior or its structural, mechanical, HVAC,
electrical, or plumbing systems or components, or require the
issuance of a building permit by Tinicum Township under its
applicable codes, rules and ordinances such approval shall not be
unreasonably withheld or delayed, but may be conditioned upon
compliance with reasonable requirements of Lessor, including
without limitation, the filing of mechanics' lien waivers by
Lessee's contractors and the submission of written evidence of
adequate insurance coverage naming Lessor as an additional insured
thereunder, and the removal of such from, and the restoration of,
the Demised Premises at the end of the Term.
c. Lessor may withhold its approval in its absolute and sole
discretion with respect to each such alteration, addition or
improvement which Lessor determines involved any modification to
the Building's exterior or its structural, electrical, mechanical,
HVAC or plumbing systems or any components thereof.
d. Lessee shall not permit any lien to be filed against the Premises
or the Building, or the Building Area or Lessor's interest therein
or permit any financing statement or statements to be filed with
respect to any of the foregoing alterations, additions or
improvements made by Lessee and all fixtures attached to the
Premises (other than Lessor's trade and business fixtures and
equipment) shall, unless Lessor gives Lessee notice to remove
them, remain at the Premises at the expiration or sooner
termination of this Lease and become the property of Lessor
without payment therefor or, at Lessor's option, after notice to
Lessee, any or all of the foregoing which may be designated by
Lessor in such removal notice shall be removed at the sole cost of
Lessee, before such expiration or sooner termination and in such
event, Lessee shall repair all damage to the Premises caused by
the installation or removal thereof, and shall restore the
Premises to its original improved condition (ordinary wear and
tear excepted), on or before the expiration or termination of this
Lease. Should Lessee fail to remove the same or restore the
Premises, Lessor may cause same to be removed and/or the Premises
to be restored at Lessee's expense, and Lessee hereby agrees to
pay for Lessor the actual cost of such removal and/or restoration,
together with any and all damages which Lessor may suffer and
sustain by reason of the
5
<PAGE>
failure of Lessee to remove the same and/or restore the Premises
as herein provided.
e. All such alterations, additions or improvements shall be performed
at Lessee's cost by Lessor or one or more contractors reasonably
approved by Lessor and Lessee, and shall be subject to all
applicable requirements of Exhibit C hereof.
6
<PAGE>
7. ACTIVITIES INCREASING FIRE INSURANCE RATES: Lessee shall not do or
suffer anything to be done on the Premises which will increase the rate
of fire insurance on the Building.
8. ASSIGNMENT AND SUBLEASE: Provided Lessee is not in default of any
provisions of this Lease, Lessee may assign or sublease the within
Lease to any party subject to the following:
a. In the event Lessee desires to assign this Lease or sublease all
or part of the Premises to any other party, the terms and
conditions of such assignment or sublease shall be communicated to
the Lessor in writing prior to the effective date of any such
sublease or assignment, and, prior to such effective date, the
Lessor shall have the option, exercisable in writing to the
Lessee, to: (i) sublease such space from Lessee at the lower rate
of (a) the rental rate per rentable square foot of Fixed Basic
Rent and Additional Rent then payable pursuant to this Lease or
(b) the terms set forth in the proposed sublease, (ii) recapture
in the case of subletting, that portion of the Premises to be
sublet or all of the Premises in the case of an assignment
("Recapture Space") so that such prospective sublessee or assignee
shall then become the sole lessee of Lessor hereunder, or (iii)
recapture the Recapture Space for Lessor's own use and the within
Lessee shall be fully released from any and all obligations
hereunder with respect to the Recapture Space.
b. In the event that the Lessor elects not to recapture the Lease as
hereinabove provided, the Lessee may nevertheless assign this
Lease or sublet the whole or any portion of the Premises, subject
to the Lessor's prior written consent, which consent shall not be
unreasonably withheld, on the basis of the following terms and
conditions:
i. The Lessee shall provide to the Lessor the name and
address of the assignee or sublessee.
ii. The assignee or sublessee shall assume, by written
instrument, all of the obligations of this Lease, and a
copy of such assumption agreement shall be furnished to
the Lessor within ten (10) days of its execution. Any
sublease shall expressly acknowledge that said
sublessee's rights against Lessor shall be no greater
than those of Lessee. Lessee further agrees that
notwithstanding any such subletting, no other and
further subletting of the Premises by Lessee or any
person claiming through or under Lessee shall or will be
made except upon compliance with and subject to the
provisions of this Article 8.
iii. Each sublease shall provide that it is subject and
subordinate to this Lease and to the matters to which
this Lease is or shall be subordinate, and that in the
event of default by Lessee under this Lease, Lessor may,
at its option, take over all of the right, title and
interest of Lessee, as sublessor, under such sublease,
and such sublessee shall, at Lessor's option, attorn to
Lessor pursuant to the then executory provisions of such
sublease, except that Lessor shall not (i) be liable for
any previous act or omission of Lessee under such
sublease or, (ii) be subject to any offset not expressly
provided in such sublease which theretofore accrued to
such sublease to which Lessor has not specifically
consented in writing or by any previous prepayment of
more than one month's rent.
iv. The Lessee and each assignee shall be and remain liable
for the observance of all the covenants and provisions
of this Lease, including, but not limited to, the
payment of Fixed Basic Rent and Additional Rent reserved
herein, through the entire Term of this Lease, as the
same may be renewed, extended or otherwise modified.
v. The Lessee and any assignee shall promptly pay to Lessor
any consideration received for any assignment and/or all
of the rent, as and when received, in excess of the Rent
required to be paid by Lessee for the area sublet
computed on the basis of an average square foot rent for
the gross square footage Lessee has leased.
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vi. In any event, the acceptance by the Lessor of any rent
from the assignee or from any of the subtenants or the
failure of the Lessor to insist upon a strict
performance of any of the terms, conditions and
covenants herein shall not release the Lessee herein,
nor any assignee assuming this Lease, from any and all
of the obligations herein during and for the entire Term
of this Lease.
vii. Lessor shall require a FIVE HUNDRED AND 00/100 DOLLAR
($500.00) payment to cover its handling charges for each
request for consent to any sublet or assignment prior to
its consideration of the same. Lessee acknowledges that
its sole remedy with respect to any assertion that
Lessor's failure to consent to any sublet or assignment
is unreasonable shall be the remedy of specific
performance and Lessee shall have no other claim or
cause of action against Lessor as a result of Lessor's
actions in refusing to consent thereto.
c. If Lessee is a corporation other than a corporation whose stock is
listed and traded on a nationally recognized stock exchange, the
provisions of Subsection 8a. shall apply to a transfer (however
accomplished, whether in a single transaction or in a series of
related or unrelated transactions) of stock (or any other
mechanism such as, by way of example, the issuance of additional
stock, a stock voting agreement or change in class(es) of stock)
which results in a change of control of Lessee as if such transfer
of stock (or other mechanism) which results in a change of control
of Lessee were an assignment of this Lease, and if Lessee is a
partnership or joint venture, said provisions shall apply with
respect to a transfer (by one or more transfers) of an interest in
the distributions of profits and losses of such partnership or
joint venture (or other mechanism, such as, by way of example, the
creation of additional general partnership or limited partnership
interests) which results in a change of control of such a
partnership or joint venture, as if such transfer of an interest
in the distributions of profits and losses of such partnership or
joint venture which results in a change of control of such
partnership or joint venture were an assignment of this Lease; but
said provisions shall not apply to transactions with a corporation
into or with which Lessee is merged or consolidated or to which
all or substantially all of Lessee's assets are transferred or to
any corporation which controls or is controlled by Lessee or is
under common control with Lessee, provided that in the event of
such merger, consolidation or transfer of all or substantially all
of Lessee's assets (i) the successor to Lessee has a net worth
computed in accordance with generally accepted accounting
principles at least equal to the greater of (1) the net worth of
Lessee immediately prior to such merger, consolidation or
transfer, or (2) the net worth of Lessee herein named on the date
of this Lease, and (ii) proof satisfactory to Lessor of such net
worth shall have been delivered to Lessor at least 10 days prior
to the effective date of any such transaction.
d. In the event that any or all of Lessee's interest in the Premises
and/or this Lease is transferred by operation of law to any
trustee, receiver, or other representative or agent of Lessee, or
to Lessee as a debtor in possession, and subsequently any or all
of Lessee's interest in the Premises and/or this Lease is offered
or to be offered by Lessee or any trustee, receiver, or other
representative or agent of Lessee as to its estate or property
(such person, firm or entity being hereinafter referred to as the
"Grantor", for assignment, conveyance, lease, or other disposition
to a person, firm or entity other than Lessor (each such
transaction being hereinafter referred to as a "Disposition"), it
is agreed that Lessor has and shall have a right of first refusal
to purchase, take, or otherwise acquire, the same upon the same
terms and conditions as the Grantor thereof shall accept upon such
Disposition to such other person, firm, or entity; and as to each
such Disposition the Grantor shall give written notice to Lessor
in reasonable detail of all of the terms and conditions of such
Disposition within twenty (20) days next following its
determination to accept the same but prior to accepting the same,
and Grantor shall not make the Disposition until and unless Lessor
has failed or refused to accept such right of first refusal as to
the Disposition, as set forth herein.
Lessor shall have sixty (60) days next following its receipt of
the written notice as to such Disposition in which to exercise the
option to acquire Lessee's interest by
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such Disposition, and the exercise of the option by Lessor shall
be effected by notice to that effect sent to the Grantor; but
nothing herein shall require Lessor to accept a particular
Disposition or any Disposition, nor does the rejection of any one
such offer of first refusal constitute a waiver or release of the
obligation of the Grantor to submit other offers hereunder to
Lessor. In the event Lessor accept such offer of first refusal,
the transaction shall be consummated pursuant to the terms and
conditions of the Disposition described in the notice to Lessor.
In the event Lessor rejects such offer of first refusal, Grantor
may consummate the Disposition with such other person, firm, or
entity; but any decrease in price of more than two percent (2%) of
the price sought from Lessor or any change in the terms of payment
for such Disposition shall constitute a new transaction requiring
a further option of first refusal to be given to Lessor hereunder.
e. Without limiting any of the provisions of Articles 12 and 13, if
pursuant to the Federal Bankruptcy Code (herein referred to as the
"Code"), or any similar law hereafter enacted having the same
general purpose, Lessee is permitted to assign this Lease
notwithstanding the restrictions contained in this Lease, adequate
assurance of future performance by an assignee expressly permitted
under such Code shall be deemed to mean the deposit of cash
security in an amount equal to the sum of one year's Fixed Basic
Rent plus an amount equal to the Additional Rent for the calendar
year preceding the year in which such assignment is intended to
become effective, which deposit shall be held by Lessor for the
balance of the Term, without interest, as security for the full
performance of all of Lessee's obligations under this Lease, to be
held and applied in the manner specified for security in Article
16.
f. Except as specifically set forth above, no portion of the Premises
or of Lessee's interest in this Lease may be acquired by any other
person or entity, whether by assignment, mortgage, sublease,
transfer, operation of law or act of the Lessee, nor shall Lessee
pledge its interest in this Lease or in any security deposit
required hereunder.
9. COMPLIANCE WITH RULES AND REGULATIONS: Lessee shall observe and comply
with the rules and regulations hereinafter set forth in Exhibit B
attached hereto and made a part hereof and with such further reasonable
rules and regulations of general applicability to all tenants in the
Building as Lessor may prescribe, on written notice to the Lessee, for
the safety, care and cleanliness of the Building and the comfort, quiet
and convenience of other occupants of the Building. Lessee shall not
place a load upon any floor of the Premises exceeding the floor load
per square foot area which it was designed to carry and which is
allowed by law. Lessor reserves the right to prescribe the weight and
position of all safes, business machines and mechanical equipment. Such
installations shall be placed and maintained by Lessee, at Lessee's
expense, in settings sufficient, in Lessor's judgement, to absorb and
prevent vibration, noise and annoyance.
10. DAMAGES TO BUILDING: If the Building is damaged by fire or any other
cause to such extent the cost of restoration, as reasonably estimated
by Lessor, will equal or exceed thirty- five percent (35%) of the
replacement value of the Building (exclusive of foundations) just prior
to the occurrence of the damage, then Lessor may, no later than the
sixtieth (60th) day following the date of damage, give Lessee a notice
of election to terminate this Lease, or if the cost of restoration will
equal or exceed fifty percent (50%) of such replacement value and if
the Premises shall not be reasonably usable for the purpose for which
they are leased hereunder, then Lessee may, no later than the sixtieth
(60th) day following the date of damage, give Lessor a notice of
election to terminate this Lease. In either said event of election,
this Lease shall be deemed to terminate on the thirtieth (30th) day
after the giving of said notice, and Lessee shall surrender possession
of the Premises within a reasonable time thereafter, and the Fixed
Basic Rent, and any Additional Rent, shall be apportioned as of the
date of said damage and any Fixed Basic Rent or Additional Rent paid
for any period beyond said date shall be repaid to Lessee. If the cost
of restoration shall not entitle Lessor to terminate this Lease, or if,
despite the cost, Lessor does not elect to terminate this Lease, Lessor
shall restore the Building and the Premises with reasonable promptness,
subject to Force Majeure, and Lessee shall have no right to terminate
this Lease. Lessor need not restore fixtures and improvements owned or
installed by Lessee.
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In any case in which use of the Premises is affected by any damage to
the Building, there shall be either an abatement or an equitable
reduction in Fixed Basic Rent, depending on the period for which and
the extent to which the Premises are not reasonably usable for the
purpose for which they are leased hereunder. The words "restoration"
and "restore" as used in this Article 10 shall include repairs. If the
damage results from the fault of the Lessee, Lessee's agents, servants,
visitors or licensees, Lessee shall not be entitled to any abatement
or reduction in Fixed Basic Rent, except to the extent of any rent
insurance received by Lessor.
11. EMINENT DOMAIN: If Lessee's use of the Premises is materially affected
due to the taking by eminent domain of (a) the Premises or any part
thereof or any estate therein; or (b) any other part of the Building;
then, in either event, this Lease shall terminate on the date when
title vests pursuant to such taking. The Fixed Basic Rent, and any
Additional Rent, shall be apportioned as of said termination date and
any Fixed Basic Rent or Additional Rent paid for any period beyond said
date, shall be repaid to Lessee. Lessee shall not be entitled to any
part of the award for such taking or any payment in lieu thereof, and
Lessee hereby assigns to Lessor any and all right, title and interest
of Lessee now or hereafter arising in or to any such award or any part
thereof and hereby waives all rights against Lessor and the condemning
authority, but Lessee may file a separate claim for any taking of
fixtures and improvements owned by Lessee which have not become the
Lessor's property, and for moving expenses, provided the same shall, in
no way, affect or diminish Lessor's award. In the event of a partial
taking which does not effect a termination of this Lease but does
deprive Lessee of the use of a portion of the Premises, there shall
either be an abatement or an equitable reduction of the Fixed Basic
Rent, and an equitable adjustment reducing the Base Period Costs as
hereinafter defined depending on the period for which and the extent to
which the Premises so taken are not reasonably usable for the purpose
for which they are leased hereunder.
12. INSOLVENCY OF LESSEE: Either (a) the appointment of a receiver to take
possession of all or substantially all of the assets of Lessee, or, (b)
a general assignment by Lessee for the benefit of creditors, or, (c)
any action taken or suffered by Lessee under any insolvency or
bankruptcy act, shall constitute a default of this Lease by Lessee, and
Lessor may terminate this Lease forthwith and upon notice of such
termination Lessee's right to possession of the Premises shall cease,
and Lessee shall then quit and surrender the Premises to Lessor but
Lessee shall remain liable as hereinafter provided in Article 14
hereof.
13. LESSEE'S DEFAULT: A breach of this Lease shall have occurred if Lessee
defaults in the payment of Fixed Basic Rent, or any Additional Rent, or
defaults in the performance of any of the other duties, obligations,
covenants and conditions hereof or permits the Premises to become
deserted, abandoned or vacated, if Lessee does not cure any Fixed Basic
Rent or Additional Rent default or a default under any of Articles 18
or 30 within five (5) business days after receiving notice from Lessor
of such default or, if Lessee does not cure any other default within
thirty (30) days after receiving notice from Lessor of such default (or
if such other default is of such nature that it cannot be completely
cured within such period, if Lessee does not commence such curing
within such fifteen (15) days and thereafter proceed with reasonable
diligence and in good faith to cure such default) (each, an "Event of
Default").
14. LESSOR'S REMEDIES
a. Upon the occurrence of any Event of Default, Lessor, at its
option, and without notice or other act, may exercise any and all
rights and remedies at law and/or in equity under the Lease
including, without limitation, all or any one or more of the
following actions:
1. Lessor may cure for the account of Lessee any such
Event of Default of Lessee and immediately recover as
Additional Rent any reasonable expenditures made and the
amount of any obligations incurred in connection
therewith, plus interest from the date of any such
expenditure equal to the lesser of (A) the greater of
(i) twelve percent (12%) per annum, or (ii) the prime
rate published in the Wall Street Journal (the "Prime
Rate") on the date of such expenditure plus four hundred
(400) basis points, or (B) the
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maximum amount or rate that Lessor may lawfully charge
Lessee in the circumstances if such a maximum exists; or
2. Lessor shall be entitled to terminate this Lease and
recover as a calculation of its lost profits, all Fixed
Basic Rent, Additional Rent, and other rent which has
accrued prior to the date of said Event of Default and
which is due for the balance of the Term and declare the
same to be immediately due and payable. It is agreed
that in determining the amount of any future payments
due Lessor of Lessee's Percentage of Operating Costs
Escalation, Utility and Energy Costs Escalation and Tax
Escalation Costs, Lessor may make such determination
based upon the sum thereof for the full Lease Year
immediately prior to the Event of Default. The sum set
forth above as aforesaid shall be discounted to present
value at the lower of (a) the Prime Rate in effect on
the date of such termination; or (b) six percent (6%)
(the "Lost Profit Sum"). Contemporaneously with the
demand for such Lost Profit Sum, this Lease shall be
deemed terminated and Lessee shall immediately quit and
surrender to Lessor the Premises in accordance with (4)
below. Lessee's liability for the payment of the Lost
Profit Sum shall survive the termination of the Lease;
or
3. Accelerate the whole or any part of the rent for the
entire unexpired balance of the Term (or such part
thereof as Lessor determines), as well as all other
charges, payments, costs and expenses herein agreed to
be paid by Lessee, and any rent or other charges,
payments, costs and expenses if so accelerated shall, in
addition to any and all installments of rent already due
and payable and in arrears, and any other charge or
payment herein reserved, included or agreed to be
treated or collected as rent and any other charge,
expense or cost herein agreed to be paid by Lessee which
may be due and payable and in arrears, be deemed due and
payable as if, by the terms and provisions of this
Lease, such accelerated rent and other charges,
payments, costs and expenses were on that date payable
in advance. Such sum is hereinafter referred to as the
"Accelerated Rent". For such purposes, all items of the
Additional Rent component of the Accelerated Rent,
Lessor may make a determination based upon such sums for
the full Lease Year immediately prior to the event of
default, or otherwise in Lessor's reasonable judgment;
or
4. Lessor, at its option, may serve notice upon Lessee
that this Lease and the then unexpired Term hereof shall
cease and expire and become absolutely void on the date
specified in such notice, to be no less than ten (10)
days after the receipt thereof by Lessee, without any
right on the part of the Lessee thereafter to save the
forfeiture by payment of any sum due or by the
performance of any term, provision, covenant, agreement
or condition broken; and, thereupon and at the
expiration of the time limit in such notice, this Lease
and the Term hereof granted, as well as the right, title
and interest of the Lessee hereunder, shall wholly cease
and expire and become void in the same manner and with
the same force and effect (except as to Lessee's
liability) as if the date fixed in such notice were the
date herein stated for expiration of the Term.
Thereupon, Lessee shall immediately quit and surrender
to Lessor the Premises by summary proceedings, detainer,
ejectment or otherwise and remove itself and all other
occupants thereof and, at Lessor's option, any property
thereon without being liable to indictment, prosecution
or damages therefor. No such expiration or termination
of this Lease shall relieve Lessee of the liabilities
and obligations under this Lease, whether or not the
Premises shall be relet, all of which shall survive such
expiration or termination; or
5. Lessor may, at any time after the occurrence of any
Event of Default, whether or not the Lease has been
terminated as aforesaid, re-enter and repossess the
Premises and any part thereof with or without process of
law, provided no undue force shall be used, and shall
have the option, but not the obligation either in its
own name, as agent for Lessee if this Lease has not
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been terminated or for its own behalf if this Lease has
been terminated, to relet all or any part of the
Premises; provided that Lessor shall not be required to
accept any tenant proposed by Lessee or observe any
instruction given by Lessee about such reletting. The
failure of Lessor to relet the Premises or any part or
parts thereof shall not release or affect Lessee's
liability hereunder, nor shall Lessor be liable for
failure to relet, or in the event of reletting, for
failure to collect the rent thereof, and in no event
shall Lessee be entitled to receive any excess of net
rents collected over sums payable by Lessee to Lessor
hereunder. No such re-entry or taking possession of the
Premises shall be construed as an election on the
Lessor's part to terminate this Lease unless a written
notice of such election by Lessor is given to Lessee.
Notwithstanding any such reletting without termination,
Lessor may at any time thereafter elect to terminate
this Lease for any previous breach and default. For the
purpose of such reletting, Lessor may decorate or make
repairs, changes, alterations or additions in or to the
Premises to the extent deemed by Lessor desirable or
convenient, and the cost of such decoration, repairs,
changes, alterations or additions shall be charged to
and payable by Lessee as Additional Rent hereunder, as
well as any reasonable brokerage and legal fees expended
by Lessor; and any sums collected by Lessor from any new
tenant obtained on account of the Lessee shall be
credited against the balance of the rent due hereunder
as aforesaid. Lessee shall pay to Lessor monthly, on the
days when the rent would have been payable under this
Lease, the amount due hereunder less the amount obtained
by Lessor from such new tenant, if any; or
6. Lessor may commence one or more actions to recover
all unpaid rent including, without limitation, the
accelerated rent and/or to recover possession of the
Premises; or
7. Lessor may apply all or part of the Security Deposit.
b. Intentionally Omitted.
c. Lessor shall have the right of injunction (including, without
limitation, specific performance) in the Event of Default, to
restrain the same, and the right to invoke any remedy allowed by
law or in equity, whether or not other remedies, indemnity or
reimbursements are herein provided. The rights and remedies given
to Lessor in this Lease or at law or in equity are distinct,
separate and cumulative remedies, and no one of them, whether or
not exercised by Lessor, shall be deemed to be in exclusion of any
other.
d. Lessee expressly waives the benefits of all laws, now or hereafter
in force, exempting any of Lessee's property on the Premises or
elsewhere from distraint, levy or sale in any legal proceedings
taken by Lessor to enforce any rights under this Lease. Lessee
further waives the right of inquisition on any real estate that
may be levied upon to collect any amount which may become due
under the terms and conditions of this Lease, and does hereby
voluntarily condemn the same and authorize the prothonotary to
enter a Writ of Execution or other process upon Lessee's voluntary
condemnation, and further agrees that said real estate may be sold
on a Writ of Execution or other process. If proceedings shall be
commenced by Lessor to recover possession under the Acts of
Assembly, either at the end of the Term or any extension thereof
or on sooner termination thereof, or for non-payment of rent or
any other reason, Lessee specifically waives the right to the
three (3) months notice and/or the fifteen (15) or thirty (30)
days notice required by the Act of April 5, 1957, No. 20, and
agrees that ten (10) days notice shall be sufficient in either or
any such case. The right to enter judgment against Lessee and to
enforce all of the other provisions of this Lease hereinabove
provided for may be exercised by any assignee of Lessor's right,
title and interest in this Lease, in such assignee's own name,
notwithstanding the fact that any or all assignments of said
right, title and interest may not be executed and/or witnessed in
accordance with the Acts of Assembly and any and all laws
regulating the manner and/or form in which such assignments shall
be executed and witnessed.
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e. INTENTIONALLY OMITTED.
f. CONFESSION OF JUDGMENT - POSSESSION. Lessee covenants and agrees
that if there is an Event of Default or this Lease is terminated
or the Term or any extensions or renewals thereof is terminated or
expires, then, and in addition to the rights and remedies set
forth in this Article 14, Lessor may, without limitation, cause
judgments in ejectment for possession of the Premises to be
entered against Lessee and, for those purposes, Lessee hereby
grants the following warrant of attorney: (i) Lessee hereby
irrevocably authorizes and empowers any prothonotary, clerk of
court, attorney of any court of record and/or Lessor (as well as
some one acting for Lessor) in any and all actions commenced for
recovery of possession of the Premises to appear for Lessee and
confess or otherwise enter judgment in ejectment for possession of
the Premises against Lessee and all persons claiming directly or
indirectly by, through or under Lessee, and thereupon writ or
writs of possession and other process may forthwith issue and be
served, without any prior notice, writ or proceeding whatsoever;
(ii) if, for any reason after the foregoing action or actions
shall have been commenced, it shall be determined that possession
of the Premises should remain in or be restored to Lessee, Lessor
shall have the right to commence with respect to any continuing or
subsequent Event of Default one or more further actions as
hereinbefore set forth to recover possession of the Premises
including, without limitation, appearing for Lessee and confessing
or otherwise entering judgment for possession of the Premises as
hereinbefore set forth.
g. When this Lease or the Term or any extension or renewal thereof
shall have terminated on account of an Event of Default or
otherwise and also when the Term hereby created or any extension
or renewal thereof shall have expired, it shall be lawful for, and
Lessee hereby irrevocably authorizes and empowers, any
prothonotary, clerk or attorney of any court of record to appear
as attorney for Lessee, and in any action or actions in ejectment
against Lessee and all persons claiming directly or indirectly by,
through or under Lessee therein enter and otherwise confess
judgment for the recovery by Lessor of possession the Premises,
for which this Lease shall be sufficient warrant; thereupon, if
Lessor so desires, an appropriate writ of possession may issue
forthwith, without any prior writ or proceeding whatsoever. Lessor
may commence one or more further action or actions as hereinbefore
set forth to recover possession of the Premises, appear for Lessee
enter and otherwise confess judgment for the recovery by Lessor of
possession of the Premises as hereinbefore provided as often as
Lessor elects. The warrant of attorney herein shall not be
exhausted by any one or more exercises thereof.
THE PRIOR TWO PARAGRAPHS SET FORTH WARRANTS OF AUTHORITY FOR AN
ATTORNEY TO CONFESS JUDGMENTS AGAINST LESSEE FOR POSSESSION OF THE
PREMISES. IN GRANTING THESE WARRANTS OF ATTORNEY TO CONFESS
JUDGMENTS AGAINST LESSEE, LESSEE HEREBY KNOWINGLY, INTENTIONALLY
AND VOLUNTARILY, AND, ON THE ADVICE OF THE SEPARATE COUNSEL OF
LESSEE, UNCONDITIONALLY WAIVES ANY AND ALL RIGHTS LESSEE HAS OR
MAY HAVE WITH RESPECT TO PRIOR NOTICE (EXCEPT AS TO ANY NOTICE
REQUIRED UNDER ARTICLE 13 HEREOF) AND AN OPPORTUNITY FOR HEARING
UNDER THE RESPECTIVE CONSTITUTIONS AND LAWS OF THE UNITED STATES
AND THE COMMONWEALTH OF PENNSYLVANIA.
h. In any action or proceeding described in Subsection 14.f. and/or
Subsection 14.g., or in connection therewith, if a copy of this
Lease is therein verified by Lessor or someone acting for Lessor
to be a true and correct copy of this Lease (and such copy shall
be conclusively presumed to be true and correct by virtue of such
verification), then it shall not be necessary to file the original
of this Lease, any statute, rule of court of law, custom or
practice to the contrary notwithstanding. Lessee hereby releases
to Lessor, anyone acting for Lessor and all attorneys who may
appear for Lessee all errors in procedure regarding the entry of
judgment or judgments by confession or
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otherwise by virtue of the warrants of attorney contained in this
Lease, and all liability therefor. The right to enter judgment or
judgments by confession or otherwise by virtue of the warrants of
attorney contained in this Lease and to enforce all of the other
provisions of this Lease may be exercised by any assignee of
Lessor's right, title and interest in this Lease in such
assignee's own name, any statute, rule of court or law, custom or
practice to the contrary notwithstanding.
i. Lessee, for itself and on behalf of any and all persons claiming
through or under it (including creditors of all kinds), does
hereby waive and surrender all right and privilege which they or
any of them might have under or by reason of any present or future
law, to redeem the Premises or to have a continuance of this Lease
for the Term, as it may have been extended, after having been
dispossessed or ejected therefrom by process of law or under the
terms of this Lease or after the termination of this Lease as
herein provided.
j. The failure or delay on the part of Lessor to enforce or exercise
at any time any of the provisions, rights or remedies in the Lease
shall in no way be construed to be a waiver thereof, nor in any
way to affect the validity of this Lease or any act hereof, or the
right of the Lessor to thereafter enforce each and every such
provisions, right or remedy. No waiver of any breach or default of
this Lease shall be held to be a waiver of any other or subsequent
breach or default. The receipt by Lessor of rent at a time when
the rent is in default under this Lease shall not be construed as
a waiver of such default. No act or thing done by Lessor or
Lessor's agents or employees during the Term and any extension
thereof shall be deemed an acceptance of a surrender of the
Premises, and no agreement to accept such a surrender shall be
valid unless in writing and signed by Lessor.
k. In the event that Lessor institutes or takes any action permitted
above following an Event of Default by Lessee, it is specifically
agreed that Lessor shall recover from, or be paid by Lessee, in
addition to all items which Lessor may be entitled to recover in
law or in equity, whether or not Lessor does recover such items,
attorney's fees, and the costs and disbursements of said
proceeding or otherwise. Said payments shall be due as Additional
Rent, and Lessor's petition and/or pleadings may make demand for
payment of attorney's fees as an amount currently due and owing to
Lessor as of the date of the petition and/or pleadings, without
the necessity of any prior or further demand therefor or invoice
for the same.
15. SUBORDINATION OF LEASE: This Lease shall, at Lessor's option, or at the
option of any holder of any underlying lease or holder of any mortgages
or trust deed, be subject and subordinate to any such underlying leases
and to any such mortgages or trust deed which may now or hereafter
affect the real property of which the Premises form a part, and also to
all renewals, modifications, consolidations and replacements of said
underlying leases and said mortgages or trust deed. Although no
instrument or act on the part of Lessee shall be necessary to
effectuate such subordination, Lessee will, nevertheless, execute and
deliver such further instruments confirming such subordination of this
Lease as may be desired by the holders of said mortgages or trust deed
or by any of the lessor's under such underlying leases. Lessee hereby
appoints Lessor attorney-in-fact, irrevocably, to execute and deliver
any such instrument for Lessee. If any underlying lease to which this
Lease is subject terminates, Lessee shall, on timely request, attorn to
the owner of the reversion.
16. SECURITY DEPOSIT:
a. Lessee shall deliver to Lessor on the signing of this Lease, an
irrevocable, unconditional letter of credit issued or confirmed by
a financial institution, having a banking office in Philadelphia,
Pennsylvania, reasonably acceptable to Lessor in the amount of Six
Hundred Thousand Dollars ($600,000), substantially in the form of
Exhibit H attached hereto, with only such modifications as are
acceptable to Lessor in form and substance, naming Lessor, its
successors and assigns, as beneficiary (the "Letter of Credit")
for the full and faithful performance of Lessee's obligations
under this Lease, including without limitation, the surrender of
possession of the Premises to Lessor as herein provided. The
Letter of Credit shall be issued or renewed (as the case may be)
for consecutive periods of one year each. Each renewal or
replacement Letter or Credit shall be in substantially the same
form as that of the letter of credit attached hereto as Exhibit H.
In the event the Letter of
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Credit is not renewed or reissued at least ten (10) business days
prior to the expiration of the then existing Letter of Credit,
Lessor shall be entitled to draw-down on the Letter of Credit in
the full amount thereof, or in any lesser amount in Lessor's
discretion. The amount of any such draw-down shall be deposited in
a money market account (the "Account"), and no amount thereof
shall be finally released to Lessor until and unless Lessee
defaults with respect to its obligations under the terms of this
Lease. Upon the reissue or renewal of the Letter of Credit as
required hereunder, any amount remaining in the Account. For
purposes of this Lease the term "Security Deposit" shall be deemed
to mean the Letter of Credit or the funds in the Account, as the
case may be.
b. Provided that no default by Lessee with respect to the payment of
Fixed Basic Rent, of any Additional Rent, or any other monetary
obligation (each a "Monetary Obligation") has occurred and is
continuing (or if not continuing has been cured by payment by
Lessee without Lessor having to draw-down funds from the Letter of
Credit) then each annually renewed or re-issued Letter of Credit
may be for an amount that is twenty percent (20%) less than the
amount of the immediately preceeding Letter of Credit; provided,
however, that in no event shall the amount of the Letter of Credit
be less than Seventy-Five Thousand Dollars ($75,000). Likewise, in
the event that the Account is funded, provided that no default by
Lessee with respect to a Monetary Obligation has occurred and is
continuing (or if not continuing has been cured by payment by
Lessee without Lessor having to draw-down funds from the Account)
then within thirty (30) days after each anniversary of the
Commencement Date, Lessor shall reduce the amount of money in the
Account by twenty percent (20%) and deliver such money to Lessee;
provided however, that in no event shall the amount of money in
the Account be less than Seventy Five Thousand Dollars ($75,000).
c. Upon a default by Lessee in the performance of any of its
obligations herein, including but not limited to the obligation to
pay Rent, Lessor may, but shall not be required to, draw-down on
the Letter of Credit or upon the Account, if applicable, (a) for
the payment of Rent or any other sum in default, (b) for the
payment of any other amount which Lessor may spend or become
obligated to spend by reason of Lessee's default, or (c) to
compensate Lessor for any other loss or damage which Lessor may
suffer by reason of Lessee's default, including without
limitation, costs and attorneys' fees incurred by Lessor to
recover possession of the Premises upon a default by Lessee
hereunder. Any draw-down by Lessor due to Lessee's default shall
not constitute the cure of any default by Lessee, the waiver of
such default, or any election by Lessor and Lessor may therefore
exercise all remedies granted Lessor hereunder. If any portion of
the Letter of Credit or the Account is drawn-down, Lessee shall
restore the amount of the Letter of Credit or Account, as the case
may be, to the sum required by this Article 16 and Lessee's
failure to do so shall constitute a separate default hereunder by
Lessee.
d. Lessee acknowledges that damages would be an inadequate remedy for
breach of Lessee's obligation to procure and maintain the Letter
of Credit, and that in the event Lessee defaults with respect to
such obligation, Lessor shall be entitled to obtain an order
specifically enforcing such obligation from any court of competent
jurisdiction.
e. If Lessor applies any part of said Security Deposit to cure any
default of Lessee, Lessee shall, on demand, deposit with Lessor
the amount so applied so that Lessor shall have the full Security
Deposit on hand at all times during the Term of this Lease. In the
event a bona fide sale, subject to this Lease, Lessor shall have
the right to transfer the Security Deposit to the vendee, and
Lessor shall be considered released by Lessee from all liability
for the return of the Security Deposit; and Lessee agrees to look
solely to the new lessor for the return of the Security Deposit,
and it is agreed that this shall apply to every transfer or
assignment made of the Security Deposit to the new lessor.
Provided this Lease is not in default, the Security Deposit (less
any portions thereof used, applied or retained by Lessor in
accordance with the provisions of this Article 16), shall be
returned to Lessee after the expiration or sooner termination of
this Lease and after delivery of the entire Premises to Lessor in
accordance with the provisions of this Lease. Lessee covenants
that it will not
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assign or encumber or attempt to assign or encumber the Security
Deposit and Lessor shall not be bound by any such assignment,
encumbrance or attempt thereof.
f. In the event of the insolvency of Lessee, or in the event of the
entry of a judgement in any court against Lessee which is not
discharged within sixty (60) days after entry, or in the event a
petition is filed by or against Lessee under any chapter of the
bankruptcy laws of the Commonwealth of Pennsylvania or the United
States of America, then in such event, Lessor may require the
Lessee to deposit additional security in an amount which in
Lessor's sole judgement would be sufficient to adequately assure
Lessee's performance of all of its obligations under this Lease
including all payments subsequently accruing. Failure of Lessee to
deposit the security required by this Article 16 within ten (10)
days after Lessor's written demand shall constitute a material
breach of this Lease by Lessee.
17. RIGHT TO CURE LESSEE'S BREACH: If Lessee breaches any covenant or
condition of this Lease, Lessor may, on reasonable notice to Lessee
(except that no notice need be given in case of emergency), cure such
breach at the expense of Lessee and the reasonable amount of all
expenses, including reasonable attorney's fees, incurred by Lessor in
so doing (whether paid by Lessor or not) shall be deemed Additional
Rent payable on demand.
18. MECHANIC'S LIENS: Prior to Lessee or anyone on behalf of Lessee
performing any construction or other work to, on or about the Premises
for which a lien or claim could be filed against Lessor, the Premises,
the Building, the Office Building Area, or Lessor's interest therein,
Lessee shall have its general contractor execute a Waiver of Mechanic's
Liens in recordable form and otherwise in form satisfactory to Lessor
and provide Lessor with the original of the same for recording. In
addition, Lessee shall cause all contracts for construction and other
services to contain a general waiver of mechanics' liens.
Notwithstanding the foregoing, if any mechanics' or other lien or claim
shall be filed against Lessor, the Premises, the Building, the Office
Building Area, or Lessor's interest therein purporting to be for labor
or material furnished or to be furnished at the request of Lessee, then
Lessee shall, at its sole cost and expense cause same to be discharged
by payment, bond or otherwise within ten (10) days after the filing
thereof. If Lessee shall fail to cause same to be discharged of record
within such ten (10) day period, Lessor may cause same to be discharged
by payment, bond or otherwise, without investigation as to the validity
thereof or as to any counterclaims, offsets or defenses thereto, all at
the sole cost and expense of Lessee. Lessee shall defend, indemnify and
hold Lessor harmless against any and all claims, costs, damages,
liabilities and expenses (including reasonable attorneys' fees) which
may be brought or imposed against or incurred by Lessor by reason of
any such lien or claim or the discharge thereof.
19. RIGHT TO INSPECT AND REPAIR: Lessor may enter the Premises but shall
not be obligated to do so (except as required by any specific provision
of this Lease) at any reasonable time on reasonable notice to Lessee
(except that no notice need be given in case of emergency) for the
purpose of inspection or the making of such repairs, replacement or
additions in, to, on and about the Premises or the Building, as Lessor
deems necessary or desirable. Lessee shall have no claims or cause of
action against Lessor by reason thereof.
20. SERVICES TO BE PROVIDED BY LESSOR/LESSOR'S EXCULPATION: Subject to
intervening laws, ordinances, regulations and executive orders, while
Lessee is not in default under any of the provisions of this Lease,
Lessor agrees to furnish, except on holidays, as set forth on Exhibit E
attached hereto and made a part hereof:
a. The cleaning services, as set forth on Exhibit D attached hereto
and made a part hereof, and subject to the conditions therein
stated. Except as set forth on Exhibit D, Lessee shall pay the
cost of all other cleaning services required by Lessee.
b. Heating, ventilating and air conditioning (herein "HVAC") as
appropriate for the season (the electric energy cost to be paid by
Lessee as provided in Article 22), and as set forth on Exhibit
C-1, attached hereto and made a part hereof, together with Common
Facilities lighting and electric energy all during "Building
Hours", as hereinafter defined.
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c. Cold and hot water for drinking and lavatory purposes.
d. Elevator service during Building Hours (if the Building contains
an elevator or elevators for the use of the occupants thereof).
e. Restroom supplies and exterior window cleaning when reasonably
required.
f. Notwithstanding the requirements of Exhibit C-1 (as to HVAC) or D
or any other provision of this Lease, Lessor shall not be liable
for failure to furnish any of the aforesaid services when such
failure is due to Force Majeure, as hereinafter defined. Lessor
shall not be liable, under any circumstances, including, but not
limited to, that arising from the negligence of Lessor, its
agents, servants or invitees, or from defects, errors or omissions
in the construction or design of the Premises and/or the Building,
including the structural and non-structural portions thereof, for
loss of or injury to Lessee or to property, however occurring,
through or in connection with or incidental to the furnishings of,
or failure to furnish, any of the aforesaid services or for any
interruption to Lessee's business, however occurring, except as to
the possible abatement of Rent as set forth in Article 21.
21. INTERRUPTION OF SERVICES OR USE: Interruption or curtailment of any
service maintained in the Building or at the Office Building Area, if
caused by Force Majeure, as hereinafter defined, shall not entitle
Lessee to any claim against Lessor or to any abatement in rent, and
shall not constitute a constructive or partial eviction, unless Lessor
fails to take measures as may be reasonable under the circumstances to
restore the service without undue delay. If the Premises are rendered
untenantable in whole or in part, for a period of ten (10) consecutive
business days, by the making of repairs, replacements or additions,
other than those made with Lessee's consent or caused by misuse or
neglect by Lessee, or Lessee's agents, servants, visitors or licensees,
there shall be a proportionate abatement of Rent from and after said
tenth (10th) consecutive business day and continuing for the period of
such untenantability. In no event, shall Lessee be entitled to claim a
constructive eviction from the Premises unless Lessee shall first have
notified Lessor in writing of the condition or conditions giving rise
thereto, and if the complaints be justified, unless Lessor shall have
failed, within a reasonable time after receipt of such notice, to
remedy, or commence and proceed with due diligence to remedy such
condition or conditions, all subject to Force Majeure as hereinafter
defined.
22. BUILDING STANDARD OFFICE ELECTRICAL SERVICE:
a. The cost of electric current which is supplied by the Lessor for
use by the Lessee in the Premises, including for heating or air
conditioning purposes, shall be reimbursed to the Lessor as
Additional Rent at terms, classification and rates normally
charged by the public utilities corporation serving that part of
the municipality where the subject Premises are located. Lessor
shall furnish (a) heat, ventilation and air conditioning
(including the labor, maintenance and equipment necessary to
provide the same), (b) electricity and other utilities needed to
operate such systems and (c) electricity for lighting and general
power for office use. Each of the foregoing to be paid for by
Lessee, to the extent that such utilities and/or services are not
separately chargeable to another occupant of the Building; and to
the extent that such utilities and/or services have not been
deemed by Lessor to be Operating Expenses, as follows:
1. Standard Usage; Business Hours. Lessee shall pay, as
Additional Rent its pro rata share (based upon Lessee's Pro
Rata Share, but subject to the last sentence of this
subparagraph) of the cost to the respective Building
(including applicable sales or use taxes) for the foregoing
services during "Business Hours" (as hereinafter defined) and
for "Building Standard Consumption" (as hereinafter defined).
Such payment shall be made by Lessee within thirty (30) days
after submission by Lessor of a statement to Lessee setting
forth the amount due. "Business Hours" shall mean Monday
through Friday from 8:30 a.m. to 6:00 p.m., Holidays (defined
below) excepted. New Year's Day, Memorial Day, Independence
Day, Labor Day, Thanksgiving, Christmas, or any day set aside
to celebrate such holidays are
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"Holidays" under this Lease. "Building Standard Consumption"
shall mean the consumption necessary, in Lessor's reasonable
judgment, for use and comfortable occupancy of the Demised
Premises when occupied by the density of people for which the
building standard system was designed with occupants using
Standard Office Equipment. "Standard Office Equipment" shall
mean all office equipment normally found in an office
facility but shall not include computer and communication
systems (other than personal computers and fax machines in
numbers typical of standard office use), telephone switches
and conference or training rooms (or items similar thereto)
which require Additional Electric Equipment, as hereinafter
defined in Paragraph 22(e) below, or additional air
conditioning service or systems. In determining Lessee's pro
rata share for the foregoing services for any period, the
cost for the foregoing services shall be deemed for such
period to be an amount equal to the like expenses which
Lessor reasonably determines would normally be incurred had
the Building been fully occupied throughout such period.
2. Non-Standard Usage; After-Hours. Lessee shall pay, as
Additional Rent, the cost of supplying the Demised Premises
with the foregoing services at times outside of Business
Hours or in amounts in excess of Building Standard
Consumption, at such rates as Lessor shall specify from time
to time to cover all of the estimated costs and expenses
incurred by Lessor in connection with supplying the Demised
Premises with such service, including without limitation the
costs of labor and utilities associated with such service and
including applicable sales or use taxes thereon, such amounts
to be paid by Lessee within thirty (30) days after submission
by Lessor of a statement to Lessee setting forth the amount
due. With respect to heat, ventilation and air conditioning
required by Lessee outside of Business Hours, Lessee shall
notify Lessor at least 24 hours in advance when such
after-hours use is desired, except if such use is desired for
a weekend, in which event Lessee shall notify Lessor no later
than 10:00 a.m. on the Friday immediately preceding such
weekend.
3. Separate Metering; Survey. Lessor reserves the right, at
Lessee's sole cost, to determine Lessee's charge for
electrical usage by separate meter or electrical engineering
survey. If Lessor elects to install a submeter to measure
Lessee's electric service use and if such installation is not
required due to Lessee's excess consumption, as reasonably
determined by Lessor, then the cost of such submeter shall be
borne by Lessor. At any time after the installation of
separate metering for the Demised Premises (or any part
thereof), or the completion of such survey, Lessor shall
furnish to Lessee a statement setting forth the amount due
for Lessee's electric usage (or the part thereof that is so
metered or subject to such survey), and the total amount set
forth in such statement shall be due and payable by Lessee
within ten (10) days after submission to Lessee by Lessor of
such statement. In such case, Lessee shall pay for such
consumption based upon the average KWH rate paid by Lessor.
4. System Failure. Lessor shall not be responsible for any
failure or inadequacy of the air conditioning system if such
failure or inadequacy results from the occupancy of the
Demised Premises by persons in excess of the density
anticipated or for which the system was designed, or if
Lessee uses the Demised Premises in a manner for which it was
not designed, or if Lessee installs or operates machines,
appliances or equipment which exceed the maximum wattage per
square foot contemplated by, or generate more heat than
anticipated in, the design of the Demised Premises (as such
design standards may be established by Lessor).
5. Additional Electrical Equipment. Lessee will not install or
use electrically-operated equipment in excess of the design
capacity of the Demised Premises (as such design standards
may be established by Lessor) and Lessee will not install or
operate in the Demised Premises any
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electrically-operated equipment or machinery other than that
commonly used in a normal office operation without first
obtaining the prior written consent of the Lessor. Lessor may
condition any consent required under this Paragraph 22(e)
upon the installation of separate meters (and transformers or
electrical panels) for such equipment or machinery at
Lessee's expense and the payment by Lessee of additional rent
as compensation for the additional consumption of electricity
occasioned by the operation of such additional equipment or
machinery, at the rates and in the manner set forth in
Paragraph 22(a) or (b) above.
6. Regulatory Compliance. The furnishing of the foregoing
heating, ventilation, air conditioning and electricity
services shall be subject to any statute, ordinance, rule,
regulation, resolution or recommendation for energy
conservation which may be promulgated by any governmental
agency or organization which Lessor shall be required to
comply with or which Lessor determines in good faith to
comply with.
b. In the event that there shall be an increase or decrease in the
rate schedule (including surcharges or demand adjustments), of the
public utility for the supply of Building Standard Office
Electrical Service, or the imposition of any tax with respect to
such service or increase in any such tax following the Lease
Term's commencement, the Additional Rent payable hereunder shall
be adjusted equitably to reflect the increase or decrease in rate
or imposition or increase in the aforesaid tax. All computations
shall be made on the basis of Lessee's surveyed usage as if a
meter exclusively measuring such usage to the Premises was in
place.
c. Lessee covenants that it shall notify Lessor immediately upon the
introduction of any office equipment or lighting different from
that on the Premises as of Lessor's electrical survey or in
addition to the aforesaid equipment or lighting on the Premises as
of said survey. The introduction of any new or different equipment
or lighting shall be cause for, at Lessor's election, a
resurveying of the Premises at Lessee's expense. Lessor reserves
the right to inspect the Premises to insure compliance with this
provision.
d. Lessor shall not be liable in any way to Lessee for any loss,
damage or expense which Lessee may sustain or incur as a result of
any failure, defect or change in the quantity or character of
electrical energy available for redistribution to the Premises
pursuant to this Article 22 nor for any interruption in the
supply, and Lessee agrees that such supply may be interrupted for
inspection, repairs and replacement and in emergencies. In any
event, the full measure of Lessor's liability for any interruption
in the supply due to Lessor's acts or omissions shall be an
abatement of Fixed Basic Rent and Additional Rent, unless Lessor
fails to take such measures as may be reasonable under the
circumstances to restore such service without undue delay. In no
event shall Lessor be liable for any business interruption
suffered by Lessee.
e. Lessor, at Lessee's expense, shall furnish and install all
replacement lighting tubes, lamps, ballasts and bulbs required in
the Premises. Lessee, however, shall have the right to furnish
and/or install any or all of the items mentioned in this Article
22(e).
f. Lessee's use of electrical service as contemplated herein shall be
during Building Hours, and any use in excess of said Building
Hours shall result in an adjustment as set forth in Article 22(a)
hereof to reflect such additional consumption.
23. ADDITIONAL RENT: It is expressly agreed that Lessee will pay in
addition to the Fixed Basic Rent provided in Article 3 hereof, an
Additional Rent to cover Lessee's Percentage as defined in the
Preamble, of the increased cost to Lessor, for each of the categories
enumerated herein, over the "Base Period Costs", as defined in the
Preamble for said categories.
a. OPERATING COST ESCALATION -- If the Operating Costs incurred for
the Building in which the Premises are located and Office Building
Area for any Lease Year or Partial Lease Year during the Lease
Term shall be greater than the Base Operating
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Costs (adjusted proportionately for periods less than a Lease
Year), then Lessee shall pay to Lessor, as Additional Rent,
Lessee's Percentage of all such excess Operating Costs. Operating
Costs shall include, by way of illustration and not of limitation:
personal property taxes; management fees; labor, including all
wages and salaries; social security taxes, and other taxes which
may be levied against Lessor upon such wages and salaries;
supplies; repairs and maintenance; maintenance and service
contracts; painting; wall and window washing; laundry and towel
service; tools and equipment (which are not required to be
capitalized for federal income tax purposes); fire and other
insurance; trash removal; lawn care; snow removal and all other
items properly constituting direct operating costs according to
standard accounting practices relating to the Building or the
Office Building Area or both (hereinafter collectively referred to
as the "Operating Costs"), but not including depreciation of
Building or equipment; interest; income or excess profits taxes;
costs of maintaining the Lessor's corporate existence; franchise
taxes; any expenditures required to be capitalized for federal
income tax purposes, unless said expenditures are for the purpose
of reducing Operating Costs within the Building and Office
Building Area, or those which under generally applied real estate
practice are expensed or regarded as deferred expenses or are
required under any governmental or quasi-governmental law,
statute, ordinance, rule, order, requirements or regulation, in
which event the costs thereof shall be included. The Base
Operating Costs shall as be as defined in the Preamble.
b. COMMON AREA FUEL, UTILITIES AND ELECTRIC COST ESCALATION
(hereinafter referred to as "Utility and Energy Costs") -- If the
Utility and Energy Costs, including any fuel surcharges or
adjustments with respect thereto, incurred for water, sewer, gas,
electric, other utilities and heating, ventilating and air
conditioning for the Building, to include all leased and leasable
areas (not separately billed or metered within the Building) and
Common Facilities electric, lighting, water, sewer and other
utilities for the Building and Office Building Area, for any Lease
Year or Partial Lease Year, during the Term, shall be greater than
the Base Utility and Energy Costs (adjusted proportionately for
periods less than a Lease Year), then Lessee shall pay to Lessor
as Additional Rent, Lessee's Percentage as hereinafter defined, of
all such excess Utility and Energy Costs. As used in this Article
23, the Base Utility and Energy Costs shall be as defined in the
Preamble.
c. TAX ESCALATION -- If the Real Estate Taxes for the Building and
Office Building Area at which the Premises are located for any
Lease Year or Partial Lease Year, during the Lease Term, shall be
greater than the Base Real Estate Taxes (adjusted proportionately
for periods less than a Lease Year), then Lessee shall pay to
Lessor as Additional Rent, Lessee's Percentage as hereinafter
defined, of all such excess Real Estate Taxes.
As used in this Article 23(c), the words and terms which follow
mean and include the following:
i. "Base Real Estate Taxes" shall be as defined in the
Preamble.
ii. "Real Estate Taxes" shall mean the property taxes and
assessments imposed upon the Building and Office
Building Area, or upon the rent, as such, payable to the
Lessor, including, but not limited to, real estate,
city, county, village, school and transit taxes, or
taxes, assessments, or charges levied, imposed or
assessed against the Building and Office Building Area
by any other taxing authority, whether general or
specific, ordinary or extraordinary, foreseen or
unforeseen. If due to a future change in the method of
taxation, any franchise, income or profit tax shall be
levied against Lessor in substitution for, or in lieu
of, or in addition to, any tax which would otherwise
constitute a Real Estate Tax, such franchise, income or
profit tax shall be deemed to be a Real Estate Tax for
the purposes hereof; conversely, any additional real
estate tax hereafter imposed in substitution for, or in
lieu of, any franchise, income or profit tax (which is
not in substitution for, or in lieu of, or in addition
to, a Real Estate Tax as hereinbefore provided) shall
not be deemed a Real Estate Tax for the purposes hereof.
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d. LEASE YEAR -- As used in this Article 23, Lease Year shall mean a
calendar year. Any portion of the Term which is less than a Lease
Year as hereinbefore defined, that is, from the Commencement Date
through the following December 31, and from the last January 1,
falling within the Term to the end of the Term, shall be deemed a
"Partial Lease Year". Any reference in this Lease to a Lease Year
shall, unless the context clearly indicates otherwise, be deemed
to be a reference to a Partial Lease Year if the period in
question involves a Partial Lease Year.
e. PAYMENT -- At any time, and from time to time, after the
establishment of the Base Period Costs for each of the categories
referred to above, Lessor shall advise Lessee in writing of
Lessee's Percentage share with respect to each of the categories
as estimated for the next twelve (12) month period (or
proportionate part thereof if the last period prior to the Lease's
expiration is less than twelve (12) months) as then known to the
Lessor, and thereafter, the Lessee shall pay as Additional Rent,
Lessee's Percentage share of these costs for the then current
period affected by such advice (as the same may be periodically
revised by Lessor as additional costs are incurred) in equal
monthly installments, such new rates being applied to any months,
for which the Fixed Basic Rent shall have already been paid which
are affected by the Operating Cost Escalation and/or Utility and
Energy Cost Escalation and/or Tax Escalation Costs above referred
to, as well as the unexpired months of the current period, the
adjustment for the then expired months to be made at the payment
of the next succeeding monthly rental, all subject to final
adjustment at the expiration of each Lease Year as defined in
Article 23(d) hereof (or Partial Lease Year if the last period
prior to the Lease's termination is less than twelve (12) months).
However, Lessor shall be reimbursed by Lessee monthly during the
first year of the Term for additional Utility and Energy Cost
Escalations resulting from an increase in the monthly rate over
the Base Utility Rate.
In the event the last period prior to the Lease's termination is
less than twelve (12) months, the Base Period Costs during said
period shall be proportionately reduced to correspond to the
duration of said final period.
f. BOOKS AND REPORTS -- For the protection of Lessee, Lessor shall
maintain books of account which shall be open to Lessee and its
representatives at all reasonable times so that Lessee can
determine that such Operating, Utility and Energy and Real Estate
Tax Costs have, in fact, been paid or incurred. Lessee's
representatives shall mean only (i) Lessee's employees and
attorneys or (ii) a Certified Public Accounting firm. At Lessor's
request, Lessee shall execute a confidentiality agreement
reasonably acceptable to Lessor prior to any examination of
Lessor's books and records. In the event Lessee disputes any one
or more of said charges, Lessee shall attempt to resolve such
dispute with Lessor, provided that if such dispute shall not be
satisfactorily settled between Lessor and Lessee, the dispute
shall be referred by either party to an independent certified
public accountant to be mutually agreed upon, and if such an
accountant cannot be agreed upon, The American Arbitration
Association may be asked by either party to select an arbitrator,
whose decision on the dispute will be final and binding upon both
parties, who shall jointly share any cost of such arbitration.
Pending resolution of said dispute the Lessee shall pay to Lessor
the sum so billed by Lessor subject to its ultimate resolution as
aforesaid.
g. RIGHT OF REVIEW -- Once Lessor shall have finally determined said
Operating, Utility and Energy or Real Estate Tax Costs at the
expiration of a Lease Year, then as to the item so established,
Lessee shall only be entitled to dispute said charge as finally
established for a period of six (6) months after such charge is
finally established, and Lessee specifically waives any right to
dispute any such charge at the expiration of said six (6) month
period.
h. OCCUPANCY ADJUSTMENT -- If, with respect to Operating Cost
Escalation, as established in Article 23(a) hereof, and Utility
and Energy Cost Escalation, as established in Article 23(b)
hereof, the Building is less than ninety percent (90%) occupied
during the establishment of the respective Base Periods, then the
Base Costs incurred with respect to said Operating Cost or Utility
and Energy Cost shall be adjusted during any such period within
the Base Period so as to reflect ninety
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percent (90%) occupancy. Similarly, if during any Lease Year or
Partial Lease Year, subsequent to the Base Period the Building is
less than ninety percent (90%) occupied, then the actual costs
incurred for Operating Cost and Utility and Energy Cost shall be
increased during any such period to reflect ninety percent (90%)
occupancy so that at all times after the Base Period the Operating
Cost or Utility and Energy Cost shall be actual costs, but in the
event less than ninety percent (90%) of the Building is occupied
during all or part of the Lease Year involved, the Operating Cost
or Utility and Energy Cost shall not be less than that which would
have been incurred had ninety percent (90%) of the Building been
occupied. The aforesaid adjustment shall only be made with respect
to those items that are in fact affected by variations in
occupancy levels.
24. LESSEE'S ESTOPPEL: Lessee shall, from time to time, on not less that
ten (10) days prior written request by Lessor, execute, acknowledge and
deliver to Lessor a written statement certifying that the Lease is
unmodified and in full force and effect, or that the Lease is in full
force and effect as modified and listing the instruments of
modification; the dates to which the rents and charges have been paid;
and, to the best of Lessee's knowledge, whether or not Lessor is in
default hereunder, and if so, specifying the nature of the default. It
is intended that any such statement delivered pursuant to this Article
24 may be relied on by a prospective purchaser of Lessor's interest or
mortgagee of Lessor's interest or assignee of any mortgage of Lessor's
interest. Lessee shall also execute and deliver the form "Lessee
Estoppel Certificate" attached hereto as Exhibit F.
25. HOLDOVER TENANCY: Should Lessee continue to occupy the Demised Premises
after expiration of the Term of this Lease or any renewal or renewals
thereof, or after a forfeiture or other termination thereof, such
tenancy shall (without limitation on any of Lessor's rights or remedies
therefor) be one at sufferance from month to month at a minimum monthly
rent for the first month equal to one and one-half times and thereafter
equal to two times the Fixed Basic Rent and Additional Rent payable for
the last month of the term of this Lease for each month of such
occupancy. Lessee shall also pay all damages suffered or incurred by
Lessor as a result of or arising from such holdover tenancy.
26. RIGHT TO SHOW PREMISES: Lessor may show the Premises to prospective
purchasers and mortgagees; and to prospective tenants, during Building
Hours on reasonable notice to Lessee.
27. LESSOR'S WORK - LESSEE'S DRAWINGS:
a. Lessor agrees that, prior to the commencement of the Term of this
Lease, it will do substantially all of the work in the Premises in
accordance with Exhibit C attached hereto and made a part hereof.
Lessor will provide the Construction Allowance to complete The
Work (as defined in Exhibit C) pursuant to the terms and
conditions set forth in Exhibit C.
b. Lessee will supply such drawings and information, including
without limitation Construction Documents, to Lessor as set forth
in Exhibit C. Any delay occasioned by Lessee's failure to timely
supply such drawings and information shall not delay the
Commencement Date of the Term and Lessee's obligations hereunder,
and the same shall commence on the date the Premises would have
been delivered to Lessee pursuant to Article 2, but for Lessee's
delay.
c. Lease commencement shall occur and the Commencement Date is
defined as that date when Lessor has done substantially all of the
work to be done by Lessor in accordance with Exhibit C and, if
required by Tinicum Township, has obtained a certificate of
occupancy with respect to the Premises, unless Lessor has been
precluded from completing said work or obtaining such certificate
as a result of Lessee's acts or omissions or unless Lessee has
taken occupancy of the Premises. Occupancy by Lessee or the
delivery of a Certificate of Occupancy by Lessor (if required
pursuant to local law) shall be prima facie evidence that Lessor
has done substantially all of the work.
28. WAIVER OF TRIAL BY JURY: To the extent such waiver is permitted by law,
the parties
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waive trial by jury in any action or proceeding brought in connection
with this Lease or the Premises.
29. LATE CHARGE: Anything in this Lease to the contrary notwithstanding, at
Lessor's option, Lessee shall pay a "Late Charge" of eight percent (8%)
of any installment of Fixed Basic Rent or Additional Rent paid more
than five (5) days after the due date thereof, to cover the extra
expense involved in handling delinquent payments, said Late Charge to
be considered Additional Rent. The amount of the Late Charge to be paid
by Lessee shall be reassessed and added to Lessee's obligations for
each successive monthly period until paid.
30. LESSEE'S INSURANCE:
a. Lessee covenants to provide at Lessee's cost and expense on or
before the earlier of (i) the Commencement Date, or (ii) Lessee's
taking actual possession for the purpose of completing any
improvement work, and to keep in full force and effect during the
entire Term and so long thereafter as Lessee, or anyone claiming
by, through or under Lessee, shall occupy the Premises, insurance
coverage as follows:
i. Commercial General Liability insurance with contractual
liability endorsements with respect to the Premises and
the business of Lessee in which Lessee shall be
adequately covered under limits of liability of not less
than FIVE MILLION AND 00/100 DOLLARS ($5,000,000)
combined single limit per occurrence for bodily or
personal injury (including death) and property damage.
Such insurance may be carried (x) under a blanket policy
covering the Premises and other locations of Lessee, if
any, provided that each such policy shall in all
respects comply with this Article and shall specify that
the portion of the total coverage of such policy that is
allocated to the Premises is in the amounts required
pursuant to this Article 30 and (y) under a primary
liability policy of not less than ONE MILLION AND 00/100
DOLLARS ($1,000,000) and the balance under an umbrella
policy. Notwithstanding anything to the contrary
contained in this Lease, the carrying of insurance by
Lessee in compliance with this Article 30 shall not
modify, reduce, limit or impair Lessee's obligations and
liability under Article 33 hereof.
ii. Fire and Extended Coverage, Vandalism, Malicious
Mischief, Sprinkler Leakage and Special Extended
Coverage Insurance in an amount adequate to cover the
cost of replacement of all personal property,
decoration, trade fixtures, furnishings, equipment in
the Premises and all contents therein. Lessor shall not
be liable for any damage to such property of Lessee by
fire or other peril includable in the coverage afforded
by the standard form of fire insurance policy with
extended coverage endorsement attached (whether or not
such coverage is in effect), no matter how caused, it
being understood that the Lessee will look solely to its
insurer for reimbursement.
iii. Workers' Compensation and Employer's Liability insurance
affording statutory coverage and containing statutory
limits with the Employer's Liability portion thereof to
have minimum limits of $1,000,000.00.
iv. Said limits shall be subject to periodic review and
Lessor reserves the right to increase said coverage
limits if, in the reasonable opinion of Lessor, said
coverage becomes inadequate and is less than that
commonly maintained by tenants in similar buildings in
the area by tenants making similar uses. On or before
the Commencement Date, and thereafter at Lessor's
request, Lessee shall provide Lessor evidence of the
insurance coverage required herein in the form of a
duplicate original insurance policy, an insurance binder
(countersigned by the insurer), or Evidence of Insurance
(in form ACORD 27) for each of the insurance policies
Lessee is required to carry in compliance with its
obligations under this Lease which shall be delivered to
Lessor at least fifteen (15) days prior to the time such
insurance is first required to be carried by Lessee.
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b. All of the aforesaid insurance shall (i) name Lessor as an
additional insured; (ii) be written by one or more responsible
insurance companies licensed in the Commonwealth of Pennsylvania
satisfactory to Lessor and in form satisfactory to Lessor; (iii)
contain endorsements substantially as follows: "It is understood
and agreed that the insurer will give to Lessor, or any successor
lessor, c/o Mack-Cali Realty Corporation, 11 Commerce Drive,
Cranford, New Jersey, thirty (30) days prior written notice of any
material change in or cancellation of this policy."; (iv) shall be
written on an "occurrence" basis and not on a "claims made" basis.
c. Lessee shall be solely responsible for payment of premium and
Lessor (or its designee) shall not be required to pay any premium
for such insurance. Lessee shall deliver to Lessor at least
fifteen (15) days prior to the expiration of such policy, either a
duplicate original or a certificate it being the intention of the
parties hereto that the insurance required under the terms hereof
shall be continuous during the entire Term of this Lease and any
other period of time during which pursuant to the Term hereof,
said insurance is required. Any insurance carried by Lessee shall
be in excess of and will not contribute with the insurance carried
by Lessor for injuries or damage arising out of the Premises.
d. Lessee agrees, at its own cost and expense, to comply with all
rules and regulations of the National Fire Protection Association
(NFPA) National Fire Code. If, or from time to time, as a result
of or in connection with any failure by Lessee to comply with the
foregoing sentence or any act or omission or commission by Lessee,
its employees, agents, contractors or licensees, or a result of or
in connection with the use to which the Premises are put
(notwithstanding that such use may be for the purposes
hereinbefore permitted or that such use may have been consented to
by Lessor), the fire insurance rate(s) applicable to the Premises
shall be higher than that which would be applicable for a business
office legally permitted therein, Lessee agrees that it will pay
to Lessor as Additional Rent, such portion of the premiums for all
Lessor's fire insurance policies in force with respect to the
building and the contents of any occupant thereof as shall be
attributable to such higher rate(s).
e. Lessor makes no representation that the limits of liability
specified to be carried by Lessee or Lessor under the terms of
this Lease are adequate to protect Lessee against Lessee's
undertaking under this Article 30, and in the event Lessee
believes that any such insurance coverage called for under this
Lease is insufficient, Lessee shall provide, at is own expense,
such additional insurance as Lessee deems adequate.
f. In the event the Premises or its contents are damaged or destroyed
by fire or other insured casualty, (i) Lessor, to the extent of
the coverage of Lessor's policies of fire insurance, hereby waives
its rights, if any, against Lessee with respect to such damage or
destruction, even if said fire or other casualty shall have been
caused, in whole or in part, by the negligence of Lessee, and (ii)
Lessee, to the extent of the coverage of Lessee's policies of fire
insurance with extended coverage, hereby waives its rights, if
any, against Lessor with respect to such damage, or destruction,
even if said fire or other casualty shall have been caused, in
whole or in part, by the negligence of Lessor; provided, however,
such waivers of subrogation shall only be effective with respect
to loss or damage occurring during such time as Lessor's or
Lessee's policies of fire insurance (as the case may be) shall
contain a clause or endorsement providing in substance that the
aforesaid waiver of subrogation shall not prejudice the type and
amount of coverage under such policies or the right of Lessor or
Lessee (as the case may be) to recover thereunder. If, at any
time, Lessor's or Lessee's insurance carrier refuses to write
insurance which contains a consent to the foregoing waiver of
subrogation, Lessor or Lessee, as the case may be, shall notify
the party thereof in writing, and upon the giving of such notice,
the provisions of this Section shall be null and void as to any
casualty which occurs after such notice. If Lessor's or Lessee's
insurance carrier shall make a charge for the incorporation of the
aforesaid waiver of subrogation in its policies, then the party
requesting the waiver shall promptly pay such charge to the other
party upon demand. In the event the party requesting their waiver
fails to pay such charge upon demand, the other party shall be
released of its obligation to supply such waiver.
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g. Should Lessee fail to maintain the insurance coverage as set forth
in this Article 30, then Lessee shall be in default hereunder and
shall be deemed to have breached its covenants as set forth
herein.
31. NO OTHER REPRESENTATIONS: No representations or promises shall be
binding on the parties hereto except those representations and promises
contained herein or in some future writing signed by the party making
such representation(s) or promise(s).
32. QUIET ENJOYMENT: Lessor covenants that if, and so long as, Lessee pays
Fixed Basic Rent, and any Additional Rent as herein provided, and
performs Lessee's covenants hereof, Lessor shall do nothing to affect
Lessee's right to peaceably and quietly have, hold and enjoy the
Premises for the Term herein mentioned, subject to the provisions of
this Lease.
33. INDEMNITY: Lessee shall defend, indemnify and save harmless Lessor and
its agents against and from; (a) any and all claims (i) arising from
(x) the conduct or management by Lessee, its subtenants, licensees, its
or their employees, agents, contractors or invitees on the Premises or
of any business therein, or (y) any work or thing whatsoever done, or
any condition created (other than by Lessor for Lessor's or Lessee's
account) in or about the Premises during the Term of this Lease, or
during the period of time, if any, prior to the Commencement Date that
Lessee may have been given access to the Premises, (z) any default by
Lessee under the terms, covenants and conditions of this Lease or (ii)
arising from any negligent or otherwise wrongful act or omission of
Lessee or any of its subtenants or licensees or its or their employees,
agents, contractors or invitees, and (b) all costs, expenses and
liabilities including reasonable attorneys fees and disbursements
incurred in or in connection with each such claim, action or proceeding
brought thereon. In case any action or proceeding be brought against
Lessor by reason of any such claim, Lessee, upon notice from Lessor,
shall resist and defend such action or proceeding.
34. ARTICLE HEADINGS: The article headings in this Lease and position of
its provisions are intended for convenience only and shall not be taken
into consideration in any construction or interpretation of this Lease
or any of its provisions. The Exhibits and Schedule referred to herein
and attached hereto are made a part of this Lease.
35. APPLICABILITY TO HEIRS AND ASSIGNS: The provisions of this Lease shall
apply to, bind and inure to the benefit of Lessor and Lessee, and their
respective heirs, successors, legal representatives and assigns. It is
understood that the term "Lessor" as used in this Lease means only the
owner, a mortgagee in possession or a term lessee of the Building, so
that in the event of any sale of the Building or of any lease thereof,
or if a mortgagee shall take possession of the Premises, the Lessor
herein shall be and hereby is entirely freed and relieved of all
covenants and obligations of Lessor hereunder accruing thereafter, and
it shall be deemed without further agreement that the purchaser, the
term lessee of the Building, or the mortgagee in possession has assumed
and agreed to carry out any and all covenants and obligations of Lessor
hereunder.
36. OUTSIDE PARKING SPACES: Lessee's occupancy of the Premises shall
include the use of the number of outside parking spaces as set forth in
the Preamble, all of which will be unassigned. Lessor shall not be
responsible for any damage or theft of any vehicle in the parking area
and shall not be required to keep parking spaces clear of unauthorized
vehicles or to otherwise supervise the use of the parking area. Lessee
shall, upon request, promptly furnish to Lessor the license numbers of
the cars operated by Lessee and its subtenants, licensees, invitees,
concessionaires, officers and employees. If any vehicle of the Lessee,
or of any subtenant, licensee, concessionaire, or of their respective
officers, agents or employees, is parked in any part of the Common
Facilities other than the employee parking area(s) designated therefor
by Lessor, Lessee shall pay to Lessor such penalty as may be fixed by
Lessor from time to time. All amounts due under the provisions of this
Article 36 shall be deemed to be Additional Rent.
37. LESSOR'S LIABILITY FOR LOSS OF PROPERTY: Lessor shall not be liable for
any loss of property from any cause whatsoever, including but not
limited to theft or burglary from the Premises, and any such loss
arising from the negligence of Lessor, its agents, servants or
invitees, or from defects, errors or omissions in the construction or
design of the Premises and/or the Building, including the structural
and non-structural portions thereof,
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and Lessee covenants and agrees to make no claim for any such loss at
any time.
38. PARTIAL INVALIDITY: If any of the provisions of this Lease, or the
application thereof to any person or circumstances, shall to any
extent, be invalid or unenforceable, the remainder of this Lease, or
the application of such provision or provisions to persons or
circumstances other than those as to whom or which it is held invalid
or unenforceable, shall not be affected thereby, and every provision of
this Lease shall be valid and enforceable to the fullest extent
permitted by law.
39. LESSEE'S BROKER: Lessee represents and warrants to Lessor that the
Broker, as defined in the Preamble is the sole broker with whom Lessee
has negotiated in bringing about this Lease and Lessee agrees to
indemnify and hold Lessor and its mortgagee(s) harmless from any and
all claims of other brokers and expenses in connection therewith
arising out of or in connection with the negotiation of or the entering
into this Lease by Lessor and Lessee. Lessor shall be responsible for
any commission due to said Broker pursuant to a separate agreement
between Lessor and Broker. In no event shall Lessor's mortgagee(s) have
any obligation to any broker involved in this transaction. In the event
that no broker was involved as aforesaid, then Lessee represents and
warrants to the Lessor that no broker brought about this transaction,
and Lessee agrees to indemnify and hold Lessor harmless from any and
all claims of any broker arising out of or in connection with the
negotiations of, or entering into of, this Lease by Lessee and Lessor.
40. PERSONAL LIABILITY: Notwithstanding anything to the contrary provided
in this Lease, it is specifically understood and agreed, such agreement
being a primary consideration for the execution of this Lease by
Lessor, that there shall be absolutely no personal liability on the
part of Lessor, its constituent members (to include but not be limited
to, officers, directors, partners and trustees) their respective
successors, assigns or any mortgagee in possession (for the purposes of
this Article, collectively referred to as "Lessor"), with respect to
any of the terms, covenants and conditions of this Lease, and that
Lessee shall look solely to the equity of Lessor in the Building for
the satisfaction of each and every remedy of Lessee in the event of any
breach by Lessor of any of the terms, covenants and conditions of this
Lease to be performed by Lessor, such exculpation of liability to be
absolute and without any exceptions whatsoever.
41. NO OPTION: The submission of this Lease Agreement for examination does
not constitute a reservation of, or option for, the Premises, and this
Lease Agreement becomes effective as a Lease Agreement only upon
execution and delivery thereof by Lessor and Lessee.
42. DEFINITIONS:
a. AFFILIATE -- Affiliate shall mean any corporation related to
Lessee as a parent, subsidiary or brother-sister corporation so
that such corporation and such party and other corporations
constitute a controlled group as determined under Section 1563 of
the Internal Revenue Code of 1986, as amended and as elaborated by
the Treasury Regulations promulgated thereunder or any business
entity in which Lessee has more than a fifty percent (50%)
interest.
b. COMMON FACILITIES -- Common Facilities shall mean the non-assigned
parking areas; lobby; elevator(s); fire stairs; public hallways;
public lavatories; all other general Building facilities that
service all Building tenants; air conditioning rooms; fan rooms;
janitors' closets; electrical closets; telephone closets; elevator
shafts and machine rooms; flues; stacks; pipe shafts and vertical
ducts with their enclosing walls. Lessor may at any time close
temporarily any Common Facilities to make repairs or changes
therein or to effect construction, repairs or changes within the
Building, or to discourage non-tenant parking, and may do such
other acts in and to the Common Facilities as in its judgement may
be desirable to improve the convenience thereof, but shall always
in connection therewith, endeavor to minimize any inconvenience to
Lessee.
c. FORCE MAJEURE -- Force Majeure shall mean and include those
situations beyond Lessor's reasonable control, including by way of
example and not by way of limitation, acts of God; accidents;
repairs; strikes; shortages of labor, supplies or
27
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materials; inclement weather; or, where applicable, the passage of
time while waiting for an adjustment or insurance proceeds. Any
time limits required to be met by either party hereunder, whether
specifically made subject to Force Majeure or not, except those
related to the payment of Fixed Basic Rent or Additional Rent,
shall, unless specifically stated to the contrary elsewhere in
this Lease, be automatically extended by the number of days by
which any performance called for is delayed due to Force Majeure.
d. LESSEE'S PERCENTAGE -- The parties agree that Lessee's Percentage,
as defined in the Preamble, reflects and will be continually
adjusted to reflect the ratio of the gross square feet of the area
rented to Lessee (including an allocable share of all Common
Facilities) [the numerator] as compared with the total number of
gross square feet of the entire Building (or additional buildings
that may be constructed within the Office Building Area) [the
denominator] measured outside wall to outside wall, but excluding
therefrom any storage areas. Lessor shall have the right to make
changes or revisions in the Common Facilities of the Building so
as to provide additional leasing area. Lessor shall also have the
right to construct additional buildings in the Office Building
Area for such purposes as Lessor may deem appropriate, and
subdivide the lands for that purpose if necessary, and upon so
doing, the Office Building Area shall become the subdivided lot on
which the Building in which the Premises is located. However, if
any service provided for in Article 23(a) or any utility provided
for in Article 23(b) is separately billed or separately metered
within the Building, then the square footage so billed or metered
shall be subtracted from the denominator and the Lessee's
proportionate share for such service and/or utility shall be
separately computed, and the Base Costs for such item shall not
include any charges attributable to said square footage. Lessee
understands that as a result of changes in the layout of the
Common Facilities from time to time occurring due to, by way of
example and not by way of limitation, the rearrangement of
corridors, the aggregate of all Building tenant proportionate
shares may be equal to, less than or greater than one hundred
percent (100%).
43. LEASE COMMENCEMENT: Notwithstanding anything contained herein to the
contrary, if Lessor, for any reason whatsoever, including Lessor's
negligence except as provided for in Article 27(b), cannot deliver
possession of the Premises, as provided for in Article 27(a), to Lessee
at the commencement of the agreed Term as set forth in Article 2, this
Lease shall not be void or voidable, nor shall Lessor be liable to
Lessee for any loss or damage resulting therefrom, but in that event,
the Term shall be for the full term as specified above to commence from
and after the date Lessor shall have delivered possession of the
Premises to Lessee or from the date Lessor would have delivered
possession of the Premises to Lessee but for Lessee's failure to timely
supply to Lessor such drawings and/or information required by Exhibit C
or for any other reason attributable to Lessee (herein the
"Commencement Date") and to expire midnight of the last day of the
month that is ninety (90) months after the month in which the
Commencement Date occurs, and if requested by Lessor, Lessor and Lessee
shall, ratify and confirm said Commencement and Expiration Dates by
completing and signing Exhibit G attached hereto and made a part
hereof.
44. NOTICES: Any notice by either party to the other shall be in writing
and shall be deemed to have been duly given only if (i) delivered
personally or (ii) sent by registered mail or certified mail return
receipt requested in a postage paid envelope addressed or (iii) sent by
nationally recognized overnight delivery service, if to Lessee, at the
above described Building; if to Lessor, at Lessor's address as set
forth above; or, to either at such other address as Lessee or Lessor,
respectively, may designate in writing. Notice shall be deemed to have
been duly given, if delivered personally, on delivery thereof, if
mailed, upon the tenth (10th) day after the mailing thereof or if sent
by overnight delivery service, the next business day.
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45. ACCORD AND SATISFACTION: No payment by Lessee or receipt by Lessor of a
lesser amount than the rent and additional charges payable hereunder
shall be deemed to be other than a payment on account of the earliest
stipulated Fixed Basic Rent and Additional Rent, nor shall any
endorsement or statement on any check or any letter accompanying any
check or payment for Fixed Basic Rent or Additional Rent be deemed an
accord and satisfaction, and Lessor may accept such check or payment
without prejudice to Lessor's right to recover the balance of such
Fixed Basic Rent and Additional Rent or pursue any other remedy
provided herein or by law.
46. EFFECT OF WAIVERS: No failure by Lessor to insist upon the strict
performance of any covenant, agreement, term or condition of this
Lease, or to exercise any right or remedy consequent upon a breach
thereof, and no acceptance of full or partial rent during the
continuance of any such breach, shall constitute a waiver of any such
breach or of such covenant, agreement, term or condition. No consent,
or waiver, express or implied, by Lessor to or of any breach of any
covenant, condition or duty of Lessee shall be construed as a consent
or waiver to or of any other breach of the same or any other covenant,
condition or duty, unless in writing signed by Lessor.
47. LEASE CONDITION: This Lease is expressly conditioned upon Lessor
receiving the consent and approval of Lessor's mortgagee to its term
and provisions not later than thirty (30) days after its execution by
Lessee, and delivery to Lessor. Should said consent not be received
within the aforesaid time period, Lessor may, at Lessor's sole option,
cancel this Lease and return the first month's Fixed Basic Rent and
Security Deposit to Lessee, which Lessee has deposited with Lessor upon
execution of this Lease, and thereafter the parties shall have no
further obligations to each other with respect to this Lease.
48. MORTGAGEE'S NOTICE AND OPPORTUNITY TO CURE: Lessee agrees to give any
mortgagees and/or trust deed holders, by registered mail, a copy of any
notice of default served upon Lessor, provided that, prior to such
notice, Lessee has been notified in writing (by way of notice of
assignment of rents and leases or otherwise) of the address of such
mortgagees and/or trust deed holders. Lessee further agrees that, if
Lessor shall have failed to cure such default within the time provided
for in this Lease, then the mortgagees and/or trust deed holders shall
have an additional thirty (30) days within which to cure such default,
or if such default cannot be cured within that time, then such
additional time as may be necessary, if within such thirty (30) days,
any mortgagee and/or trust deed holder has commenced and is diligently
pursuing the remedies necessary to cure such default (including but not
limited to commencement of foreclosure proceedings if necessary to
effect such cure), in which event this Lease shall not be terminated
while such remedies are being so diligently pursued.
49. LESSOR'S RESERVED RIGHT: Lessor and Lessee acknowledge that the
Premises are in a Building which is not open to the general public.
Access to the Building is restricted to Lessor, Lessee, their agents,
employees and contractors and to their invited visitors. In the event
of a labor dispute including a strike, picketing, informational or
associational activities directed at Lessee or any other tenant, Lessor
reserves the right unilaterally to alter Lessee's ingress and egress to
the Building or make any change in operating conditions to restrict
pedestrian, vehicular or delivery ingress and egress to a particular
location.
50. CORPORATE AUTHORITY: If Lessee is a corporation, Lessee represents and
warrants that this Lease has been duly authorized and approved by the
corporation's Board of Direc tors. The undersigned officers and
representatives of the corporation represent and warrant that they are
officers of the corporation with authority to execute this Lease on
behalf of the corporation, and within fifteen (15) days of execution
hereof, Lessee will provide Lessor with a corporate resolution
confirming the aforesaid.
51. INTENTIONALLY DELETED.
52. LESSEE'S RELOCATION: The Lessor, in its sole discretion, shall have the
right following receipt of a Renewal Notice to change the location of
the Premises to other space (the "Substituted Leased Premises") within
the Airport Business Center, subject Lessee's right to reject such
relocation as provided in Section 2.f. above and to the terms and
conditions set forth below.
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a. The Substituted Leased Premises shall contain a minimum floor area
of approximately the same number of square feet as are contained
in the Premises; and the square footage of any Common Facilities
attributable to the Substituted Leased Premises shall be
approximately the same as that of the Common Facilities
attributable to the Premises.
b. If the total square footage comprised by the Substituted Leased
Premises and its attributable Common Facilities exceed the total
of the Premises and its attributable Common Facilities, the Lessee
shall not be required to pay any increase in the Fixed Basic Rent
and Lessee's Percentage shall not be increased. If, however, such
total square footage shall be less, Lessee's Fixed Basic Rent and
Lessee's Percentage shall be decreased proportionately.
c. Lessee agrees that it shall relocate to the Substituted Leased
Premises no later than the date designated by Lessor in Lessor's
Notice, which date shall not be sooner than forty-five (45) days
after the date of Lessor's Notice.
d. The Lessor shall bear and pay for the cost and expense of any such
relocation; provided, however, that the Lessee shall not be
entitled to any compensation for damages for any interference with
or interruption of its business during or resulting from such
relocation. The Lessor shall make reasonable efforts to minimize
such interference.
e. In connection with any such relocation, the Lessor shall, at its
own cost and expense, furnish and install in (or, if practicable,
relocate to) the Substituted Leased Premises all walls,
partitions, floors, floor coverings, ceilings, fixtures, wiring
and plumbing, if any, (as distinguished from trade fixtures,
equipment, furniture, furnishings and other personal property
belonging to Lessee) required for the Lessee's proper use and
occupancy thereof, all of which items shall be comparable in
quality to those situated in the Premises.
f. The payments of new monthly minimum rent shall commence on the
earlier of ten (10) days after Lessor has completed the physical
relocation and installation of permanent improvements in the
Substituted Leased Premises or the date that Lessee first opens
for business in the Substituted Leased Premises.
g. Lessor and Lessee shall promptly execute an amendment to this
Lease reciting the relocation of the Premises and any changes in
the monthly minimum rent payable hereunder.
53. BUILDING PERMIT: This Lease is expressly conditioned upon Lessor
obtaining a building permit from the appropriate government official
for Lessee's Premises. Lessor hereby agrees to make application to said
government official within five (5) days following the execution of the
construction drawings for the Premises. As used herein, construction
drawings shall mean the final plans and specifications required
pursuant to Article 27(b).
54. INTENTIONALLY OMITTED.
55. USE AND OCCUPANCY TAX AND MISCELLANEOUS TAXES: Lessee shall pay
prior to delinquency all taxes (or its equivalent) assessed against or
levied or imposed upon its use and occupancy of the Premises or upon
the fixtures, furnishings, equipment and all other personal property of
Lessee located in the Premises and when possible Lessee shall cause
said fixtures, furnishings, equipment and all other personal property
to be assessed and billed separately from the property of Lessor. In
the event any or all of Lessee's fixtures, furnishings, equipment and
all other personal property or its occupancy of the Premises shall be
assessed and taxed with the property of Lessor, Lessee shall pay to
Lessor its share of such taxes within twenty (20) days after delivery
to Lessee by Lessor of a statement in writing setting forth the amount
of such taxes applicable to Lessee's fixtures, furnishings, equipment,
personal property or occupancy. If, during the Term of this Lease or
any renewal or extension thereof, any tax is imposed upon the privilege
of renting or occupying the Premises or upon the amount of rentals
collected therefor, Lessee will pay each month, as Additional Rent, a
sum equal to such tax or charge that is imposed for such month, but
nothing herein shall be taken to require Lessee to pay any income,
estate, inheritance or franchise tax imposed upon Lessor except to the
extent required by Article 23 hereof. In
30
<PAGE>
addition, Lessee will pay as additional rent, all school district
business use and occupancy tax applicable to Lessee and the Premises
(if any) within the time set forth in any bill rendered by the taxing
authority having such authority, or Lessor for said tax. Lessor shall
have the same rights and remedies for the non-payment of such use and
occupancy tax, or any other item hereunder, that it has upon Lessee's
failure to pay rent hereunder.
56. APPRAISAL, FAIR MARKET VALUE.
a. If Lessee, in good faith, determines that a Fair Market Rental
Rate (as defined in Section 56.b below as determined by Lessor as
otherwise provided in this Lease is not acceptable to Lessee,
Lessee may invoke an appraisal procedure by written notice to
Lessor within ten (10) days after Lessee's receipt of Lessor's
determination of the Fair Market Rental Rate. If no such written
notice is given by Lessee within such time, Lessee shall have no
further right to appraisal and shall be obligated to pay the rate
as determined by Lessor. Lessor and Lessee, within ten (10)
business days after the appraisal procedure is invoked, shall each
simultaneously submit to the other its good faith estimate of the
Fair Market Rental Rate. If the higher of said estimate is not
more than one hundred five percent (105%) of the lower of such
estimates, the Fair Market Rental Rate in question shall be deemed
to be the average of the submitted rates. If otherwise, then the
dispute shall be settled by arbitration to be held in
Philadelphia, Pennsylvania in accordance with the Real Estate
Valuation Arbitration Rules of the American Arbitration
Association, except that the arbitration shall be on the basis
that the arbitrators will pick one of the two rates submitted,
being the rate which is closer to the Fair Market Rental Rate as
determined by the arbitrators using the definitions set forth in
Section 56.b. The parties agree to be bound by the decision of the
arbitrators and shall share equally the costs of arbitration, and
judgment upon the award rendered by the arbitrators may be entered
in any court having jurisdiction thereof.
b. The phrase "Fair Market Rental Rate" as used herein shall mean the
fair market value annual rental rate for which Lessor, at or about
the time that such fair market value rent rate is to be first set
by Lessor, has entered into a lease or leases with other
comparable tenants (excluding existing tenants with options to
expand or renew at predetermined or fixed rental rates or pursuant
to a definition of fair market value rental rate which is not
comparable or equivalent to the definition of Fair Market Rental
Rate set forth herein and also excluding existing tenants who take
additional space without the benefit of an expansion option, but
including new tenants without such options who, by subsequent
agreement with Landlord, expand or renew their premises at a rent
determined pursuant to a definition of fair market value rental
rate which is comparable space in the Building or in the Airport
Business Center (the "Project"), as the case may be, at the time
that such Fair Market Value rental rate is first set by Lessor
under the applicable provisions of this Lease, or would obtain
from any prospective tenant for any general office use of such
space, as such space is then improved. The Fair Market Rental Rate
shall take into account the value of any rent or equivalent
economic concessions (the "Concessions") then offered in
connection with the leasing of such comparable space in the
Building or the Project. The Fair Market Rental Rate shall also
take into account that (i) a lessee may lease the Premises on an
"as-is" basis without Lessor granting Concessions such as lessee
improvement allowances; (ii) the Premises, in their then existing
condition, may be partially suitable to a lessee, without the
necessity of additional improvements or the granting of any
concession such as lessee improvement allowances; (iii) the
Premises, in their then existing condition, may exceed the quality
of available space in the marketplace for the operation of
Lessee's business, and (iv) the improvements in the Premises, in
their then existing condition, may need to be demolished and
rebuilt to be suitable for use by Lessee. For purposes of this
Section 56.b on a renewal of the Term hereof, all of the Premise
shall be deemed to be satisfactory to Lessee and suitable for the
conduct of Lessee's business, except to the extent such space may
need to be refurbished.
57. RIGHT OF FIRST OFFER.
a. Upon any space on the second floor of the Building becoming
available ("Available Space"), Lessor shall provide to Lessee
notice thereof ("Availability Notice"). Space shall be "available"
only to the extent it is not subject to expansion, extension,
first
31
<PAGE>
offer, first refusal and any other rights of other tenants in the
Building or Project. Lessee acknowledges that, among others,
Keystone Mercy Health Plan has a right of first offer for any
available space on the second floor of the Building. Provided that
at least three (3) years remain on the initial Term of this Lease,
and provided that Lessee is not in default with respect to this
Lease, Lessee shall have a one-time first right to lease the
Available Space (in its entirety), on the terms and conditions
described in this Article 57 and otherwise consistent with this
Lease, which is exercisable by written notice to Lessor within ten
(10) business days after Lessee's receipt of the Availability
Notice. Any such Available Space shall be leased to Lessee on an
"as is" basis, for a term coterminous with the balance of the Term
remaining on the Premises (or such shorter term as may be
necessary to prevent any conflict with any other lessees' rights
to such space) and at a rental rate equal to the Fair Market
Rental Rate provided, however, Lessee's exercise of the first
right described in this Article 57 shall be final with respect to
the lease by Lessee of such Available Space, and Lessee hereby
agrees that any dispute between Lessor and Lessee concerning the
determination by Lessor of the rental rate for such Available
Space shall be submitted to arbitration pursuant to Section 56.1.
b. In the event Lessee does not timely elect to lease the Available
Space then Lessor may lease the Available Space and any further
available space in the Building to any third party and Lessee
shall have no right of first offer with respect thereto. Likewise,
if Lessee timely elects to lease the Available Space, Lessee shall
have no right of first offer to lease any subsequent available
space in the Building.
c. As of the date that Lessor delivers actual possession to Lessee of
the Available Space leased by Lessee, such Available Space shall
become part of the Premises and, except as otherwise provided in
this Article 57, shall be leased upon the same terms and
conditions (other than as to Fixed Basic Rent, which will be
governed by subsection (a) above and Section 56) and Additional
Rent which shall increase in accordance with the increase in
Lessee's Percentage.
d. The first right to lease the Available Space set forth in this
Article 57 is personal to Lessee and may not be assigned,
transferred or conveyed to any party, unless the Lease is assigned
in its entirety in accordance with the terms hereof.
58. ARBITRATION.
a. Whenever in this lease it is provided that a dispute shall be
resolved by arbitration, the arbitration shall be conducted in
Philadelphia, Pennsylvania, as provide din this Article 58. The
party desiring such arbitration shall give written notice thereof
to the other specifying the dispute to the arbitrated. Within
twenty (20) days after the date on which the arbitration procedure
is invoked as provided in this Lease, each party shall appoint an
experienced arbitrator and notify the other party of the
arbitrator's name and address. For purposes of this Article 58, an
"experienced arbitrator" shall be an individual unrelated to any
party hereto who possesses at least ten (10) years experience in
the development, management or leasing of first class office space
in complex real estate transactions in the Philadelphia
metropolitan area, and who has at no time ever represented or
acted on behalf of any of the parties. The party who selects the
experienced arbitrator may not consult with such experienced
arbitrator, directly or indirectly, to determine such experienced
arbitrator's position on the issue which is the subject of the
dispute. If the party fails to so appoint an experienced
arbitrator and notify the other party of such arbitrator's name
and address, an arbitrator shall be appointed pursuant to the same
procedure that is followed when agreement cannot be reached as to
the third arbitrator. Within ten (10) days after the appointment
of the second experienced arbitrator and notice to the other part
of such arbitrator's name and address, the two arbitrators so
appointed shall notify both parties of the third arbitrator's name
and address. If the three arbitrators to be so appointed are not
appointed within thirty (30) days after the date the arbitration
procedure is invoked as provided in this Lease, then the
arbitrator or arbitrators, if any, who have been selected shall
proceed to carry out the arbitration. The arbitrator or
arbitrators so selected shall furnished Lessor and Lessee with a
written decision within thirty (30) days after the date of
selection of the last of the arbitrators to be so selected. Any
decision so submitted shall be signed by a majority of the
arbitrators,
32
<PAGE>
if more than two have been selected. If only two arbitrators have
been selected and they are unable to agree, then either Lessor or
Lessee shall be entitled to apply to the President Judge of the
Court of Common Pleas of Delaware County, Pennsylvania for the
selection of a third arbitration who shall be selected from a list
of names of experienced arbitrators submitted by Lessor or from a
list of names submitted by Lessee, as the case may be, unless both
Lessor and Lessee submits lists of names, in which case the Court,
in its sole discretion, shall select the third arbitrator from the
lists. In the event of any subsequent vacancies or inabilities to
perform among the arbitrators appointed, the arbitrator or
arbitrators involved shall be replaced in accordance with the
provisions of this Article 58 as if such replacement was an
initial appointment to be made under this Article 58 within the
time constraints set forth in this Article 58, measured from the
date of notice of such vacancy or inability to the person or
persons required to make such appointment, with all the attendant
consequences of failure to act timely if such appointment person
is the party hereto. In designating arbitrators and in deciding
the dispute, the arbitrators shall utilize their utmost skill and
act diligently in accordance with the Commercial Rules of
Arbitration then in force of the American Arbitration Association,
subject, however, to such limitations as may be placed upon them
by the provisions of this lease.
b. The arbitrators appointed pursuant to this Article 58 shall (i)
determine the Fair Market Rental Rate as provided in the Lease,
and (ii) fix and establish any and all rules as it shall consider
appropriate in their sole and absolute discretion to govern the
proceedings before it, including any and all rules of discovery,
procedure and/or evidence.
c. The decision of the arbitrators shall be final and bindings, may
be confirmed and entered by any court of competent jurisdiction at
the request of any party and may not be appealed to any court of
competent jurisdiction or otherwise except upon a claim of fraud
on the part of the arbitrators, or on the basis of a mistake as to
the applicable law.
d. The obligations of Lessor and Lessee to submit a dispute to
arbitration is limited to disputes arising under those articles of
this Lease which specifically provide for arbitration. Neither
party shall be in default hereunder with respect to any provision
hereof during the time period commencing as of the initial notice
of desire to arbitrate and ending on the date of resolution by the
arbitrators; provided, however, that during said period each party
shall continue to make all payments of money required by this
Lease and shall otherwise perform all duties and obligations
required to be performed by such party under this Lease and, with
respect to the issue under arbitration, shall maintain the status
quo.
EACH PARTY AGREES that it will not raise or assert as a defense to any
obligation under the Lease or this Agreement or make any claim that the Lease or
this Agreement is invalid or unenforceable due to any failure of this document
to comply with ministerial requirements including, but not limited to,
requirements for corporate seals, attestations, witnesses, notarizations, or
other similar requirements, and each party hereby waives the right to assert any
such defense or make any claim of invalidity or unenforceability due to any of
the foregoing.
THE UNDERSIGNED LESSEE ACKNOWLEDGES THAT IT FULLY UNDERSTANDS THE
CONFESSIONS OF JUDGMENT CONTAINED IN ARTICLE 14 HEREOF AND THAT THE
LESSOR-LESSEE RELATIONSHIP CREATED HEREBY IS COMMERCIAL IN NATURE AND THAT THE
UNDERSIGNED WAIVES ANY RIGHT TO A HEARING WHICH WOULD OTHERWISE BE A CONDITION
TO LESSOR'S OBTAINING THE JUDGMENTS AUTHORIZED BY ARTICLE 14.
THE UNDERSIGNED LESSEE FURTHER ACKNOWLEDGES AND UNDERSTANDS THAT LESSEE
HAS WAIVED ITS RIGHT TO A TRIAL BY JURY.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
and seals the day and year first above written.
LESSOR: LESSEE:
33
<PAGE>
CALI AIRPORT REALTY BLUESTONE SOFTWARE, INC.
ASSOCIATES, L.P.
By: Mack-Cali Sub XVIII, Inc.,
General Managing Partner
By: /s/ John Jay Crandall By: /s/ Craig Huke
-------------------------------------- -----------------------
John Jay Crandall Craig Huke
Vice President, Leasing - NJ/PA Region Chief Financial Officer
34
<PAGE>
EXHIBIT A
LOCATION OF PREMISES
[Graphic, two pages; A not to scale aerial view of the premises]
35
<PAGE>
EXHIBIT A-2
OFFICE BUILDING AREA
PREMISES "3"
ALL THAT CERTAIN lot or piece of ground with the buildings and improvements
thereon erected, Situate in the Township of Tinicum, County of Delaware, State
of Pennsylvania, as shown on an ALTA/ACSM Land Title Survey Plan for Airport
Business Center (Lot 3 Parcel 2), prepared by Brandywine Valley Engineers, Inc.,
Consulting Engineers and Land Surveyors, dated November 18, 1996, last revised
December 16, 1996, and being bounded and described as follows:
BEGINNING at a point in the Northwesterly side of Governor Printz Boulevard
(westbound - L.R. 762) (S.R. 0291) (various widths) said point being measured
along same the following eight (8) courses and distances from a point of
intersection of said side of Governor Printz Boulevard (60 feet wide) with the
Northeasterly side of Fourth Avenue (60 feet wide): (1) along said side of
Governor Printz Boulevard North 63 degrees 19 minutes 37 seconds East 685.12
feet to a point; (2) North 26 degrees 40 minutes 23 seconds West 25.00 feet to a
point; (3) North 63 degrees 19 minutes 37 seconds East 124.98 feet to a point of
curvature; (4) along the arc of a circle curving to the right in a
Northeastwardly direction having a radius of 5784.58 feet an arc distance of
544.20 feet (chord North 66 degrees 01 minute 20 seconds East 544.00 feet) to a
point; (5) South 21 degrees 16 minutes 58 seconds East 5.00 feet to a point; (6)
along the arc of a circle curving to the right in a Northeastwardly direction
having a radius of 5779.58 feet an arc distance of 275.02 feet (chord North 70
degrees 04 minutes 50 seconds East 275.00 feet) to a point; (7) North 27 degrees
36 minutes 51 seconds West 25.26 feet to a point; (8) North 52 degrees 14
minutes 28 seconds East 81.37 feet to the point of beginning; thence from said
beginning point and along the Northeasterly side of Stevens Drive the following
two (2) courses and distances: (1) North 32 degrees 16 minutes 00 seconds West
41.25 feet to a point of curvature and (2) along the arc of a circle curving to
the left in a Northwestwardly direction having a radius of 175.00 feet an arc
distance of 198.53 feet (chord North 64 degrees 46 minutes 00 seconds West
188.05 feet) to a point of tangency; thence leaving the same North 22 degrees 44
minutes 00 seconds East 457.57 feet to a point in the southeasterly right of way
line for limited access for Interstate 95 (S.R. 0095); thence along said limited
access right of way the following three (3) courses and distances: (1) South 70
degrees 45 minutes 32 seconds East 481.67 feet to a point; (2) South 03 degrees
38 minutes 14 seconds West 40.01 feet to a point; (3) South 52 degrees 14
minutes 28 seconds West 552.65 feet to the first mentioned point and place of
beginning.
BEING Lot #3 on said Plan and containing an area of 4.0022 acres more or less.
BEING Folio No. 45-00-00504-03.
BEING commonly known as 300 Stevens Drive.
36
<PAGE>
EXHIBIT B
RULES AND REGULATIONS
1. OBSTRUCTION OF PASSAGEWAYS: The sidewalks, entrance, passages, courts,
elevators, vestibules, stairways, corridors and public parts of the
Building shall not be obstructed or encumbered by Lessee or used by
Lessee for any purpose other than ingress and egress. If the Premises
are situated on the ground floor with direct access to the street, then
Lessor shall, at Lessor's expense, keep the sidewalks and curbs
directly in front of the Premises clean and free from ice, snow and
refuse.
2. WINDOWS: Windows in the Premises shall not be covered or obstructed by
Lessee. No bottles, parcels or other articles shall be placed on the
windowsills, in the halls, or in any other part of the Building other
than the Premises. No article shall be thrown out of the doors or
windows of the Premises.
3. PROJECTIONS FROM BUILDING: No awnings, air-conditioning units, or other
fixtures shall be attached to the outside walls or the window sills of
the Building or otherwise affixed so as to project from the Building,
without prior written consent of Lessor.
4. SIGNS: No sign or lettering shall be affixed by Lessee to any part of
the outside of the Premises, or any part of the inside of the Premises
so as to be clearly visible from the outside of the Premises, without
the prior written consent of Lessor. However, Lessee shall have the
right to place its name on any door leading into the Premises the size,
color and style thereof to be subject to the Lessor's approval. Lessee
shall not have the right to have additional names placed on the
Building directory without Lessor's prior written consent.
5. FLOOR COVERING: Lessee shall not lay linoleum or other similar floor
covering so that the same shall come in direct contact with the floor
of the Premises. If linoleum or other similar floor covering is desired
to be used, an interlining of builder's deadening felt shall first be
fixed to the floor by a paste or other material that may easily be
removed with water, the use of cement or other similar adhesive
material being expressly prohibited.
6. INTERFERENCE WITH OCCUPANTS OF BUILDING: Lessee shall not make, or
permit to be made, any unseemly or disturbing noises or odors and shall
not interfere with other tenants or those having business with them.
Lessee will keep all mechanical apparatus in the Premises free of
vibration and noise which may be transmitted beyond the limits of the
Premises.
7. LOCK KEYS: No additional locks or bolts of any kind shall be placed on
any of the doors or windows by Lessee. Lessee shall, on the termination
of Lessee's tenancy, deliver to Lessor all keys to any space within the
Building either furnished to or otherwise procured by Lessee, and in
the event of the loss of any keys furnished, Lessee shall pay to Lessor
the cost thereof. Lessee, before closing and leaving the Premises,
shall ensure that all windows are closed and entrance doors locked.
Nothing in this Paragraph 7 shall be deemed to prohibit Lessee from
installing a burglar alarm within the Premises, provided: (1) Lessee
obtains Lessor's consent which will not be unreasonably withheld or
delayed; (2) Lessee supplies Lessor with copies of the plans and
specifications of the system; (3) such installation shall not damage
the Building; and (4) all costs of installation shall be borne solely
by Lessee.
8. CONTRACTORS: No contract of any kind with any supplier of towels,
water, toilet articles, waxing, rug shampooing, venetian blind washing,
furniture polishing, lamp servicing, cleaning of electrical fixtures,
removal of waste paper, rubbish, garbage, or other like service shall
be entered into by Lessee, nor shall any machine of any kind be
installed in the Building or the Office Building Area without the prior
written consent of the Lessor. Lessee shall not employ any persons
other than Lessor's janitors for the purpose of cleaning the Premises
without prior written consent of Lessor. Lessor shall not be
responsible to
37
<PAGE>
Lessee for any loss of property from the Premises however occurring, or
for any damage to the effects of Lessee by such janitors or any of its
employees, or by any other person or any other cause.
9. PROHIBITED ON PREMISES: Lessee shall not conduct, or permit any other
person to conduct, any auction upon the Premises, manufacture or store
goods, wares or merchandise upon the Premises without the prior written
approval of Lessor, except the storage of usual supplies and inventory
to be used by Lessee in the conduct of his business, permit the
Premises to be used for gambling, make any unusual noises in the
Building, permit any musical instrument to be played on the Premises,
permit any radio to be played, or television, recorded or wired music
in such loud manner as to disturb or annoy other tenants, or permit any
unusual odors to be produced on the Premises. Lessee shall not permit
any portion of the Premises to be occupied as an office for a public
stenographer or typewriter, or for the storage, manufacture, or sale of
intoxicating beverages, narcotics, tobacco in any form or as a barber
or manicure shop. Canvassing, soliciting and peddling in the Building
and the Office Building Area are prohibited and Lessee shall cooperate
to prevent the same. No bicycles, vehicles or animals (except personal
assistance dogs) of any kind shall be brought into or kept in or about
the Premises.
10. PLUMBING, ELECTRIC AND TELEPHONE WORK: Plumbing facilities shall not be
used for any purpose other than those for which they were constructed;
and no sweepings, rubbish, ashes, newspaper or other substances of any
kind shall be thrown into them. Waste and excessive or unusual amounts
of electricity or water is prohibited. When electric wiring of any kind
is introduced, it must be connected as directed by Lessor, and no
stringing or cutting of wires will be allowed, except by prior written
consent of Lessor, and shall be done by contractors approved by Lessor.
The number and locations of telephones, telegraph instruments,
electrical appliances, call boxes, etc. shall be subject to Lessor's
approval.
11. MOVEMENT OF FURNITURE, FREIGHT OR BULKY MATTER: The carrying in or out
of freight, furniture or bulky matter of any description must take
place during such hours as Lessor may from time to time reasonably
determine and only after advance notice to the superintendent of the
Building. The persons employed by Lessee for such work must be
reasonably acceptable to the Lessor. Lessee may, subject to these
provisions, move freight, furniture, bulky matter, and other material
into or out of the Premises on Saturdays between the hours of 9:00 a.m.
and 1:00 p.m., provided Lessee pays additional costs, if any, incurred
by Lessor for elevator operators or security guards, and for any other
expenses occasioned by such activity of Lessee. If, at least three (3)
days prior to such activity, Lessor requests that Lessee deposit with
Lessor, as security of Lessee's obligations to pay such additional
costs, a sum of which Lessor reasonably estimates to be the amount of
such additional cost, the Lessee shall deposit such sum with Lessor as
security of such cost. There shall not be used in the Building or
Premises, either by Lessee or by others in the delivery or receipt of
merchandise, any hand trucks except those equipped with rubber tires
and side guards, and no hand trucks will be allowed in the elevators
without the consent of the superintendent of the Building.
12. SAFES AND OTHER HEAVY EQUIPMENT: Lessor reserves the right to prescribe
the weight and position of all safes and other heavy equipment so as to
distribute properly the weight thereof and to prevent any unsafe
condition from arising.
13. ADVERTISING: Lessor shall have the right to prohibit any advertising by
Lessee which in Lessor's reasonable opinion tends to impair the
reputation of the Building or its desirability as a building for
offices, and upon written notice from Lessor, Lessee shall refrain from
or discontinue such advertising.
14. NON-OBSERVANCE OR VIOLATION OF RULES BY OTHER TENANTS: Lessor shall not
be responsible to Lessee for non-observance or violation of any of
these rules and regulations by any other tenant.
38
<PAGE>
15. AFTER HOURS USE: Lessor reserves the right to exclude from the Building
between the hours of 6:00 p.m. and 8:00 a.m. and at all hours on
Saturdays, Sundays and Building Holidays, all persons who do not
present a pass to the Building signed by the Lessee. Each Lessee shall
be responsible for all persons for whom such a pass is issued and shall
be liable to the Lessor for the acts of such persons.
16. PARKING: Lessee and its employees shall park their cars only in those
portions of the parking area designated by Lessor.
17. RESERVATIONS: Lessor hereby reserves to itself any and all rights not
granted to Lessee hereunder, including, but not limited to, the
following rights which are reserved to Lessor for its purposes in
operating the Building:
a) the exclusive right to the use of the name of the Building for all
purposes, except that Lessee may use the name as its business
address and for no other purposes; and
b) the right to change the name or address of the Building, without
incurring any liability to Lessee for doing so; and
c) the right to install and maintain a sign on the exterior of the
Building; and
d) the exclusive right to use or dispose of the use of the roof of
the Building; and
e) the right to limit the space on the directory of the Building to
be allotted to Lessee; and
f) the right to grant to anyone the right to conduct any particular
business or undertaking in the Building.
18. HEALTH: The Lessee shall be responsible for initiating, maintaining and
supervising all health and safety precautions and/or programs required
by Law in connection with the Lessee's use and occupancy of the
Premises.
19. HAZARDOUS MATERIALS: The Lessee shall not store, introduce or otherwise
permit any material known to be hazardous within the Premises. Any
material within the Premises which is determined to be hazardous shall
be removed and properly disposed of by the Lessee at the Lessee's sole
expense.
39
<PAGE>
EXHIBIT C
LESSOR'S WORK
Workletter Agreement for office space on the 3rd floor, at 300 Stevens Drive,
Lester, Pennsylvania between Cali Airport Realty Associates, L.P., as Lessor,
and Bluestone Software, Inc., as Lessee.
Dated: October 29, 1999
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
DIVISION GLS DESCRIPTION BUDGET
- ---------------------------------------------------------------------
<S> <C> <C> <C>
1.0 5510 General Requirements $ 23,694.74
- ---------------------------------------------------------------------
2.0 5524 Miscellaneous 24,972.00
- ---------------------------------------------------------------------
6.0 5561 Cabinets & Millwork 13,630.00
- ---------------------------------------------------------------------
8.1 5540 Doors & Hardware 42,600.00
- ---------------------------------------------------------------------
8.4 5570 Aluminum, Glass & Glazing 19,360.00
- ---------------------------------------------------------------------
9.3 5530 Partitions 58,250.00
- ---------------------------------------------------------------------
9.5 5542 Acoustical Ceilings 11,575.00
- ---------------------------------------------------------------------
9.7 5565 Painting and Vinyl Wall Covering 30,325.00
- ---------------------------------------------------------------------
9.9 5564 Flooring & Carpet 56,167.50
- ---------------------------------------------------------------------
15.3 5574 Fire Suppression 22,500.00
- ---------------------------------------------------------------------
15.4 5532 Plumbing 15,605.00
- ---------------------------------------------------------------------
15.5 5535 HVAC 59,989.25
- ---------------------------------------------------------------------
16.0 5533 Electrical 79,855.00
- ---------------------------------------------------------------------
SUBTOTAL $458,523.49
10% OVERHEAD 45,852.35
- ---------------------------------------------------------------------
SUBTOTAL $504,375.84
5% GENERAL CONDITIONS 25,218.79
- ---------------------------------------------------------------------
TOTAL $529,594.63
- ---------------------------------------------------------------------
</TABLE>
Rentable Area = 23,957 S.F.
Preliminary pricing & assumptions based on Test-Fit-1 Dated 8/17/99
and ADA letter dated 9/29/99
<TABLE>
- ---------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL COST $529,594.63
- ---------------------------------------------------------------------
5799 LESS: LESSOR'S ALLOWANCE $479,140.00
$20.00 per rt. sq. ft.
$0.00 lot allowance
- ---------------------------------------------------------------------
NET COST TO BE PAID BY $ 50,454.63
LESSEE PRIOR TO OCCUPANCY
- ---------------------------------------------------------------------
</TABLE>
AGREED AND ACCEPTED:
LESSEE:
BLUESTONE SOFTWARE, INC.
By: /s/ Craig Huke
----------------------
CRAIG HUKE
Chief Financial Officer
40
<PAGE>
EXHIBIT C
NOTES
RE: Workletter Agreement for office space on the 3rd floor at 300 Stevens
Drive, Lester, Pennsylvania between Cali Airport Realty Associates,
L.P. as Lessor and Bluestone Software, Inc., as Lessee.
You ("Lessee") and we ("Lessor") are executing simultaneously with this
Workletter Agreement a written lease ("Lease"), covering the space referred to
above, as more particularly described in the Lease ("Premises").
To induce Lessee to enter into the Lease (which is hereby incorporated by
reference) and in consideration of the covenants hereinafter contained, Lessor
and Lessee mutually agree as follows:
1a. Lessor has heretofore delivered to Lessee for use by Lessee and/or its
architect or engineer, such structural, electrical and mechanical
drawings, specifications, and other information with respect to the
Building ("Base Building Plans") reflecting Lessor's construction of
the core and shell of the Building (the "Core and Shell"). Lessee
acknowledges that the Core and Shell were constructed to construction
industry standard tolerances permitting limited deviations from the
requirements of the Base Building Plans. Lessee has or will cause its
architect or engineer to conduct a field survey of the Premises to
verify critical dimensions and ascertain any deviation from the Base
Building Plans.
1b. Lessee shall consult with its architect, engineer, designer and such
other consultants (collectively, "Lessee's Architect") as it shall deem
necessary for the development and timely completion of Construction
Documents, as hereinafter defined, which shall conform to the Base
Building Plans.
1c. Subject to the procedural requirements set forth below in Subsection
1.f., Lessee shall cause Lessee's Architect to prepare and design
development documents consisting of architectural, mechanical,
electrical, plumbing (if permitted) and structural drawing and other
documents to fix and describe the interior size and character of the
Premises (the "Construction Documents"). Lessee shall cause Lessee's
Architect to prepare and deliver to Lessor prior to the execution of
the lease one (1) complete reproducible set and a CAD disk(s)
containing the Construction Documents.
1d. Lessee's Construction Documents shall be signed and sealed by a
reputable architect or professional engineer (where applicable)
licensed and registered in the Commonwealth of Pennsylvania. In
addition to conforming to Lessor's Base Building Plans, Lessee's
Construction Documents shall also conform to all applicable laws,
ordinances, building codes and requirements of public authorities and
insurance underwriters. Lessee's Construction Documents shall contain,
at a minimum, floor plans, reflected ceiling plans, power and telephone
plans, mechanical plans, electrical plans, fire protection plans and
all other details and schedules which designate the locations and
specifications for all mechanical, electrical, fire protection and life
safety equipment to be installed in the Premises, and all partitions,
doors, lighting fixtures, electric receptacles and switches, telephone
outlets, special air-conditioning, and other improvements to be
installed within the Premises.
1e. Lessee's Construction Documents, as approved by Lessor and as modified
by Lessee to take account of any changes reasonably requested by
Lessor, are hereinafter considered to be "Issued for Construction".
1f. Lessee shall submit for Lessor's approval all Construction Documents.
The approval by Lessor of Lessee's Construction Documents shall be
subject to the following procedural requirements:
41
<PAGE>
(1) Lessor shall review, within five (5) business days
after submission, the applicable documents or any additional requested
information, and either approve the same or return the same to Lessee with
requested modifications.
(2) If Lessor shall return the documents to Lessee with
requested modifications, Lessor shall specify a reasonable period of time, not
to exceed five (5) business days, within which such modifications shall be made
and within which such modified plans shall be resubmitted to Lessor by Lessee,
until the modified documents are finally approved by Lessor.
(3) To the extent the Tenant's Construction Documents,
in Lessor's sole judgment, involve any modification of, or impact upon, the
Building's structural, mechanical, electrical or plumbing systems or components,
then such approval may be withheld by Lessor in its absolute and sole
discretion.
2. Following Lessor's receipt of Construction Documents Issued for
Construction, upon Lessor's receipt from Lessee of an invoice
evidencing the actual cost of Lessee's preparation of its Construction
Documents, Lessor shall pay to Lessee's Architect the amount of such
cost as reimbursement therefor provided, that the aggregate amount to
be reimbursed by Lessor to Lessee for Lessee's cost to prepare such
documents shall not exceed $13,176.35, and the Construction Allowance
shall be reduced by every such reimbursement to Lessee.
3. Lessor agrees to do the work in the Premises as preliminarily described
on the "Description of Materials" schedule attached hereto and as shown
on the plans dated August 17, 1999 and ADA letter dated September 29,
1999, which shall hereinafter be referred to as "The Work". "Building
Standard" shall mean the type and grade of material, equipment and/or
device designated by Lessor as standard for the Building. All items are
Building Standard unless otherwise noted. The provisions of Article 5
of the Lease shall apply to any alterations made to the Premises after
the initial work to be performed herein.
4. Lessor has estimated the cost of The Work based upon the sketch plans
and specifications submitted to Lessor by Lessee to be $529,689.27
(23,957 RSF @ 22.11). This amount is an estimate only. Against such
estimated cost, Lessor shall credit an allowance of $479,140 (23,957
RSF @ $20 per RSF) (the "Construction Allowance") and the remaining
balance, if any, shall be paid by Lessee prior to occupancy. The
Construction Allowance may be used to pay the cost of The Work,
preparing Construction Documents (as provided above), obtaining
construction and occupancy permits, oversight and inspection fees of
Lessor, Lessor's construction representative and governmental
authorities, and fees of the general contractor. No part of the
Construction Allowance may be used for any other purpose and may not be
used to fund, pay for or offset any miscellaneous tenant expense or as
a rent credit. Lessor shall obtain, and provide to Lessee, at least two
bids from general contractors for The Work. Lessor agrees to request a
bid for The Work from Interior Construction Plus, provided that
Interior Construction Plus provides evidence to Lessor that it
maintains insurance coverages and amounts in keeping with Lessor's
standards.
5. All low partitioning, work station modules, bankscreen partitions and
prefabricated partition systems shall be furnished and installed by
Lessee.
6. The installation or wiring of telephone and computer (data) outlets is
not part of The Work. Lessee shall bear the responsibility to provide
its own telephone and data systems at Lessee's sole cost and expense.
Upon expiration or sooner termination of the Lease, Lessee shall remove
all telephone and data equipment and wiring from the Premises and the
Building risers prior to vacation of same.
7. Changes in The Work, if necessary or requested by the Lessee, shall be
accomplished after the execution of the Lease and this Workletter
Agreement, and without invalidating any part of the Lease or Workletter
Agreement, by written agreement between Lessor and Lessee hereinafter
referred to as a Change Order. Each Change Order shall be prepared by
Lessor and signed by both Lessee and Lessor stating their agreement
upon all of the following:
42
<PAGE>
a. The scope of the change in The Work; and
b. The cost of the change; and
c. Manner in which the cost will be paid or credited; and
d. The estimated extent of any adjustment to the Commencement Date as
a result of the change in The Work.
Each and every Change Order shall be signed by Lessor's and Lessee's
respective construction representatives. In no event shall any Change
Order(s) be permitted without such authorizations. A 10% supervision
plus 5% overhead charge will be added to the cost of any Change Order
executed thirty (30) days or more after the date of the Lease. If
Lessee shall fail to approve any such Change Order within one (1) week,
the same shall be deemed disapproved in all respects by Lessee and
Lessor shall not be authorized to proceed thereon. Any increase in the
cost of The Work or the change in The Work stated in a Change Order
which results from Lessee's failure to timely approve and return said
Change Order shall be paid by the Lessee. Lessee agrees to pay to
Lessor the cost of any Change Order promptly upon receipt of an invoice
for same.
8. If Lessee elects to use the architect suggested by Lessor, this
architect becomes the Lessee's agent solely with respect to the plans,
specifications and The Work. If any change is made prior to completion
of schematic drawings and final construction documents which result in
a Change Order and additional costs, such costs shall be the
responsibility of the Lessee. Similarly, any cost savings resulting
from such Change Order(s) shall be credited to the Lessee.
9. Prior to Lessee's occupancy of the Premises, Lessee shall identify and
list any portion of The Work which does not conform to this Workletter
Agreement ("Punch List"). The Lessor shall review with the Lessee all
of the items so listed and correct or complete any portion of The Work
which fails to conform to the requirements of this Workletter
Agreement.
10. The terms contained in the Lease (which include all exhibits attached
thereto) constitute Lessor's agreement with Lessee with respect to the
work to be performed by Lessor on Lessee's behalf. If the architectural
drawings are in conflict with the terms of the Lease, then the Lease
shall be deemed the controlling document.
11. All materials and installations constructed for the Lessee within the
Premises shall become the property of the Lessor upon installation. No
refund, credit or removal of said items is to be permitted at the
termination of the Lease. Items installed that are not integrated in
any such way with other common building materials do not fall under
this provision (e.g. shelving, furniture, etc.).
12. It is agreed that notwithstanding the date provided in the Lease for
the Commencement Date, the term shall not commence until Lessor has
"substantially completed" all work to be performed by Lessor as
hereinbefore set forth in Paragraph 3 above and as set forth in the
Lease; provided, however, that if Lessor shall be delayed in
substantially completing said work as a result of:
a. Lessee's failure to provide Construction Documents in accordance
with Paragraph 1 hereof; or
b. Lessee's failure to furnish interior finish specifications, i.e.,
paint colors, carpet selection, etc., to Lessor by the fifth (5th)
working day after Lessor has approved the Construction Documents
submitted by Lessee referred to in Paragraph 1 hereof; or
c. Lessee's request for materials, finishes or installations other
than Lessor's Building
43
<PAGE>
Standard; or
d. Lessee's changes in The Work; or
e. The performance of a person, firm, partnership or corporation
employed by Lessee and the completion of the said work by said
person, firm, partnership or corporation;
then the Commencement Date of the term of said Lease shall be
accelerated by the number of days of such delay and Lessee's obligation
to pay Fixed Basic Rent and Additional Rent shall commence as of such
earlier date.
13. Lessor shall permit Lessee and its agents to enter the Premises prior
to the Commencement Date in order that Lessee may perform through its
own union contractors such other work and decorations as Lessee may
desire at the same time Lessor's contractors are working in the
Premises. The foregoing license to enter prior to the Commencement
Date, however, is conditioned upon:
a. Lessee's workmen and mechanics working in harmony and not
interfering with the labor employed by Lessor, Lessor's mechanics
or contractors or by any other Lessee or its mechanics or
contractors; and
b. Lessee providing Lessor with evidence of Lessee's contractors and
subcontractors carrying such worker's compensation, general
liability, personal and property insurance as required by law and
in amounts no less than the amounts set forth in Article 30 of the
Lease. If at any time such entry shall cause disharmony or
interference therewith, this license may be withdrawn by Lessor
upon forty-eight (48) hours written notice to Lessee. Such entry
shall be deemed controlled by all of the terms, covenants,
provisions and conditions of said Lease, except as to the covenant
to pay Fixed Basic Rent and Additional Rent. Lessor shall not be
liable in any way for any injury, loss or damage which may occur
to any of Lessee's decorations or installations so made prior to
the Commencement Date, the same being solely at Lessee's risk.
a. Lessee providing to Lessor for filing, an original Waiver of
Mechanics' Liens fully executed by Lessee's general contractor in
recordable form and otherwise in form satisfactory to Lessor.
d. Lessee providing to Lessor a copy of the written agreement between
Lessee and its contractor containing a general waiver of liens by
such contractor for itself and all subcontractors.
14. No part of the Premises shall be deemed unavailable for occupancy by
the Lessee, or shall any work which the Lessor is obligated to perform
in such part of the Premises be deemed incomplete for the purpose of
any adjustment of Fixed Basic Rent payable hereunder, solely due to the
non-completion of details of construction, decoration or mechanical
adjustments which are minor in character and the non-completion of
which does not materially interfere with the Lessee's use of such part
of the Premises.
15. Lessee is responsible for all costs related to the repairs and
maintenance of any additional or supplemental HVAC systems, appliances
and equipment installed to meet Lessee's specific requirements. Lessee
shall purchase a service contract for this equipment so that the
equipment is covered by such service contract each year of the term of
the Lease.
16. If construction is to occur in a space occupied by Lessee's employees,
Lessee shall be liable for all costs associated with a delay if Lessee
shall fail to comply with a submitted construction schedule to relocate
personnel, furniture, or equipment. These costs shall include, but not
be limited to the following:
a. cost of construction workers time wasted; and
b. cost of any overtime work necessary to meet schedule deadlines;
and
c. any other costs associated with delays in final completion.
17. This workletter is based on the quantities and specifications listed
herein. Any change to
44
<PAGE>
these specifications shall require the recalculation of the
construction costs. Such recalculation shall not negate any other
section of this Lease.
18. With respect to the construction work being conducted in or about the
Premises, each party agrees to be bound by the approval and actions of
their respective construction representatives. Unless changed by
written notification, the parties hereby designate the following
individuals as their respective construction representatives:
FOR LESSOR: FOR LESSEE:
c/o Mr. Tony DeCaro Ms. Mary Gatto
Mack-Cali Realty Corporation 100 Briggs Road
11 Commerce Drive Mt. Laurel, New Jersey 08054
Cranford, New Jersey 07016
If the foregoing correctly sets forth our understanding, kindly sign this letter
agreement where indicated.
CALI AIRPORT REALTY BLUESTONE SOFTWARE, INC.,
ASSOCIATES, L.P., LESSOR LESSEE
By: Mack-Cali Sub XVIII, Inc.
Managing General Partner
By: /s/ John Jay Crandall By: /s/ Craig Huke
-------------------------------------- -----------------------
John Jay Crandall Craig Huke
Vice President, Leasing - NJ/PA Region Chief Financial Officer
45
<PAGE>
EXHIBIT C - 1
AIR CONDITIONING & HEATING DESIGN STANDARDS
The following are design standards for the building air-conditioning system for
cooling and heating in the air in the subject building:
1. During the normal heating season to maintain an average indoor dry bulb
temperature of not less than 70 degrees F (21 degrees C) or more than
76 degrees (24.4 degrees C) when the outdoor dry bulb temperature is
lower than 65 degrees F (18 degrees C) but not lower than 0 degrees F
(-13 degrees C).
2. To maintain comfort cooling for an average indoor dry bulb temperature
of not more than 78 degrees F when the outside dry bulb temperature is
95 degrees F (24 degrees C).
3. During the intermediate seasons, when the outside dry bulb temperature
is below 55 degrees (13 degrees C), cooling will be provided by outside
air usage in conjunction with operating of return air, outside air and
exhaust air dampers.
4. To furnish not less than .10 cubic foot of fresh air per minute per
square foot of rentable area, and between .20 and 1.0 cubic feet of
total air per minute, per square foot of rentable occupied space.
5. Lessor will not be responsible for the failure of the air-conditioning
system if such failure results from (i) the occupancy of the Premises
with more than an average of one (1) person for each one hundred (100)
usable square feet of floor area (ii) the installation or operation by
Lessee of machines and appliances, the installed electrical load of
which when combined with the load of all lighting fixtures exceeds five
(5) watts per square foot of floor area and in any manner exceeding the
aforementioned occupancy and electrical load criteria, or (iii)
rearrangement of partitioning after the initial preparation of the
Premises. If interference with normal operation of the air-conditioning
system in the Premises results, necessitating changes in the air
conditioning system servicing the Premises, such changes shall be made
by Lessor upon written notice to Lessee at Lessees sole cost and
expense. Lessee agrees to lower and close window coverings when
necessary because of the suns position whenever the air conditioning
system is in operation, and Lessee agrees at all times to cooperate
fully with Lessor and to abide by all the Rules and Regulations
attached hereto as well as reasonable rules and regulations which
Lessor may hereafter prescribe involving the air-conditioning system.
50
<PAGE>
EXHIBIT D
CLEANING SERVICES
(Five Nights Per Week)
LESSEE'S PREMISES
1. Vacuum clean all carpeted areas.
2. Sweep and dust mop all non-carpeted areas. Wet mop whenever necessary.
3. All office furniture such as desks, chairs, files, filing cabinets,
etc. shall be dusted with a clean treated dust cloth whenever necessary
and only if such surfaces are clear of Lessee's personal property
including but not limited to plants.
4. Empty and wash ashtrays.
5. Empty wastepaper baskets and remove waste to the designated areas.
6. All vertical surfaces within arms reach shall be spot cleaned to remove
finger marks and smudges. Baseboard and window sills are to be spot
cleaned whenever necessary.
7. All cleaning of cafeterias, vending areas, kitchen facilities are
excluded. Lessee may make necessary arrangements for same directly with
Lessor's cleaning maintenance company.
8. Cleaning hours shall be Monday through Friday between 5:30 p.m. and
11:00 p.m.
9. No cleaning service is provided on Saturday, Sunday and Building
Holidays.
10. Cartons or refuse in excess which can not be placed in wastebaskets
will not be removed. Lessee is responsible to place such unusual refuse
in trash dumpster.
11. Cleaning maintenance company will not remove nor clean tea, office cups
or similar containers. If such liquids are spilled in waste baskets,
the waste baskets will be emptied but not otherwise cleaned. Lessor
will not be responsible for any stained carpet caused from liquids
leaking or spilling from Lessee's wastepaper receptacles.
12. Upon completion of cleaning, all lights will be turned off and doors
locked leaving the Premises in an orderly condition.
13. Glass entrance doors will be cleaned nightly. Interior glass doors or
glass partitions are excluded. Lessee may make arrangements for same
with Lessor's cleaning maintenance company.
COMMON AREAS
1. Vacuum all carpeting in entrance lobbies, outdoor mats and all
corridors.
2. Wash glass doors in entrance lobby with a clean damp cloth and dry
towel.
3. Clean cigarette urns. Sweep and/or wet mop all resilient tile flooring.
Hard surface floors such as quarry tile, etc., shall be cleaned
nightly.
4. Wash, clean and disinfect water fountains.
5. Clean all elevators and stairwells.
6. Lavatories -- Men and Women.
a. Floors in all lavatories shall be wet mopped each evening with a
germicidal detergent to ensure a clean and germ free surface.
b. Wash and polish all mirrors, shelves, bright work including any
piping and toilet seats. c. Wash and disinfect wash basins and
sinks using a germicidal detergent.
d. Wash and disinfect toilet bowls and urinals.
51
<PAGE>
e. Keep lavatory partitions, tiled walls, dispensers and receptacles
in a clean condition using a germicidal detergent when necessary.
f. Empty and sanitize sanitary disposal receptacles.
g. Fill toilet tissue holders, towel dispensers and soap dispensers.
Refills to be supplied by Lessor.
7. Clean all air ventilation grill work in ceilings.
52
<PAGE>
EXHIBIT E
BUILDING HOLIDAYS
BUILDING CLOSED
* NEW YEAR'S DAY *
* MEMORIAL DAY *
* INDEPENDENCE DAY *
* LABOR DAY *
* THANKSGIVING DAY *
* CHRISTMAS DAY *
53
<PAGE>
EXHIBIT F
TENANT ESTOPPEL CERTIFICATE
TO: MORTGAGEE and/or its affiliates and/or whom else it may concern:
1. The undersigned is the Lessee (Tenant) under that certain Lease dated
by and between CALI AIRPORT REALTY ASSOCIATES, L.P. as Lessor
(Landlord) and BLUESTONE SOFTWARE, INC., as Lessee, covering those
certain premises commonly known and designated as 23,957 r.s.f. on the
third (3) floor of 300 Stevens Drive, Lester, PA.
2. The Lease has not been modified, changed, altered or amended in any
respect (except as indicated following this sentence) and is the only
Lease or agreement between the undersigned and the Lessor affecting
said premises. If none, state "none".
3. The undersigned has made no agreements with Lessor or its agents or
employees concerning free rent, partial rent, rebate of rental payments
or any other type of rental concession (except as indicated following
this sentence). If none, state "none".
4. The undersigned has accepted and now occupies the premises, and is and
has been open for business since , l99_. The Lease term began , 199_,
and the rent for said premises has been paid to and including , 199_ in
conformity with this Lease agreement. No rent has been prepaid for more
than two (2) months. The fixed minimum rent being paid as above is $
__________ per month. If Lessee is not in full possession, whether
Lessee has assigned the Lease, sublet all or any portion of the
Premises, or otherwise transferred any interest in the Lease or the
Premises, Lessee agrees to provide a copy of such assignment, sublease,
or transfer upon request.
5. The Lease is not in default and is in full force and effect. As of the
date hereof, the undersigned is entitled to no credit, no free rent and
no offset or deduction in rent.
6. All alterations, improvements, additions, build-outs, or construction
required to be performed under the Lease have been completed in
accordance with the terms of the Workletter attached to Lease as
Exhibit C.
7. The Lease does not contain and the undersigned doesn't have any
outstanding options or rights of first refusal to purchase the premises
or any part thereof or the real property of which the premises are a
part.
8. No actions, whether voluntary or otherwise, are pending against the
undersigned under the bankruptcy laws of the United States or any State
thereof.
9. There are currently no valid defenses, counterclaims, off-sets,
credits, deductions in rent, or claims against the enforcement of any
of the agreements, terms, or conditions of the Lease.
10. The undersigned acknowledges that all the interest of Lessor in and to
the above-mentioned Lease is being duly assigned to MORTGAGEE or one of
its affiliates hereunder and that pursuant to the terms thereof (i) all
rental payments under said Lease shall continue to be paid to Lessor in
accordance with the terms of the Lease unless and until you are
otherwise notified in writing by MORTGAGEE, or its successor or assigns
and (ii) no modification, revision, or cancellation of the Lease or
amendments thereto shall be effective unless a written consent thereto
of such mortgagee is first obtained.
11. The undersigned is authorized to execute this Tenant Estoppel
Certificate on behalf of the Lessee.
Dated this ________ day of __________________ , 199__
BLUESTONE SOFTWARE, INC.,
LESSEE
- -----------------------------
Name:
Title:
54
<PAGE>
EXHIBIT G
COMMENCEMENT DATE AGREEMENT
1. PARTIES
1.1 THIS AGREEMENT made the _________day of ________, 199__ is by and
between CALI AIRPORT REALTY ASSOCIATES, L.P. ("Lessor") whose
address is c/o Mack-Cali Realty Corporation, 11 Commerce Drive,
Cranford, New Jersey 07016 and BLUESTONE SOFTWARE, INC. ("Lessee")
whose address is 300 Stevens Drive, Lester, Pennsylvania.
2. STATEMENT OF FACTS
2.1 Lessor and Lessee entered into a Lease dated October __, 1999
("Lease") setting forth the terms of occupancy by Lessee of
approximately 23,957 gross rentable square feet on the third (3rd)
floor ("Premises") at 300 Stevens Drive, Lester, PA ("Building");
and
2.2 The Term of the Lease is for seven years and six months with the
Commencement Date of the initial Term being defined in the
Preamble to the Lease as being subject to change under Articles 27
and 43 thereof; and
2.3 It has been determined in accordance with the provisions of
Articles 27 and 43 of the Lease that ___________, 1999 is the
Commencement Date of the Term of the Lease.
3. AGREEMENT
NOW, THEREFORE, in consideration of the Premises and the covenants
hereinafter set forth, Lessor and Lessee agree as follows:
3.1 The Commencement Date of the Term of the Lease is ___________ ,
1999 and the Expiration Date thereof is _____________ , 2000 and
Articles 6 and 9 of the Preamble to the Lease shall be deemed
amended accordingly.
3.2 Article 10 of the Preamble to the Lease shall be deemed amended as
follows:
3.3 This Agreement is executed by the parties hereto for the purpose
of providing a record of the Commencement and Expiration Dates of
the Lease, adjust the Term of the Lease and Fixed Basic Rent
amount accordingly.
EXCEPT AS EXPRESSLY AMENDED HEREIN, the Lease covering the Premises
shall remain in full force and effect as if the same were set forth in full
herein and Lessor and Lessee hereby ratify and confirm all the terms and
conditions thereof.
THIS AGREEMENT shall be binding upon and inure to the benefit of the
parties hereto and their respective legal representatives, successors and
permitted assigns.
EACH PARTY AGREES that it will not raise or assert as a defense to any
obligation under the Lease or this Agreement or make any claim that the Lease or
this Agreement is invalid or unenforceable due to any failure of this document
to comply with ministerial requirements including, but not limited to,
requirements for corporate seals, attestations, witnesses, notarizations, or
other similar requirements, and each party hereby waives the right to assert any
such defense or make any claim of invalidity or unenforceability due to any of
the foregoing.
55
<PAGE>
IN WITNESS THEREOF, Lessor and Lessee have hereunto set their hands and
seals the date and year first above written and acknowledge one to the other
they possess the requisite authority to enter into this transaction and to sign
this Agreement.
CALI AIRPORT REALTY BLUESTONE SOFTWARE, INC.,
ASSOCIATES, L.P., LESSOR LESSEE
By: Mack-Cali Sub XVIII, Inc.,
Managing General Partner
By: By:
------------------------------------- ------------------------
John J. Crandall, Name:
Vice President-Leasing, PA/NJ Region Title:
56
<PAGE>
EXHIBIT H
LETTER OF CREDIT FORM
Bank:
-------------------
Date:
-------------------
c/o Mack-Cali Realty Corporation
11 Commerce Drive
Cranford, New Jersey 07016
RE: Irrevocable, Clean Letter of Credit No.
------------------------------------
Gentlemen:
At the request of ____________________________ (herein the "Company") we, as
drawee, hereby establish our Irrevocable Letter of Credit No.
_______________________ in your favor and authorize you to draw on us up to an
aggregate sum of ___________________________, available by your drafts at sight
as of ___________________.
All drafts must be presented at our office at our close of business not later
than ___________________, together with a statement signed by a duly authorized
representative of ___________________, (or duly authorized designee of any
subsequent holder of this credit) (herein the "Beneficiary") certifying that the
Beneficiary is entitled to draw such draft pursuant to a Lease Agreement between
it and the Company dated ________________________. Reference in this credit to a
Lease Agreement dated __________________ is for identification purposes only,
and the terms and conditions of same are not incorporated in nor made part of
this credit. We hereby engage with you (and any subsequent holder of this
credit) that we shall accept said statement as binding, correct and conclusive
without verification or investigation as to the accuracy, veracity, correctness,
genuineness or validity of the same.
If this credit is not renewed on or before the last date for presentation of
drafts for an additional period not less than twelve (12) months on an ongoing
basis throughout the term of the Lease Agreement, the amount of this credit
shall be paid to the Beneficiary upon demand, notwithstanding that such demand
may be made up to thirty (30) days after the last date for presentation of
drafts.
Should the Beneficiary not make demand for payment within the specified period,
then the Letter of Credit shall be automatically renewed for an additional
twelve (12) month period for each succeeding year until
___________________________ or thirty (30) days after the expiration or sooner
termination of the aforesaid Lease Agreement, whichever occurs later.
No charges are payable by the Beneficiary. All charges are for the account of
the Company.
We hereby engage with the drawers, endorsers and bona fide holders of all drafts
drawn under and in compliance with the terms of this Letter of Credit that such
drafts will be duly honored upon presentation to the drawee.
This Letter of Credit is subject to the "Uniform Customs and Practice for
Documentary Credits" _________________________. International Chamber of
Commerce Brochure, No.___________________.
Address all drafts, documents and correspondence regarding this Letter of Credit
to ___________________ at the above address, mentioning specifically our Letter
of Credit No.__________________.
Very truly yours,
57
<PAGE>
SCHEDULE 1
FIXED BASIC RENT PAYMENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TERM YEAR YEARLY RATE MONTHLY RATE
- --------------------------------------------------------------------------------
<S> <C> <C>
1/1/2000 through 12/31/2000 $485,398.00 For January 1
through May 31,
2000 - $30,000
for June 1 through
December 31,
2000 - $47,914
- --------------------------------------------------------------------------------
1/1/2001 through 12/31/2001 $586,946.50 $48,912.21
- --------------------------------------------------------------------------------
1/1/2002 through 12/31/2002 $598,925.00 $49,910.42
- --------------------------------------------------------------------------------
1/1/2003 through 12/31/2003 $610,903.50 $50,908.63
- --------------------------------------------------------------------------------
1/1/2004 through 12/31/2004 $622,882.00 $51,906.83
- --------------------------------------------------------------------------------
1/1/2005 through 12/31/2005 $634,860.50 $52,905.04
- --------------------------------------------------------------------------------
1/1/2006 through 12/31/2006 $646,839.00 $53,903.25
- --------------------------------------------------------------------------------
1/1/2007 through 6/30/2007 $329,408.75 (6 months) $54,901.46
- --------------------------------------------------------------------------------
Total: $4,516,163.25
- --------------------------------------------------------------------------------
</TABLE>
CALI AIRPORT REALTY BLUESTONE SOFTWARE, INC.
ASSOCIATES, L.P.
By: Mack-Cali Sub XVIII, Inc.,
Managing General Partner
By: By:
-------------------------------- -------------------------
James G. Nugent Craig Huke
Senior Vice President - Leasing Chief Financial Officer
58
<PAGE>
Exhibit 10.41
LEASE AGREEMENT Bldg.: Westport 15
Owner : 30
Prop : 0115
Unit : 1
Tenant: Blue01
Lease : 0115-Blue01-01
THIS LEASE, made this 15th day of October, 1999 between WESTPORT JOINT
VENTURE, a California joint venture, hereinafter called Landlord, and BLUESTONE
SOFTWARE, INC., a Delaware corporation, hereinafter called Tenant.
WITNESSETH:
Landlord hereby leases to Tenant and Tenant hereby hires and takes from
Landlord those certain premises (the "Premises") outlined in red on Exhibit "A",
attached hereto and incorporated herein by this reference thereto more
particularly described as follows:
A portion of that certain 48,384+/- square foot, two-story building located at
1300 Bridge Parkway, Suite 101, Redwood City, California 94065, consisting of
approximately 10,847+/- square feet on the first floor of the building. Said
Premises is more particularly shown within the area outlined in Red on EXHIBIT A
attached hereto. The entire parcel, of which the Premises is a part, is shown
within the area outlined in Green on EXHIBIT A attached. The Premises shall be
improved by Landlord as shown on EXHIBIT B to be attached hereto, and is leased
on an "as-is" basis, in its present condition, and in the configuration as shown
in Red on EXHIBIT B to be attached hereto.
As used herein the Complex shall mean and include all of the land
outlined in Green and described in Exhibit "A", attached hereto, common area
private roads within the Complex, and all of the buildings, improvements,
fixtures and equipment now or hereafter situated on said land.
Said letting and hiring is upon and subject to the terms, covenants and
conditions hereinafter set forth and Tenant covenants as a material part of the
consideration for this Lease to perform and observe each and all of said terms,
covenants and conditions. This Lease is made upon the conditions of such
performance and observance.
1. USE. Tenant shall use the Premises only in conformance with applicable
governmental laws, regulations, rules and ordinances for the purpose of general
office, light manufacturing, research and development, and storage and other
uses necessary for Tenant to conduct Tenant's business, provided that such uses
shall be in accordance with all applicable governmental laws and ordinances and
for no other purpose. Tenant shall not do or permit to be done in or about the
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Premises or the Complex nor bring or keep or permit to be brought or kept in or
about the Premises or the Complex anything which is prohibited by or will in any
way increase the existing rate of (or otherwise affect) fire or any insurance
covering the Complex or any part thereof, or any of its contents, or will cause
a cancellation of any insurance covering the Complex or any part thereof, or any
of its contents. Tenant shall not do or permit to be done anything in, on or
about the Premises or the Complex which will in any way obstruct or interfere
with the rights of other tenants or occupants of the Complex or injure or annoy
them, or use or allow the Premises to be used for any improper, immoral,
unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit
any nuisance in, on or about the Premises or the Complex. No sale by auction
shall be permitted on the Premises. Tenant shall not place any loads upon the
floors, walls, or ceiling, which endanger the structure, or place any harmful
fluids or other materials in the drainage system of the building, or overload
existing electrical or other mechanical systems. No waste materials or refuse
shall be dumped upon or permitted to remain upon any part of the Premises or
outside of the building in which the Premises are a part, except in trash
containers placed inside exterior enclosures designated by Landlord for that
purpose or inside of the building proper where designated by Landlord. No
materials, supplies, equipment, finished products or semi-finished products, raw
materials or articles of any nature shall be stored upon or permitted to remain
outside the Premises or on any portion of common area of the Complex. No
loudspeaker or other device, system or apparatus which can be heard outside the
Premises shall be used in or at the Premises without the prior written consent
of Landlord. Tenant shall not commit or suffer to be committed any waste in or
upon the Premises. Tenant shall indemnify, defend and hold Landlord harmless
against any loss, expense, damage, attorneys' fees, or liability arising out of
failure of Tenant to comply with any applicable law. Tenant shall comply with
any covenant, condition, or restriction ("CC&R's") affecting the Premises. The
provisions of this paragraph are for the benefit of Landlord only and shall not
be construed to be for the benefit of any tenant or occupant of the Complex.
2. TERM*
A. The term of this Lease shall be for a period of Five (5) years Seventeen
(17) days (unless sooner terminated as hereinafter provided) and, subject to
Paragraphs 2(B) and 3, shall commence on the 15th day of January 2000 and end on
the 31st day of January of 2005.
B. Possession of the Premises shall be deemed tendered and the term of this
Lease shall commence when the first of the following occurs:
(a) One day after a Certificate of Occupancy is granted by the proper
governmental agency, or, if the governmental agency having jurisdiction over
the area in
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* It is agreed in the event said Lease commences on a date other than the
first day of the month the term of the Lease will be extended to
account for the number of days in the partial month. The Basic Rent
during the resulting partial month will be pro-rated (for the number
of days in the partial month) at the Basic Rent scheduled for the
projected commencement date as shown in Paragraph 43.
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which the Premises are situated does not issue certificates of occupancy,
then the same number of days after certification by Landlord's architect or
contractor that Landlord's construction work has been completed; or
(b) Upon the occupancy of the Premises by any of Tenant's operating
personnel; or
(c) When the Tenant Improvements have been substantially completed for
Tenant's use and occupancy, in accordance and compliance with Exhibit B of
this Lease Agreement; or
(d) As otherwise agreed in writing.
3. POSSESSION. If Landlord, for any reason whatsoever, cannot deliver possession
of said premises to Tenant at the commencement of the said term, as hereinbefore
specified, this Lease shall not be void or voidable; no obligation of Tenant
shall be affected thereby; nor shall Landlord or Landlord's agents be liable to
Tenant for any loss or damage resulting therefrom; but in that event the
commencement and termination dates of the Lease, and all other dates affected
thereby shall be revised to conform to the date of Landlord's delivery of
possession, as specified in Paragraph 2(b), above. The above is, however,
subject to the provision that the period of delay, of delivery of the premises
shall not exceed 60 days from the commencement date herein (except those delays
caused by Acts of God, strikes, war, utilities, governmental bodies, weather,
unavailable materials, and delays beyond Landlord's control shall be excluded in
calculating such period) in which instance Tenant, at its option, may, by
written notice to Landlord, terminate this Lease.
4. RENT.
A. BASIC RENT. Tenant agrees to pay to Landlord at such place as Landlord may
designate without deduction, offset, prior notice, or demand, and Landlord
agrees to accept as Basic Rent for the leased Premises the total sum of TWO
MILLION FOUR HUNDRED TWENTY EIGHT THOUSAND EIGHT HUNDRED FIFTY THREE AND 24/100
($2,428,853.24) Dollars in lawful money of the United States of America, payable
as follows:
SEE PARAGRAPH 43 FOR BASIC RENT SCHEDULE.
B. TIME FOR PAYMENT. In the event that the term of this Lease commences on a
date other than the first day of a calendar month, on the date of commencement
of the term hereof Tenant shall pay to Landlord as rent for the period from such
date of commencement to the first day of the next succeeding calendar month that
proportion of the monthly rent hereunder which the number of days between such
date of commencement and the first day of the next succeeding calendar month
bears to thirty (30). In the event that the term of this Lease for any reason
ends on a date other than the last day of a calendar month, on the first day of
the last calendar month
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of the term hereof Tenant shall pay to Landlord as rent for the period from said
first day of said last calendar month to and including the last day of the term
hereof that proportion of the monthly rent hereunder which the number of days
between said first day of said last calendar month and the last day of the term
hereof bears to thirty (30).
C. LATE CHARGE. Notwithstanding any other provision of this Lease, if Tenant
is in default in the payment of rental as set forth in this Paragraph 4 when
due, or any part thereof, Tenant agrees to pay Landlord, in addition to the
delinquent rental due, a late charge for each rental payment in default ten (10)
days. Said late charge shall equal ten (10%) percent of each rental payment so
in default.
D. ADDITIONAL RENT. Beginning with the commencement date of the term of this
Lease, Tenant shall pay to Landlord in addition to the Basic Rent and as
Additional Rent the following:
(a) Tenant's proportionate share of all Taxes relating to the Complex as
set forth in Paragraph 12, and
(b) Tenant's proportionate share of all insurance premiums and deductibles
relating to the Complex, as set forth in Paragraph 15, and
(c) Tenant's proportionate share of expenses for the operation,
management, maintenance and repair of the Building (including common areas of
the Building) and Common Areas of the Complex in which the Premises are
located as set forth in Paragraph 7, and
(d) All charges, costs and expenses, which Tenant is required to pay
hereunder, together with all interest and penalties, costs and expenses
including attorneys' fees and legal expenses, that may accrue thereto in the
event of Tenant's failure to pay such amounts, and all damages, reasonable
costs and expenses which Landlord may incur by reason of default of Tenant or
failure on Tenant's part to comply with the terms of this Lease. In the event
of nonpayment by Tenant of Additional Rent, Landlord shall have all the
rights and remedies with respect thereto as Landlord has for nonpayment of
rent.
The Additional Rent due hereunder shall be paid to Landlord or Landlord's agent
(i) within five days for taxes and insurance and within thirty days for all
other Additional Rent items after presentation of invoice from Landlord or
Landlord's agent setting forth such Additional Rent and/or (ii) at the option of
Landlord, Tenant shall pay to Landlord monthly, in advance, Tenant's prorata
share of an amount estimated by Landlord to be Landlord's approximate average
monthly expenditure for such Additional Rent items, which estimated amount shall
be reconciled within 120 days of the end of each calendar year or more
frequently if Landlord so elects to do so at Landlord's sole and absolute
discretion, as compared to Landlord's actual expenditure for said Additional
Rent items, with Tenant paying to Landlord, upon demand, any amount of actual
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expenses expended by Landlord in excess of said estimated amount, or Landlord
crediting to Tenant (providing Tenant is not in default in the performance of
any of the terms, covenants and conditions of this Lease) any amount of
estimated payments made by Tenant in excess of Landlord's actual expenditures
for said Additional Rent items (however, if Tenant is in default of said Lease
and the default can be cured by applying the credit or a portion thereof to cure
the default, the remaining balance (if any) of said credit shall be applied to
Tenant's account). Within thirty (30) days after receipt of Landlord's
reconciliation, Tenant shall have the right, at Tenant's sole expense, to audit,
at a mutually convenient time at Landlord's office, Landlord's records relating
to the foregoing expenses. Such audit must be conducted by Tenant or an
independent nationally recognized accounting firm that is not being compensated
by Tenant or other third party on a contingency fee basis. Landlord shall be
provided a complete copy of said audit at no expense to Landlord. If such audit
reveals that Landlord has overcharged Tenant and the audit is not challenged by
Landlord, the amount overcharged shall be credited to Tenant's account within
thirty (30) days after the audit is concluded.
The respective obligations of Landlord and Tenant under this paragraph shall
survive the expiration or other termination of the term of this Lease, and if
the term hereof shall expire or shall otherwise terminate on a day other than
the last day of a calendar year, the actual Additional Rent incurred for the
calendar year in which the term hereof expires or otherwise terminates shall be
determined and settled on the basis of the statement of actual Additional Rent
for such calendar year and shall be prorated in the proportion which the number
of days in such calendar year preceding such expiration or termination bears to
365.
E. FIXED MANAGEMENT FEE. Beginning with the Commencement Date of the Term of
this Lease, Tenant shall pay, in addition to the Basic Rent and Additional Rent,
a fixed monthly management fee ("Management Fee") equal to three percent (3%) of
the Basic Rent due for each month during the Lease Term. Said Management Fee
shall be paid by Tenant to A&P Property Management Company at 2560 Mission
College Blvd., Suite 101, Santa Clara, CA 95054.
F. PLACE OF PAYMENT OF RENT AND ADDITIONAL RENT. All Basic Rent hereunder and
all payments hereunder for Additional Rent shall be paid to Landlord at the
office of Landlord at Westport Joint Venture, 2560 Mission College Blvd., Suite
101, Santa Clara, CA 95054 or to such other person or to such other place as
Landlord may from time to time designate in writing.
G. SECURITY DEPOSIT. Concurrently with Tenant's execution of this Lease,
Tenant shall deposit with Landlord the sum of EIGHTY FOUR THOUSAND SIX HUNDRED
SIX AND 60/100 ($84,606.60) Dollars. Said sum shall be held by Landlord as a
Security Deposit for the faithful performance by Tenant of all of the terms,
covenants, and conditions of this Lease to be kept and performed by Tenant
during the term hereof. If Tenant defaults with respect to any provision of this
Lease, including, but not limited to, the provisions relating to the payment of
rent and any of the monetary sums due herewith, Landlord may (but shall not be
required to) use, apply or retain all or any part of this Security Deposit for
the payment of any other amount which Landlord may spend by reason of Tenant's
default or to compensate Landlord for any other loss
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or damage which Landlord may suffer by reason of Tenant's default. If any
portion of said Deposit is so used or applied, Tenant shall, within ten (10)
days after written demand therefor, deposit cash with Landlord in the amount
sufficient to restore the Security Deposit to its original amount. Tenant's
failure to do so shall be a material breach of this Lease. Landlord shall not be
required to keep this Security Deposit separate from its general funds, and
Tenant shall not be entitled to interest on such Deposit. If Tenant fully and
faithfully performs every provision of this Lease to be performed by it
(however, if Tenant is in default of said Lease and the default can be cured by
applying the credit or a portion thereof to cure the default, the remaining
balance (if any) of said credit shall be applied to Tenant's account), the
Security Deposit or any balance thereof shall be returned to Tenant (or at
Landlord's option, to the last assignee of Tenant's interest hereunder) at the
expiration of the Lease term and after Tenant has vacated the Premises. In the
event of termination of Landlord's interest in this Lease, Landlord shall
transfer said Deposit to Landlord's successor in interest whereupon Tenant
agrees to release Landlord from liability for the return of such Deposit or the
accounting therefor.
5. RULES AND REGULATIONS AND COMMON AREA. Subject to the terms and conditions of
this Lease and such Rules and Regulations as Landlord may from time to time
prescribe, Tenant and Tenant's employees, invitees and customers shall, in
common with other occupants of the Complex in which the Premises are located,
and their respective employees, invitees and customers, and others entitled to
the use thereof, have the non-exclusive right to use the access roads, parking
areas, and facilities provided and designated by Landlord for the general use
and convenience of the occupants of the Complex in which the Premises are
located, which areas and facilities are referred to herein as "Common Area".
This right shall terminate upon the termination of this Lease. Landlord reserves
the right from time to time to make changes in the shape, size, location, amount
and extent of Common Area. Landlord further reserves the right to promulgate
such reasonable rules and regulations relating to the use of the Common Area,
and any part or parts thereof, as Landlord may deem appropriate for the best
interests of the occupants of the Complex. The Rules and Regulations shall be
binding upon Tenant upon delivery of a copy of them to Tenant, and Tenant shall
abide by them and cooperate in their observance. Such Rules and Regulations may
be amended by Landlord from time to time, with or without advance notice, and
all amendments shall be effective upon delivery of a copy to Tenant. Landlord
shall not be responsible to Tenant for the non-performance by any other tenant
or occupant of the Complex of any of said Rules and Regulations.
Landlord shall operate, manage and maintain the Common Area. The manner in
which the Common Area shall be maintained and the expenditures for such
maintenance shall be at the discretion of the Landlord.
6. PARKING. Tenant shall have the right to use with other tenants or occupants
of the Complex 36 parking spaces in the common parking areas of the Complex.
Tenant agrees, that Tenant, Tenant's employees, agents, representatives and/or
invitees shall not use parking spaces in excess of said 36 spaces allocated to
Tenant hereunder. Landlord shall have the right, at Landlord's sole discretion,
to specifically designate the location of Tenant's parking spaces
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within the common parking areas of the Complex in the event of a dispute among
the tenants occupying the building and/or Complex referred to herein, in which
event Tenant agrees that Tenant, Tenant's employees, agents, representatives
and/or invitees shall not use any parking spaces other than those parking spaces
specifically designated by Landlord for Tenant's use. Said parking spaces, if
specifically designated by Landlord to Tenant, may be relocated by Landlord at
any time, and from time to time. Landlord reserves the right, at Landlord's sole
discretion, to rescind any specific designation of parking spaces, thereby
returning Tenant's parking spaces to the common parking area. Landlord shall
give Tenant written notice of any change in Tenant's parking spaces. Tenant
shall not, at any time, park, or permit to be parked, any trucks or vehicles
adjacent to the loading areas so as to interfere in any way with the use of such
areas, nor shall Tenant at any time park, or permit the parking of Tenant's
trucks or other vehicles or the trucks and vehicles of Tenant's suppliers or
others, in any portion of the common area not designated by Landlord for such
use by Tenant. Tenant shall not park nor permit to be parked, any inoperative
vehicles or equipment on any portion of the common parking area or other common
areas of the Complex. Tenant agrees to assume responsibility for compliance by
its employees with the parking provision contained herein. If Tenant or its
employees park in other than such designated parking areas, then Landlord may
charge Tenant, as an additional charge, and Tenant agrees to pay, ten ($10.00)
Dollars per day for each day or partial day each such vehicle is parked in any
area other than that designated. Tenant hereby authorizes Landlord at Tenant's
sole expense to tow away from the Complex any vehicle belonging to Tenant or
Tenant's employees parked in violation of these provisions, or to attach
violation stickers or notices to such vehicles. Tenant shall use the parking
areas for vehicle parking only, and shall not use the parking areas for storage.
7. EXPENSES OF OPERATION, MANAGEMENT, AND MAINTENANCE OF THE COMMON AREAS OF THE
COMPLEX AND BUILDING IN WHICH THE PREMISES ARE LOCATED. As Additional Rent and
in accordance with Paragraph 4D of this Lease, Tenant shall pay to Landlord
Tenant's proportionate share (calculated on a square footage or other equitable
basis as calculated by Landlord) of all expenses of operation, management,
maintenance and repair of the Common Areas of the Complex including, but not
limited to, license, permit, and inspection fees; security; utility charges
associated with exterior landscaping and lighting (including water and sewer
charges); all charges incurred in the maintenance and replacement of landscaped
areas, lakes, private roads within the Complex and roads with reciprocal
easement areas; parking lots; and paved areas (including repairs, replacement,
resealing and restriping), sidewalks, driveways; maintenance, repair and
replacement of all fixtures and electrical, mechanical, and plumbing systems;
structural elements and exterior surfaces of the buildings; salaries and
employee benefits of personnel and payroll taxes applicable thereto; supplies,
materials, equipment and tools; the cost of capital expenditures which have the
effect of reducing operating expenses, provided, however, that in the event
Landlord makes such capital improvements, Landlord may amortize its investment
in said improvements (together with interest at the rate of fifteen (15%)
percent per annum on the unamortized balance) as an operating expense in
accordance with standard accounting practices,
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provided, that such amortization is not at a rate greater than the anticipated
savings in the operating expenses.
"Additional Rent" as used herein shall not include Landlord's debt
repayments; interest on charges; expenses directly or indirectly incurred by
Landlord for the benefit of any other tenant; cost for the installation of
partitioning or any other tenant improvements; cost of attracting tenants;
depreciation; interest, or executive salaries.
As Additional Rent and in accordance with paragraph 4D of this Lease, Tenant
shall pay its proportionate share (calculated on a square footage or other
equitable basis as calculated by Landlord) of the cost of operation (including
common utilities), management, maintenance, and repair of the building
(including common areas such as lobbies, restrooms, janitor's closets, hallways,
elevators, mechanical and telephone rooms, stairwells, entrances, spaces above
the ceilings and janitorization of said common areas) in which the Premises are
located. The maintenance items herein referred to include, but are not limited
to, all windows, window frames, plate glass, glazing, truck doors, main plumbing
systems of the building (such as water and drain lines, sinks, toilets, faucets,
drains, showers and water fountains), main electrical systems (such as panels
and conduits), heating and airconditioning systems (such as compressors, fans,
air handlers, ducts, boilers, heaters), store fronts, roofs, downspouts,
building common area interiors (such as wall coverings, window coverings, floor
coverings and partitioning), ceilings, building exterior doors, skylights (if
any), automatic fire extinguishing systems, and elevators; license, permit, and
inspection fees; security; salaries and employee benefits of personnel and
payroll taxes applicable thereto; supplies, materials, equipment and tools; the
cost of capital expenditures which have the effect of reducing operating
expenses, provided, however, that in the event Landlord makes such capital
improvements, Landlord may amortize its investment in said improvements
(together with interest at the rate of fifteen (15%) percent per annum on the
unamortized balance) as an operating expense in accordance with standard
accounting practices, provided, that such amortization is not at a rate greater
than the anticipated savings in the operating expenses. Tenant hereby waives all
rights under, and benefits of, subsection 1 of Section 1932 and Sections 1941
and 1942 of the California Civil Code and under any similar law, statute or
ordinance now or hereafter in effect.
8. ACCEPTANCE AND SURRENDER OF PREMISES. By entry hereunder, Tenant accepts the
Premises as being in good and sanitary order, condition and repair and accepts
the building and improvements included in the Premises in their present
condition and without representation or warranty by Landlord as to the condition
of such building or as to the use or occupancy which may be made thereof. Any
exceptions to the foregoing must be by written agreement executed by Landlord
and Tenant. Tenant agrees on the last day of the Lease term, or on the sooner
termination of this Lease, to surrender the Premises promptly and peaceably to
Landlord in good condition and repair (damage by Acts of God, fire, normal wear
and tear excepted), with all interior walls painted, or cleaned so that they
appear freshly painted, and repaired and replaced, if damaged; all floors
cleaned and waxed; all carpets cleaned and shampooed; the airconditioning and
heating equipment serviced by a reputable and licensed
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service firm and in good operating condition (provided the maintenance of such
equipment has been Tenant's responsibility during the term of this Lease)
together with all alterations, additions, and improvements which may have been
made in, to, or on the Premises (except movable trade fixtures installed at the
expense of Tenant) except that Tenant shall ascertain from Landlord within
thirty (30) days before the end of the term of this Lese whether Landlord
desires to have the Premises or any part or parts thereof restored to their
condition and configuration as when the Premises were delivered to Tenant and if
Landlord shall so desire, then Tenant shall restore said Premises or such part
or parts thereof before the end of this Lease at Tenant's sole cost and expense.
Tenant, on or before the end of the term or sooner termination of this Lease,
shall remove all of Tenant's personal property and trade fixtures from the
Premises, and all property not so removed on or before the end of the term or
sooner termination of this Lease shall be deemed abandoned by Tenant and title
to same shall thereupon pass to Landlord without compensation to Tenant.
Landlord may, upon termination of this Lease, remove all moveable furniture and
equipment so abandoned by Tenant, at Tenant's sole cost, and repair any damage
caused by such removal at Tenant's sole cost. If the Premises be not surrendered
at the end of the term or sooner termination of this Lease, Tenant shall
indemnify Landlord against loss or liability resulting from the delay by Tenant
in so surrendering the Premises including, without limitation, any claims made
by any succeeding tenant founded on such delay. Nothing contained herein shall
be construed as an extension of the term hereof or as a consent of Landlord to
any holding over by Tenant. The voluntary or other surrender of this Lease or
the Premises by Tenant or a mutual cancellation of this Lease shall not work as
a merger and, at the option of Landlord, shall either terminate all or any
existing subleases or subtenancies or operate as an assignment to Landlord of
all or any such subleases or subtenancies.
9. ALTERATIONS AND ADDITIONS. Tenant shall not make, or suffer to be made, any
alteration or addition to the Premises, or any part thereof, without the written
consent of Landlord first had and obtained by Tenant (which consent shall not be
unreasonably withheld), but at the cost of Tenant, and any addition to, or
alteration of, the Premises, except moveable furniture and trade fixtures, shall
at once become a part of the Premises and belong to Landlord. Landlord reserves
the right to approve all contractors and mechanics proposed by Tenant to make
such alterations and additions. Tenant shall retain title to all moveable
furniture and trade fixtures placed in the Premises. All heating, lighting,
electrical, airconditioning, floor to ceiling partitioning, drapery, carpeting,
and floor installations made by Tenant, together with all property that has
become an integral part of the Premises, shall not be deemed trade fixtures.
Tenant agrees that it will not proceed to make such alteration or additions,
without having obtained consent from Landlord to do so, and until five (5) days
from the receipt of such consent, in order that Landlord may post appropriate
notices to avoid any liability to contractors or material suppliers for payment
for Tenant's improvements. Tenant will at all times permit such notices to be
posted and to remain posted until the completion of work. Tenant shall, if
required by Landlord, secure at Tenant's own cost and expense, a completion and
lien indemnity bond, satisfactory to Landlord, for such work. Tenant further
covenants and agrees that any mechanic's lien filed against the Premises or
against the Complex for work claimed to have been done for, or materials claimed
to have been furnished to Tenant, will be discharged by Tenant, by bond or
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otherwise, within ten (10) days after the filing thereof, at the cost and
expense of Tenant. Any exceptions to the foregoing must be made in writing and
executed by both Landlord and Tenant. Notwithstanding anything to the contrary
herein, under no circumstances shall Tenant be authorized to penetrate the soil
to a depth that exceeds three and one-half feet from the uppermost surface of
the soil.
10. TENANT MAINTENANCE. Tenant shall, at its sole cost and expense, keep and
maintain the Premises (including appurtenances) and every part thereof in a high
standard of maintenance and repair, and in good and sanitary condition. Tenant's
maintenance and repair responsibilities herein referred to include, but are not
limited to, janitorization, plumbing systems within the non-common areas of the
Premises (such as water and drain lines, sinks), electrical systems within the
non-common areas of the Premises (such as outlets, lighting fixtures, lamps,
bulbs, tubes, ballasts), heating and airconditioning controls within the
non-common areas of the Premises (such as mixing boxes, thermostats, time
clocks, supply and return grills), all interior improvements within the premises
including but not limited to: wall coverings, window coverings, acoustical
ceilings, vinyl tile, carpeting, partitioning, doors (both interior and
exterior, including closing mechanisms, latches, locks), and all other interior
improvements of any nature whatsoever. Tenant agrees to provide carpet shields
under all rolling chairs or to otherwise be responsible for wear and tear of the
carpet caused by such rolling chairs if such wear and tear exceeds that caused
by normal foot traffic in surrounding areas. Areas of excessive wear shall be
replaced at Tenant's sole expense upon Lease termination.
11. UTILITIES OF THE BUILDING IN WHICH THE PREMISES ARE LOCATED. As Additional
Rent and in accordance with paragraph 4D of this Lease, Tenant shall pay its
proportionate share (calculated on a square footage or other equitable basis as
calculated by Landlord) of the cost of all utility charges such as water, gas,
electricity, telephone, telex and other electronic communications service, sewer
service, waste pick up and any other utilities, materials or services furnished
directly to the building in which the Premises are located, including, without
limitation, any temporary or permanent utility surcharge or other exactions
whether or not hereinafter imposed.
Landlord shall not be liable for and Tenant shall not be entitled to any
abatement or reduction of rent by reason of any interruption or failure of
utility services to the Premises when such interruption or failure is caused by
accident, breakage, repair, strikes, lockouts, or other labor disturbances or
labor disputes of any nature, or by any other cause, similar or dissimilar,
beyond the reasonable control of Landlord.
Provided that Tenant is not in default in the performance or observance of
any of the terms, covenants or conditions of this Lease to be performed or
observed by it, Landlord shall furnish to the Premises between the hours of 8:00
AM and 6:00 PM, Mondays through Fridays (holidays excepted) and subject to the
rules and regulations of the Complex hereinbefore referred to, reasonable
quantities of water, gas and electricity suitable for the intended use of the
Premises and heat and air conditioning required in Landlord's judgment for the
comfortable use and
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occupation of the Premises for such purposes. Tenant agrees that at all times it
will cooperate fully with Landlord and abide by all regulations and requirements
that Landlord may prescribe for the proper functioning and protection of the
building heating, ventilating and air conditioning systems. Whenever heat
generating machines, equipment, or any other devices (including exhaust fans)
are used in the Premises by Tenant which affect the temperature or otherwise
maintained by the air conditioning system, Landlord shall have the right to
install supplementary air conditioning units in the Premises and the cost
thereof, including the cost of installation and the cost of operation and
maintenance thereof, shall be paid by Tenant to Landlord upon demand by
Landlord. Tenant will not, without the written consent of Landlord, use any
apparatus or device in the Premises (including, without limitation), electronic
data processing machines or machines using current in excess of 110 Volts which
will in any way increase the amount of electricity, gas, water or air
conditioning usually furnished or supplied to premises being used as general
office space, or connect with electric current (except through existing
electrical outlets in the Premises), or with gas or water pipes any apparatus or
device for the purposes of using electric current, gas, or water. If Tenant
shall require water, gas, or electric current in excess of that usually
furnished or supplied to premises being used as general office space, Tenant
shall first obtain the written consent of Landlord, which consent shall not be
unreasonably withheld and Landlord may cause an electric current, gas, or water
meter to be installed in the Premises in order to measure the amount of electric
current, gas or water consumed for any such excess use. The cost of any such
meter and of the installation, maintenance and repair thereof, all charges for
such excess water, gas and electric current consumed (as shown by such meters
and at the rates then charged by the furnishing public utility); and any
additional expense incurred by Landlord in keeping account of electric current,
gas, or water so consumed shall be paid by Tenant, and Tenant agrees to pay
Landlord therefor promptly upon demand by Landlord.
12. TAXES. A. As Additional Rent and in accordance with Paragraph 4D of this
Lease, Tenant shall pay to Landlord Tenant's proportionate share of all Real
Property Taxes, which pro rata share shall be allocated to the leased Premises
by square footage or other equitable basis, as calculated by Landlord. The term
"Real Property Taxes", as used herein, shall mean (i) all taxes, assessments,
levies and other charges of any kind or nature whatsoever, general and special,
foreseen and unforeseen (including all installments of principal and interest
required to pay any general or special assessments for public improvements and
any increases resulting from reassessments caused by any change in ownership of
the Complex) nor or hereafter imposed by any governmental or quasi-governmental
authority or special district having the direct or indirect power to tax or levy
assessments, which are levied or assessed against, or with respect to the value,
occupancy or use of, all or any portion of the Complex (as now constructed or as
may at any time hereafter be constructed, altered, or otherwise changed) or
Landlord's interest therein; any improvements located within the Complex
(regardless of ownership); the fixtures, equipment and other property of
Landlord, real or personal, that are an integral part of and located in the
Complex; or parking areas, public utilities or energy within the Complex; (ii)
all charges, levies or fees imposed by reason of environmental regulation or
other governmental control of the Complex; and (iii) all costs and fees
(including attorneys' fees) incurred by Landlord in contesting any Real Property
Tax and in negotiating with public authorities as to any real
<PAGE>
Property Tax. If at any time during the term of this Lease the taxation or
assessment of the Complex prevailing as of the commencement date of this Lease
shall be altered so that in lieu of or in addition to any Real Property Tax
described above there shall be levied, assessed or imposed (whether by reason of
a change in the method of taxation or assessment, creation of a new tax or
charge, or any other cause) an alternate or additional tax or charge (i) on the
value, use or occupancy of the Complex or Landlord's interest therein or (ii) on
or measured by the gross receipts, income or rentals form the Complex, on
Landlord's business of leasing the Complex, or computed in any manner with
respect to the operation of the Complex, then any such tax or charge, however,
designated, shall be included within the meaning of the term "Real Property
Taxes" for purposes of this Lease. If any Real Property Tax is based upon
property or rents unrelated to the Complex, then only that part of such real
Property Tax that is fairly allocable to the Complex shall be included within
the meaning of the term "Real Property Taxes." Notwithstanding the foregoing,
the term "Real Property Taxes" shall not include estate, inheritance, gift or
franchise taxes of Landlord or the federal or state net income tax imposed on
Landlord's income from all sources. The term "Real Estate Taxes" shall also
include supplemental taxes related to the period of Tenant's Lease Term whenever
levied, including any such taxes that may be levied after the Lease Term has
expired.
B. TAXES ON TENANT'S PROPERTY.
(a) Tenant shall be liable for and shall pay ten days before delinquency, taxes
levied against any personal property or trade fixtures placed by Tenant in or
about the Premises. If any such taxes on Tenant's personal property or trade
fixtures are levied against Landlord or Landlord's property or if the assessed
value of the Premises is increased by the inclusion therein of a value placed
upon such personal property or trade fixtures of Tenant and if Landlord, after
written notice to Tenant, pays the taxes based on such increased assessment,
which Landlord shall have the right to do regardless of the validity thereof,
but only under proper protest if requested by Tenant. Tenant shall upon demand,
as the case may be, repay to Landlord the taxes so levied against Landlord, or
the proportion of such taxes resulting from such increase in the assessment;
provided that in any such event Tenant shall have the right, in the name of
Landlord and with Landlord's full cooperation, to bring suit in any court of
competent jurisdiction to recover the amount of any such taxes so paid under
protest, and any amount so recovered shall belong to Tenant.
(b) If the Tenant improvements in the Premises, whether installed, and/or paid
for by Landlord or Tenant and whether or not affixed to the real property so as
to become a part thereof, are assessed for real property tax purposes at a
valuation higher than the valuation at which standard office improvements in
other space in the Complex are assessed, then the real property taxes and
assessments levied against Landlord or the Complex by reason of such excess
assessed valuation shall be deemed to be taxes levied against personal property
of Tenant and shall be governed by the provisions of 12Ba, above. If the records
of the County Assessor are available and sufficiently detailed to serve as a
basis for determining whether said Tenant improvements are assessed at a higher
valuation than standard office improvements in other space in the Complex, such
records shall be binding on both the Landlord and the Tenant. If the records of
the County
<PAGE>
Assessor are not available or sufficiently detailed to serve as a basis for
making said determination, the actual cost of construction shall be used.
13. LIABILITY INSURANCE. Tenant at Tenant's expense, agrees to keep in force
during the term of this Lease a policy of commercial general liability insurance
with a combined single limit coverage of not less than Two Million Dollars
($2,000,000) per occurrence for injuries to or death of persons occurring in, on
or about the Premises or the Complex, and property damage. The policy or
policies affecting such insurance, certificates of insurance of which shall be
furnished to Landlord, shall name Landlord as additional insureds, and shall
insure any liability of Landlord, contingent or otherwise, as respects acts or
omissions of Tenant, its agents, employees or invitees or otherwise by any
conduct or transactions of any of said persons in or about or concerning the
Premises, including any failure of Tenant to observe or perform any of its
obligations hereunder; shall be issued by an insurance company admitted to
transact business in the State of California; and shall provide that the
insurance effected thereby shall not be canceled, except upon thirty (30) days'
prior written notice to Landlord. If, during the term of this Lease, in the
considered opinion of Landlord's Lender, insurance advisor, or counsel, the
amount of insurance described in this paragraph 13 is not adequate, Tenant
agrees to increase said coverage to such reasonable amount as Landlord's Lender,
insurance advisor, or counsel shall deem adequate.
14. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION INSURANCE.
Tenant shall maintain a policy or policies of fire and property damage insurance
in "all risk" form with a sprinkler leakage endorsement insuring the personal
property, inventory, trade fixtures, and leasehold improvements within the
leased Premises for the full replacement value thereof. The proceeds from any of
such policies shall be used for the repair or replacement of such items so
insured.
Tenant shall also maintain a policy or policies of workman's compensation
insurance and any other employee benefit insurance sufficient to comply with all
laws.
15. PROPERTY INSURANCE. Landlord shall purchase and keep in force and as
Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall
pay to Landlord (or Landlord's agent if so directed by Landlord) Tenant's
proportionate share (calculated on a square footage or other equitable basis as
calculated by Landlord) of the deductibles on insurance claims and the cost of
policy or policies of insurance covering loss or damage to the Premises and
Complex in the amount of the full replacement value thereof, providing
protection against those perils included within the classification of "all
risks" insurance and flood and/or earthquake insurance, if available, plus a
policy of rental income insurance in the amount of one hundred (100%) percent of
twelve (12) months Basic Rent, plus sums paid as Additional Rent. If such
insurance cost is increased due to Tenant's use of the Premises or the Complex,
Tenant agrees to pay to Landlord the full cost of such increase. Tenant shall
have no interest in nor any right to the proceeds of any insurance procured by
Landlord for the Complex.
<PAGE>
Landlord and Tenant do each hereby respectively release the other, to the
extent of insurance coverage of the releasing party, from any liability for loss
or damage caused by fire or any of the extended coverage casualties included in
the releasing party's insurance policies, irrespective of the cause of such fire
or casualty; provided, however, that if the insurance policy of either releasing
party prohibits such waiver, then this waiver shall not take effect until
consent to such waiver is obtained. If such waiver is so prohibited, the insured
party affected shall promptly notify the other party thereof.
16. INDEMNIFICATION. Landlord shall not be liable to Tenant and Tenant hereby
waives all claims against Landlord for any injury to or death of any person or
damage to or destruction of property in or about the Premises or the Complex by
or from any cause whatsoever, including, without limitation, gas, fire, oil,
electricity or leakage of any character from the roof, walls, basement or other
portion of the Premises or the Complex but excluding, however, the willful
misconduct or negligence of Landlord, its agents, servants, employees, invitees,
or contractors of which negligence Landlord has knowledge and reasonable time to
correct. Except as to injury to persons or damage to property to the extent
arising from the willful misconduct or the negligence of Landlord, its agents,
servants, employees, invitees, or contractors, Tenant shall hold Landlord
harmless from and defend Landlord against any and all expenses, including
reasonable attorneys' fees, in connection therewith, arising out of any injury
to or death of any person or damage to or destruction of property occurring in,
on or about the Premises, or any part thereof, from any cause whatsoever.
17. COMPLIANCE. Tenant, at its sole cost and expense, shall promptly comply with
all laws, statutes, ordinances and governmental rules, regulations or
requirements now or hereafter in effect; with the requirements of any board of
fire underwriters or other similar body now or hereafter constituted; and with
any direction or occupancy certificate issued pursuant to law by any public
officer; provided, however, that no such failure shall be deemed a breach of the
provisions if Tenant, immediately upon notification, commences to remedy or
rectify said failure. The judgment of any court of competent jurisdiction or the
admission of Tenant in any action against Tenant, whether Landlord be a party
thereto or not, that Tenant has violated any such law, statute, ordinance or
governmental rule, regulation, requirement, direction or provision, shall be
conclusive of that fact as between Landlord and Tenant. This paragraph shall not
be interpreted as requiring Tenant to make structural changes or improvements,
except to the extent such changes or improvements are required as a result of
Tenant's use of the Premises. Tenant shall, at its sole cost and expense, comply
with any and all requirements pertaining to said Premises, of any insurance
organization or company, necessary for the maintenance of reasonable fire and
public liability insurance covering the Premises.
18. LIENS. Tenant shall keep the Premiss and the Complex free from any liens
arising out of any work performed, materials furnished or obligation incurred by
Tenant. In the event that Tenant shall not, within ten (10) days following the
imposition of such lien, cause the same to be released of record, Landlord shall
have, in addition to all other remedies provided herein and by law, the right,
but no obligation, to cause the same to be released by such means as it shall
deem
<PAGE>
proper, including payment of the claim giving rise to such lien. All sums paid
by Landlord for such purpose, and all expenses incurred by it in connection
therewith, shall be payable to Landlord by Tenant on demand with interest at the
prime rate of interest as quoted by the Bank of America.
19. ASSIGNMENT AND SUBLETTING. Tenant shall not assign, transfer, or hypothecate
the leasehold estate under this Lease, or any interest therein, and shall not
sublet the Premises, or any part thereof, or any right or privilege appurtenant
thereto, or suffer any other person or entity to occupy or use the Premises, or
any portion thereof, without, in each case, the prior written consent of
Landlord which consent will not be unreasonably withheld. As a condition for
granting this consent to any assignment, transfer or subletting, Landlord shall
require Tenant to pay to Landlord, as Additional Rent, all rents and/or
additional consideration due Tenant from its assignees, transferees, or
subtenants in excess of the Rent payable by Tenant to Landlord hereunder for the
assigned, transferred, and/or subleased space. Tenant shall by thirty (30) days
written notice, advise Landlord of its intent to assign or transfer Tenant's
interest in the Lease or sublet the Premises or any portion thereof for any part
of the term hereof. Within thirty (30) days after receipt of said written
notice, Landlord may, in its sole discretion, elect to terminate this Lease as
to the portion of the Premises described in Tenant's notice on the date
specified in Tenant's notice by giving written notice of such election to
terminate. If no such notice to terminate is given to Tenant within said thirty
(30) day period, Tenant may proceed to locate an acceptable sublessee, assignee,
or other transferee for presentment to Landlord for Landlord's approval, all in
accordance with the terms, covenants, and conditions of this paragraph 19. If
Tenant intends to sublet the entire Premises and Landlord elects to terminate
this Lease, this Lease shall be terminated on the date specified in Tenant's
notice. If, however, this Lease shall terminate pursuant to the foregoing with
respect to less than all the Premises, the rent, as defined and reserved
hereinabove shall be adjusted on a pro rata basis to the number of square feet
retained by Tenant, and this Lease as so amended shall continue in full force
and effect. In the event Tenant is allowed to assign, transfer or sublet the
whole or any part of the Premises, with the prior written consent of Landlord,
no assignee, transferee or subtenant shall assign or transfer this Lease, either
in whole or in part, or sublet the whole or any part of the Premises, without
also having obtained the prior written consent of Landlord. A consent of
Landlord to one assignment, transfer, hypothecation, subletting, occupation or
use by any other person shall not release Tenant from any of Tenant's
obligations hereunder or be deemed to be a consent to any subsequent similar or
dissimilar assignment, transfer, hypothecation, subletting, occupation or use by
any other person. Any such assignment, transfer, hypothecation, subletting,
occupation or use without such consent shall be void and shall constitute a
breach of this Lease by Tenant and shall, at the option of Landlord exercised by
written notice to Tenant, terminate this Lease. The leasehold estate under this
Lease shall not, nor shall any interest therein, be assignable for any purpose
by operation of law without the written consent of Landlord. As a condition to
its consent, Landlord shall require Tenant to pay all expenses in connection
with the assignment, and Landlord shall require Tenant's assignee or transferee
(or other assignees or transferees) to assume in writing all of the obligations
under this Lease and for Tenant to remain liable to
<PAGE>
Landlord under the Lease. Notwithstanding the above, in no event will Landlord
consent to a sub-sublease.
20. SUBORDINATION AND MORTGAGES. In the event Landlord's title or leasehold
interest is now or hereafter encumbered by a deed of trust, upon the interest of
Landlord in the land and buildings in which the Demised Premises are located, to
secure a loan from a lender (hereinafter referred to as "Lender") to Landlord.
Tenant shall, at the request of Landlord or Lender, execute in writing an
agreement subordinating its rights under this Lease to the lien of such deed of
trust, or, if so requested, agreeing that the lien of Lender's deed of trust
shall be or remain subject and subordinate to the rights of Tenant under this
Lease. Notwithstanding any such subordination, Tenant's possession under this
Lease shall not be disturbed if Tenant is not in default and so long as Tenant
shall pay all rent and observe and perform all of the provisions set forth in
this Lease.
21. ENTRY BY LANDLORD. Landlord reserves, and shall at all reasonable times
after at least 24 hours notice (except in emergencies) have, the right to enter
the Premises to inspect them; to perform any services to be provided by Landlord
hereunder; to submit the Premises to prospective purchasers, mortgagers or
tenants; to post notices of nonresponsibility; and to alter, improve or repair
the Premises and any portion of the Complex, all without abatement of rent; and
may erect scaffolding and other necessary structures in or through the Premises
where reasonably required by the character of the work to be performed;
provided, however, that the business of Tenant shall be interfered with to the
least extent that is reasonably practical. For each of the foregoing purposes,
any entry to the Premises obtained by Landlord by any of said means, or
otherwise, shall not under any circumstances be construed or deemed to be a
forcible or unlawful entry into or a detainer of the Premises or an eviction,
actual or constructive, of Tenant from the premises or any portion thereof.
Landlord shall also have the right at any time to change the arrangement or
location of entrances or passageways, doors and doorways, and corridors,
elevators, stairs, toilets or other public parts of the Complex and to change
the name, number or designation by which the Complex is commonly known, and none
of the foregoing shall be deemed an actual or constructive eviction of Tenant,
or shall entitle Tenant to any reduction of rent hereunder.
22. BANKRUPTCY AND DEFAULT. The commencement of a bankruptcy action or
liquidation action or reorganization action or insolvency action or an
assignment of or by Tenant for the benefit of creditors, or any similar action
undertaken by Tenant, or the insolvency of Tenant, shall, at Landlord's option,
constitute a breach of this Lease by Tenant. If the trustee or receiver
appointed to serve during a bankruptcy, liquidation, reorganization, insolvency
or similar action elects to reject Tenant's unexpired Lease, the trustee or
receiver shall notify Landlord in writing of its election within thirty (30)
days after an order for relief in a liquidation action or within thirty (30)
days after the commencement of any action.
Within thirty (30) days after court approval of the assumption of this
Lease, the trustee or receiver shall cure (or provide adequate assurance to the
reasonable satisfaction of Landlord that
<PAGE>
the trustee or receiver shall cure) any and all previous defaults under the
unexpired Lease and shall compensate Landlord for all actual pecuniary loss and
shall provide adequate assurance of future performance under said Lease to the
reasonable satisfaction of Landlord. Adequate assurance of future performance,
as used herein, includes, but shall not be limited to: (i) assurance of source
and payment of rent, and other consideration due under this Lease; (ii)
assurance that the assumption or assignment of this Lease will not breach
substantially any provision, such as radius, location, use, or exclusivity
provision, in any agreement relating to the above described Premises.
Nothing contained in this section shall affect the existing right of
Landlord to refuse to accept an assignment upon commencement of or in connection
with a bankruptcy, liquidation, reorganization or insolvency action or an
assignment of Tenant for the benefit of creditors or other similar act. Nothing
contained in this Lease shall be construed as giving or granting or creating an
equity in the demised Premises to Tenant. In no event shall the leasehold estate
under this Lease, or any interest therein, be assigned by voluntary or
involuntary bankruptcy proceeding without the prior written consent of Landlord.
In no event shall this Lease or any rights or privileges hereunder be an asset
of Tenant under any bankruptcy, insolvency or reorganization proceedings.
The failure to perform or honor any covenant, condition or representation
made under this Lease shall constitute a default hereunder by Tenant upon
expiration of the appropriate grace period hereinafter provided. Tenant shall
have a period of five (5) days from the date of written notice from landlord
within which to cure any default in the payment of rental or adjustment thereto.
Tenant shall have a period of thirty (30) days from the date of written notice
from Landlord within which to cure any other default under this Lease. Upon an
uncured default of this Lease by Tenant, Landlord shall have the following
rights and remedies in addition to any other rights or remedies available to
Landlord at law or in equity:
(a) The rights and remedies provided for by California Civil Code Section
1951.2., including but not limited to, recovery of the worth at the time of
award of the amount by which the unpaid rent for the balance of the term after
the time of award exceeds the amount of rental loss for the same period that
Tenant proves could be reasonably avoided, as computed pursuant to subsection
(b) of said Section 1951.2. Any proof by Tenant under subparagraphs(2) and (3)
of Section 1951.2 of the California Civil Code of the amount of rental loss that
could be reasonably avoided shall be made in the following manner: Landlord and
Tenant shall each select a licensed real estate broker in the business of
renting property of the same type and use as the Premises and in the same
geographic vicinity. Such two real estate brokers shall select a third licensed
real estate broker, and the three licensed real estate brokers so selected shall
determine the amount of the rental loss that could be reasonably avoided from
the balance of the term of this Lease after the time of award. The decision of
the majority of said licensed real estate brokers shall be final and binding
upon the parties hereto.
<PAGE>
(b) The rights and remedies provided by California Civil Code Section which
allows Landlord to continue the Lease in effect and to enforce all of its rights
and remedies under this Lease, including the right to recover rent as it becomes
due, for so long as Landlord does not terminate Tenant's right to possession;
acts of maintenance or preservation, efforts to relet the Premises, or the
appointment of a receiver upon Landlord's initiative to protect its interest
under this Lease shall not constitute a termination of Tenant's right to
possession.
(c) The right to terminate this Lease by giving notice to Tenant in
accordance with applicable law.
(d) To the extent permitted by law the right and power to enter the Premises
and remove therefrom all persons and property, to store such property in a
public warehouse or elsewhere at the cost of and for the account of Tenant, and
to sell such property and apply such proceeds therefrom pursuant to applicable
California law. Landlord, may from time to time, sublet the Premises or any part
thereof for such term or terms (which may extend beyond the term of this Lease)
and at such rent and such other terms as Landlord in its sole discretion may
deem advisable, with the right to make alterations and repairs to the Premises.
Upon each subletting, (i) Tenant shall be immediately liable to pay Landlord, in
addition to indebtedness other than rent due hereunder, the cost of such
subletting, including, but not limited to, reasonable attorneys' fees, and any
real estate commissions actually paid, and the cost of such alterations and
repairs incurred by Landlord and the amount, if any, by which the rent hereunder
for the period of such subletting (to the extent such period does not exceed the
term hereof) exceeds the amount to be paid as rent for the Premises for such
period or (ii) at the option of Landlord, rents received from such subletting
shall be applied first to payment of indebtedness other than rent due hereunder
from Tenant to Landlord; second, to the payment of any costs of such subletting
and of such alterations and repairs; third to payment of rent due and unpaid
hereunder; and the residue, if any, shall be held by Landlord and applied in
payment of future rent as the same becomes due hereunder. If Tenant has been
credited with any rent to be received by such subletting under option (i) and
such rent shall not be promptly paid to Landlord by the subtenant(s), or if such
rentals received from such subletting under option (ii) during any month be less
than that to be paid during that month by Tenant hereunder, Tenant shall pay any
such deficiency to Landlord. Such deficiency shall be calculated and paid
monthly. For all purposes set forth in this subparagraph d., no taking
possession of the Premises by Landlord shall be construed as an election on its
part to terminate this Lease unless a written notice of such intention be given
to Tenant. Notwithstanding any such subletting without termination, Landlord may
at any time hereafter elect to terminate this Lease for such previous breach.
(e) The right to have a receiver appointed for Tenant upon application by
Landlord, to take possession of the Premise and to apply any rental collected
from the Premises and to exercise all other rights and remedies granted to
Landlord pursuant to subparagraph d. above.
23. ABANDONMENT. Tenant shall not vacate or abandon the Premises at any time
during the term of this Lease and if Tenant shall abandon, vacate of surrender
said Premises, or be
<PAGE>
dispossessed by the process of law, or otherwise, any personal property
belonging to Tenant and left on the Premises shall be deemed to be abandoned, at
the option of Landlord, except such property as may be mortgaged to Landlord.
24. DESTRUCTION. In the event the Premises are destroyed in whole or in part
from any cause, except for routine maintenance and repairs and incidental damage
and destruction caused from vandalism and accidents for which Tenant is
responsible for under Paragraph 10, Landlord may, at its option:
(a) Rebuild or restore the Premises to their condition prior to the damage
or destruction, or
(b) Terminate this Lease (providing that the Premises is damaged to the
extent of 33 1/3% of the replacement cost).
If Landlord does not give Tenant notice in writing within (30) days from
the destruction of the Premises of its election to either rebuild and restore
them, or to terminate this Lease, Landlord shall be deemed to have elected to
rebuild or restore them, in which event Landlord agrees, at its expense,
promptly to rebuild or restore the Premises to their condition prior to the
damage or destruction. Tenant shall be entitled to a reduction in rent while
such repair is being made in the proportion that the area of the Premises
rendered untenantable by such damage bears to the total area of the Premises. If
Landlord initially estimates that the rebuilding or restoration will exceed 180
days or if Landlord does not complete the rebuilding or restoration within one
hundred eighty (180) days following the date of destruction (such period of time
to be extended for delays caused by the fault or neglect of Tenant or because of
Acts of God, acts of public agencies, labor disputes, strikes, fires, freight
embargoes, rainy or stormy weather, inability to obtain materials, supplies or
fuels, acts of contractors or subcontractors, or delay of the contractors or
subcontractors due to such causes or other contingencies beyond the control of
Landlord), then Tenant shall have the right to terminate this Lease by giving
fifteen (15) days prior written notice to Landlord. Notwithstanding anything
herein to the contrary, Landlord's obligation to rebuild or restore shall be
limited to the building and interior improvements constructed by Landlord as
they existed as of the commencement date of the Lease and shall not include
restoration of Tenant's trade fixtures, equipment, merchandise, or any
improvements, alterations or additions made by Tenant to the Premises, which
Tenant shall forthwith replace or fully repair at Tenant's sole cost and expense
provided this Lease is not cancelled according to the provisions above.
Unless this Lease is terminated pursuant to the foregoing provisions, this
Lease shall remain in full force and effect. Tenant hereby expressly waives the
provisions of Section 1932, Subdivision 2, in Section 1933, Subdivision 4 of the
California Civil Code.
In the event that the building in which the Premises are situated is damaged
or destroyed to the extent of not less than 33 1/3% of the replacement cost
thereof, Landlord may elect to
<PAGE>
terminate this Lease, whether the Premises be injured or not. Notwithstanding
anything to the contrary herein, Landlord may terminate this Lease in the event
of an uninsured event or if insurance proceeds are insufficient to cover 100% of
the rebuilding costs net of the deductible.
25. EMINENT DOMAIN. If all or any part of the Premises shall be taken by any
public or quasi-public authority under the power of eminent domain or conveyance
in lieu thereof, this Lease shall terminate as to any portion of the Premises so
taken or conveyed on the date when title vests in the condemnor, and Landlord
shall be entitled to any and all payment, income, rent, award, or any interest
therein whatsoever which may be paid or made in connection with such taking or
conveyance, and Tenant shall have no claim against Landlord or otherwise for the
value of any unexpired term of this Lease. Notwithstanding the foregoing
paragraph, any compensation specifically awarded Tenant for loss of business,
Tenant's personal property, moving cost or loss of goodwill, shall be and remain
the property of Tenant.
If (i) any action or proceeding is commenced for such taking of the Premises
or any part thereof, or if Landlord is advised in writing by any entity or body
having the right or power of condemnation of its intention to condemn the
premises or any portion thereof, or (ii) any of the foregoing events occur with
respect to the taking of any space in the Complex not leased hereby, or if any
such spaces so taken or conveyed in lieu of such taking and Landlord shall
decide to discontinue the use and operation of the Complex, or decide to
demolish, alter or rebuild the Complex, then, in any of such events Landlord
shall have the right to terminate this Lease by giving Tenant written notice
thereof within sixty (60) days of the date of receipt of said written advice, or
commencement of said action or proceeding, or taking conveyance, which
termination shall take place as of the first to occur of the last day of the
calendar month next following the month in which such notice is given or the
date on which title to the Premises shall vest in the condemnor.
In the event of such a partial taking or conveyance of the Premises, if the
portion of the Premises taken or conveyed is so substantial that the Tenant can
no longer reasonably conduct its business, Tenant shall have the privilege of
terminating this Lease within sixty (60) days from the date of such taking or
conveyance, upon written notice to Landlord of its intention so to do, and upon
giving of such notice this Lease shall terminate on the last day of the calendar
month next following the month in which such notice is given, upon payment by
Tenant of the rent from the date of such taking or conveyance to the date of
termination.
If a portion of the Premises be taken by condemnation or conveyance in lieu
thereof and neither Landlord nor Tenant shall terminate this Lease as provided
herein, this Lease shall continue in full force and effect as to the part of the
Premises not so taken or conveyed, and the rent herein shall be apportioned as
of the date of such taking or conveyance so that thereafter the rent to be paid
by Tenant shall be in the ratio that the area of the portion of the Premises not
so taken or conveyed bears to the total area of the Premises prior to such
taking.
<PAGE>
26. SALE OR CONVEYANCE BY LANDLORD. In the event of a sale or conveyance of the
Complex or any interest therein, by any owner of the reversion then constituting
Landlord, the transferor shall thereby be released from any further liability
upon any of the terms, covenants or conditions (express or implied) herein
contained in favor of Tenant, and in such event, insofar as such transfer is
concerned, Tenant agrees to look solely to the responsibility of the successor
in interest of such transferor in and to the Complex and this Lease. This Lease
shall not be affected by any such sale or conveyance, and Tenant agrees to
attorn to the successor in interest of such transferor.
27. ATTORNMENT TO LENDER OR THIRD PARTY. In the event the interest of Landlord
in the land and buildings in which the leased Premises are located (whether such
interest of Landlord is a fee title interest or a leasehold interest) is
encumbered by deed of trust, and such interest is acquired by the lender or any
third party through judicial foreclosure or by exercise of a power of sale at
private trustee's foreclosure sale, Tenant hereby agrees to attorn to the
purchaser at any such foreclosure sale and to recognize such purchaser as the
Landlord under this Lease. In the event the lien of the deed of trust securing
the loan from a Lender to landlord is prior and paramount to the Lease, this
Lease shall nonetheless continue in full force and effect for the remainder of
the unexpired term hereof, at the same rental herein reserved and upon all the
other terms, conditions and covenants herein contained.
28. HOLDING OVER. Any holding over by Tenant after expiration or other
termination of the term of this Lease with the written consent of Landlord
delivered to Tenant shall not constitute a renewal or extension of the Lease or
give Tenant any rights in or to the leased Premises except as expressly provided
in this Lease. Any holding over after the expiration or other termination of the
term of this Lease, with the consent of Landlord, shall be construed to be a
tenancy from month to month, on the same terms and conditions herein specified
insofar as applicable except that the monthly Basic Rent shall be increased to
an amount equal to one hundred fifty (150%) percent of the monthly Basic Rent
required during the last month of the Lease term.
29. CERTIFICATE OF ESTOPPEL. Tenant shall at any time upon not less than ten
(10) days' prior written notice from Landlord execute, acknowledge and deliver
to Landlord a statement in writing (i) certifying that this Lease is unmodified
and in full force and effect (or, if modified, stating the nature of such
modification and certifying that this Lease, as so modified, is in full force
and effect) and the date to which the rent and other charges are paid in
advance, if any, and (ii) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder, or specifying
such defaults, if any, are claimed. Any such statement may be conclusively
relied upon by any prospective purchaser or encumbrancer of the Premises.
Tenant's failure to deliver such statement within such time shall be conclusive
upon Tenant that this Lease is in full force and effect, without modification
except as may be represented by Landlord; that there are no uncured defaults in
Landlord's performance, and that not more than one month's rent has been paid in
advance.
<PAGE>
30. CONSTRUCTION CHANGES. It is understood that the description of the Premises
and the location of ductwork, plumbing and other facilities therein are subject
to such minor changes as Landlord or Landlord's architect determines to be
desirable in the course of construction of the Premises, and no such changes, or
any changes in plans for any other portions of the Complex shall affect this
Lease or entitle Tenant to any reduction of rent hereunder or result in any
liability of Landlord to Tenant. Landlord does not guarantee the accuracy of any
drawings supplied to Tenant and verification of the accuracy of such drawings
rests with Tenant.
31. RIGHT OF LANDLORD TO PERFORM. All terms, covenants and conditions of this
Lease to be performed or observed by Tenant shall be performed or observed by
Tenant at Tenant's sole cost and expense and without any reduction of rent. If
Tenant shall fail to pay any sum of money, or other rent, required to be paid by
it hereunder and such failure shall continue for five (5) days after written
notice by Landlord, or shall fail to perform any other term or covenant
hereunder on its part to be performed, and such failure shall continue for
thirty (30) days after written notice thereof by Landlord, Landlord, without
waiving or releasing Tenant from any obligation of Tenant hereunder, may, but
shall not be obligated to, make any such payment or perform any such other term
or covenant on Tenant's part to be performed. All sums so paid by Landlord and
all necessary costs of such performance by Landlord together with interest
thereon at the rate of the prime rate of interest per annum as quoted by the
Bank of America from the date of such payment or performance by Landlord, shall
be paid (and Tenant covenants to make such payment) to Landlord on demand by
Landlord, and Landlord shall have (in addition to any other right or remedy of
Landlord) the same rights and remedies in the event of nonpayment by Tenant as
in the case of failure by Tenant in the payment of rent hereunder.
32. ATTORNEYS' FEES. (A) In the event that either Landlord or Tenant should
bring suit for the possession of the Premises, for the recovery of any sum due
under this Lease, or because of the breach of any provision of this Lease, or
for any other relief against the other party hereunder, then all costs and
expenses, including reasonable attorneys' fees, incurred by the prevailing party
therein shall be paid by the other party, which obligation on the part of the
other party shall be deemed to have accrued on the date of the commencement of
such action and shall be enforceable whether or not the action is prosecuted to
judgment.
(B) Should Landlord be named as a defendant in any suit brought against
Tenant in connection with or arising out of Tenant's occupancy hereunder, Tenant
shall pay to Landlord its costs and expenses incurred in such suit, including a
reasonable attorney's fee.
33. WAIVER. The waiver by either party of the other party's failure to perform
or observe any term, covenant or condition herein contained to be performed or
observed by such waiving party shall not be deemed to be a waiver of such item,
covenant or condition or of any subsequent failure of the party failing to
perform or observe the same or any other such term, covenant or condition
therein contained, and no custom or practice which may develop between the
parties hereto during the term hereof shall be deemed a waiver of, or in any way
affect, the
<PAGE>
right of either party to insist upon performance and observance by the other
party in strict accordance with the terms hereof.
34. NOTICES. All notices, demands, requests, advices or designations which may
be or are required to be given by either party to the other hereunder shall be
in writing. All notices, demands, requests, advices or designations by Landlord
to Tenant shall be sufficiently given, made or delivered if personally served on
Tenant by leaving the same at the Premises or if sent by United States certified
or registered mail, postage prepaid, addressed to Tenant at the Premises. All
notices, demands, request, advices or designations by Tenant to Landlord shall
be sent by United States certified or registered mail, postage prepaid,
addressed to Landlord at its offices at Westport Joint Venture, 2560 Mission
College Blvd., #101, Santa Clara, CA 95054. Each notice, request, demand, advice
or designation referred to in this paragraph shall be deemed received on the
date of the personal service or mailing thereof in the manner herein provided,
as the case may be.
35. EXAMINATION OF LEASE. Submission of this instrument for examination or
signature by Tenant does not constitute a reservation of or option for a lease,
and this instrument is not effective as a lease or otherwise until its execution
and delivery by both Landlord and Tenant.
36. DEFAULT BY LANDLORD. Landlord shall not be in default unless Landlord fails
to perform obligations required of Landlord within a reasonable time, but in no
event earlier than thirty (30) days after written notice by Tenant to Landlord
and to the holder of any first mortgage or deed of trust covering the Premises
whose name and address shall have heretofore been furnished to Tenant in
writing, specifying wherein Landlord has failed to perform such obligations;
provided, however, that if the nature of Landlord's obligations is such that
more than thirty (30) days are required for performance, then Landlord shall not
be in default if Landlord commences performance within such thirty (30) day
period and thereafter diligently prosecutes the same to completion.
37. CORPORATE AUTHORITY. If Tenant is a corporation, (or a partnership) each
individual executing this Lease on behalf of said corporation (or partnership)
represents and warrants that he is duly authorized to execute and deliver this
Lease on behalf of said corporation (or partnership) in accordance with the
by-laws of said corporation (or partnership in accordance with the partnership
agreement) and that this Lease is binding upon said corporation (or partnership)
in accordance with its terms. If Tenant is a corporation, Tenant shall, within
thirty (30) days after execution of this Lease, deliver to Landlord a certified
copy of the resolution of the Board of Directors of said corporation authorizing
or ratifying the execution of this Lease.
38. INTENTIONALLY DELETED.
<PAGE>
39. LIMITATION OF LIABILITY. In consideration of the benefits accruing
hereunder, Tenant and all successors and assigns covenant and agree that, in the
event of any actual or alleged failure, breach or default hereunder by Landlord:
(i) the sole and exclusive remedy shall be against Landlord's interest in
the Premises leased herein;
(ii) no partner of Landlord shall be sued or named as a party in any suit
or action (except as may be necessary to secure jurisdiction of the
partnership)
(iii) no service or process shall be made against any partner of Landlord
(except as may be necessary to secure jurisdiction of the
partnership)
(iv) no partner of Landlord shall be required to answer or otherwise
plead to any service of process;
(v) no judgment will be taken against any partner of Landlord;
(vi) any judgment taken against any partner of Landlord may be vacated and
set aside at any time without hearing;
(vii) no writ of execution will ever be levied against the assets of any
partner of Landlord;
(viii) these covenants and agreements are enforceable both by Landlord and
also by any partner of Landlord.
Tenant agrees that each of the foregoing covenants and agreements shall be
applicable to any covenant or agreement either expressly contained in this Lease
or imposed by statute or at common law.
40. MISCELLANEOUS AND GENERAL PROVISIONS
a. Tenant shall not, without the written consent of Landlord, use the name
of the building for any purpose other than as the address of the business
conducted by Tenant in the Premises.
b. This Lease shall in all respects be governed by and construed in
accordance with the laws of the State of California. If any provision of
this Lease shall be invalid, unenforceable or ineffective for any reason
whatsoever, all other provisions hereof shall be and remain in full force
and effect.
c. The term "Premises" includes the space leased hereby and any improvements
now hereafter installed herein or attached thereto. The term "Landlord" or
any pronoun used in place thereof includes the plural as well as the
singular and the successors and assigns of Landlord. The term "Tenant" or
any pronoun used in place thereof includes the plural as well as the
singular and individuals, firms, associations, partnerships and
corporations, and their and each of their respective heirs, executors,
administrators, successors and permitted assigns, according to the context
hereof, and the provisions of this Lease shall inure to the benefit of and
bind such heirs, executors, administrators, successors and permitted
assigns. The term "person" includes the plural as well as the singular and
<PAGE>
individuals, firms, associations, partnerships and corporations, Words used
in any gender include other genders. If there be more than one Tenant the
obligations of Tenant hereunder are joint and several. The paragraph
headings of this Lease are for convenience of reference only and shall have
no effect upon the construction or interpretation of any provision hereof.
d. Time is of the essence of this Lease and of each and all of its
provisions.
e. At the expiration or earlier termination of this Lease, Tenant shall
execute, acknowledge and deliver to Landlord, within ten (10) days after
written demand from Landlord to Tenant, any quitclaim deed or other document
required by any reputable title company, licensed to operate in the State of
California, to remove the cloud or encumbrance created by this Lease from
the real property of which Tenant's Premises are a part.
f. This instrument along with any exhibits and attachments hereto
constitutes the entire agreement between Landlord and Tenant relative to the
Premises and this agreement and the exhibits and attachments may be altered,
amended or revoked only by an instrument in writing signed by both Landlord
and Tenant. Landlord and Tenant agree hereby that all prior or
contemporaneous oral agreements between and among themselves and their
agents or representatives relative to the leasing of the Premises are merged
in or revoked by this agreement.
g. Neither Landlord nor Tenant shall record this Lease or a short form
memorandum hereof without the consent of the other.
h. Tenant further agrees to execute any amendments required by a lender to
enable Landlord to obtain financing, so long as Tenant's rights hereunder
are not substantially affected.
i. Paragraphs 43 through 55 are added hereto and are included as a part of
this Lease.
j. Clauses, plats and riders, if any, signed by Landlord and Tenant and
endorsed on or affixed to this Lease are a part hereof.
k. Tenant covenants and agrees that no diminution or shutting off of light,
air or view by any structure which may be hereafter erected (whether or not
by Landlord) shall in any way affect his Lease, entitle Tenant to any
reduction of rent hereunder or result in any liability of Landlord to
Tenant.
<PAGE>
41. BROKERS. Tenant warrants that it had dealings with only the following real
estate brokers or agents in connection with the negotiation of this Lease: None
and that it knows of no other real estate broker or agent who is entitled to a
commission in connection with this Lease.
42. SIGNS. No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the outside of
the Premises or any exterior windows of the Premises without the written consent
of Landlord first had and obtained and Landlord shall have the right to remove
any such sign, placard, picture, advertisement, name or notice without notice to
and at the expense of Tenant. If Tenant is allowed to print or affix or in any
way place a sign in, on, or about the Premises, upon expiration or other sooner
termination of this Lease, Tenant, at Tenant's sole cost and expense shall both
remove such sign and repair all damage in such a manner as to restore all
aspects of the appearance of the Premises to the condition prior to the
placement of said sign.
All approved signs or lettering on outside doors shall be printed, painted,
affixed or inscribed at the expense of Tenant by a person approved of by
Landlord. Tenant shall not place anything or allow anything to be placed near
the glass of any window, door partition or wall which may appear unsightly from
outside the Premises.
IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this
Lease as of the day and year last written below.
LANDLORD: TENANT:
WESTPOINT JOINT VENTURE BLUESTONE SOFTWARE, INC.
a California joint venture a Delaware corporation
JOHN ARRILLAGA SURVIVOR'S TRUST
By: ________________________________________ By: /s/ Robert W. Bickel
John Arrillaga, Trustee
Date: ______________________________________ Title: Senior Vice President
PEERY PRIVATE INVESTMENT Robert W. Bickel
COMPANY-WP, L.P. Type or Print Name
a California limited partnership
Date: ___________________________
By: ________________________________________
Richard T. Peery, Trustee of the
Richard T. Peery Separate Property Trust
dated 7/20/77, as its General Partner
Date: ______________________________________
<PAGE>
PEERY PUBLIC INVESTMENT COMPANY-WP, L.P.
a California limited partnership
By: _________________________________________
Richard T. Peery, Trustee of the
Richard T. Peery Separate Property Trust
dated 7/20/77, as its General Partner
Date: _______________________________________
<PAGE>
Paragraphs 43 through 55 to Lease Agreement dated October 15, 1999,
By and Between Westport Joint Venture, a California joint venture,
as Landlord, and Bluestone Software, Inc., a Delaware corporation,
as Tenant for 10,847 +/- Square Feet of Space Located at 1300 Bridge
Parkway, Suite 101, Redwood City, California.
43. BASIC RENT: In accordance with Paragraph 4A herein, the total aggregate sum
of TWO MILLION FOUR HUNDRED TWENTY EIGHT THOUSAND EIGHT HUNDRED FIFTY THREE AND
24/100 DOLLARS ($2,428,853.24), shall be payable as follows:
On January 15, 2000, the sum of TWENTY THOUSAND EIGHT HUNDRED NINETEEN AND
24/100 DOLLARS ($20,819.24) shall be due, representing the prorated Basic Rent
for the period of January 15, 2000 through January 31, 2000.
On February 1, 2000, the sum of THIRTY SEVEN THOUSAND NINE HUNDRED SIXTY
FOUR AND 50/100 DOLLARS ($37,964.50) shall be due, and a like sum due on the
first day of each month thereafter, through and including January 1, 2001.
On February 1, 2001, the sum of THIRTY NINE THOUSAND FORTY NINE AND 20/100
DOLLARS ($39,049.20) shall be due, and a like sum due on the first day of each
month thereafter, through and including January 1, 2002.
On February 1, 2002, the sum of FORTY THOUSAND ONE HUNDRED THIRTY THREE AND
90/100 DOLLARS ($40,133.90) shall be due, and a like sum due on the first day
of each month thereafter, through and including January 1, 2003.
On February 1, 2003, the sum of FORTY ONE THOUSAND TWO HUNDRED EIGHTEEN AND
60/100 DOLLARS ($41,218.60) shall be due, and a like sum due on the first day
of each month thereafter, through and including January 1, 2004.
On February 1, 2004, the sum of FORTY TWO THOUSAND THREE HUNDRED THREE AND
30/100 DOLLARS ($42,303.30) shall be due, and a like sum due on the first day
of each month thereafter, through and including January 1, 2005; or until the
entire aggregate sum of TWO MILLION FOUR HUNDRED TWENTY EIGHT THOUSAND EIGHT
HUNDRED FIFTY THREE AND 24/100 DOLLARS ($2,428,853.24) has been paid.
44. "AS-IS" BASIS: Subject only to Paragraph 45 and to Landlord making the
improvements shown on EXHIBIT B to be attached hereto, it is hereby agreed that
the Premises leased hereunder is leased strictly on an "as-is" basis and in its
present condition, and in the configuration as shown on EXHIBIT B to be
attached hereto, and by reference made a part hereof. Except as noted herein,
it is specifically agreed between the parties that after Landlord makes the
interior improvements as shown on EXHIBIT B, Landlord shall not be required to
make, nor be responsible for any cost, in connection with any repair,
restoration, and/or improvement to the Premises in order for this Lease to
commence, or thereafter, throughout the Term of this Lease.
<PAGE>
Notwithstanding anything to the contrary within this Lease, Landlord makes no
warranty or representation of any kind or nature whatsoever as to the condition
or repair of the Premises, nor as to the use or occupancy which may be made
thereof.
45. TENANT INTERIOR IMPROVEMENTS: Landlord shall, at its sole cost and expense,
construct certain interior improvements (the "Tenant Improvements") in the
Premises, as shown on Exhibit B to be attached to the Lease and Landlord agrees
to deliver the Premises leased hereunder to Tenant, at Landlord's expense, in
the configuration shown in Red on EXHIBIT B to be attached hereto.
Notwithstanding anything to the contrary above, it is specifically understood
and agreed that Landlord shall be required to furnish only a standard air
conditioning/heating system, normal electrical outlets, standard fire sprinkler
system, standard bathroom, standard lobby, 2'x4' suspended acoustical tile drop
ceiling throughout the entire space leased, carpeting and/or vinyl-coated floor
tile, and standard office partitions and doors, as shown on EXHIBIT B to be
attached hereto; provided however, any special HVAC and/or plumbing and/or
electrical requirements over and above that normally supplied by Landlord shall
be 100 percent the responsibility of and be paid for 100 percent by Tenant.
It is further agreed that Tenant shall furnish Landlord with Tenant's
required specifications and a preliminary space plan showing the layout of the
improvements to be constructed in the Premises by November 15, 1999. At that
time, Landlord shall have the final interior plans drawn by Landlord's
architect. All of the plans and specifications shall be EXHIBIT B to this
Lease. If said preliminary plans and specifications for any items affecting the
interior improvements to be constructed in the building are not received by
Landlord for Landlord's approval (which approval shall not be unreasonably
withheld) by November 15, 1999, then it is agreed that, notwithstanding
anything to the contrary in this Lease, this Lease and Tenant's obligation to
perform all terms, covenants and conditions of this Lease shall commence
January 15, 2000, regardless of whether or not the building and interior
improvements are completed on January 15, 2000, and Landlord shall complete
construction of the interior improvements as soon as reasonably possible
thereafter.
Notwithstanding anything to the contrary, it is agreed that in the event
Tenant makes changes, additions, or modifications to the plans and
specifications to be constructed by Landlord as set forth herein, or
improvements are installed for Tenant in excess of those to be provided Tenant
by Landlord as set forth on EXHIBIT B, any increased cost(s) resulting from
said changes, additions, and/or modifications and/or improvements in excess of
those to be provided Tenant shall be contracted for with Landlord and paid for
one hundred percent (100%) by Tenant.
The interior shall be constructed in accordance with EXHIBIT B of the
Lease, it being agreed, however, that if the interior improvements constructed
by Landlord relating thereto, do not conform exactly to the plans and
specifications as set forth in the Lease, and the general appearance,
structural integrity, and Tenant's uses and occupancy of the Premises and
interior improvements relating thereto are not materially or unreasonably
affected by such deviation, it is agreed that the commencement date of the
Lease, and Tenant's obligation to pay rental, shall not
<PAGE>
be affected, and Tenant hereby agrees, in such event, to accept the Premises
and interior improvements as constructed by Landlord.
Tenant shall have thirty (30) days after the Commencement Date to provide
Landlord with a "punch list" pertaining to Landlord's work with respect to
Tenant's interior improvements. As soon as reasonably possible thereafter,
Landlord, or one of Landlord's representatives (if so approved by Landlord),
and Tenant shall conduct a joint walk-through of the Premises (if Landlord so
requires), and inspect such Tenant Improvements, using their best efforts to
agree on the incomplete or defective construction related to the Tenant
Improvements installed by Landlord. After such inspection has been completed,
Landlord shall prepare, and both parties shall sign, a list of all "punch list"
items which the parties reasonably agree are to be corrected by Landlord (but
which shall exclude any damage or defects caused by Tenant, its employees,
agents or parties Tenant has contracted with to work on the Premises). Landlord
shall have thirty (30) days thereafter (or longer if necessary, provided
Landlord is diligently pursuing the completion of the same) to complete, at
Landlord's expense, the repairs on the "punch list" without the Commencement
Date of the Lease and Tenant's obligation to pay Rental thereunder being
affected. This Paragraph shall be of no force and effect if Tenant shall fail
to give any such notice to Landlord within thirty (30) days after the
Commencement Date of this Lease.
46. CONSENT: Whenever the consent of one party to the other is required
hereunder, such consent shall not be unreasonably withheld.
47. CHOICE OF LAW: SEVERABILITY. This Lease shall in all respects be governed
by and construed in accordance with the laws of the State of California. If any
provisions of this Lease shall be invalid, unenforceable, or ineffective for
any reason whatsoever, all other provisions hereof shall be and remain in full
force and effect.
48. AUTHORITY TO EXECUTE. The parties executing this Lease Agreement hereby
warrant and represent that they are properly authorized to execute this Lease
Agreement and bind the parties on behalf of whom they execute this Lease
Agreement and to all of the terms, covenants and conditions of this Lease
Agreement as they relate to the respective parties hereto.
49. ASSESSMENT CREDITS. The demised property herein may be subject to a special
assessment levied by the City of Redwood City as part of an Improvement
District. As a part of said special assessment proceedings (if any), additional
bonds were or may be sold and assessments were or may be levied to provide for
construction contingencies and reserve funds. Interest shall be earned on such
funds created for contingencies and on reserve funds which will be credited for
the benefit of said assessment district. To the extent surpluses are created in
said district through unused contingency funds, interest earnings or reserve
funds, such surpluses shall be deemed the property of Landlord. Notwithstanding
that such surpluses may be credited on assessments otherwise due against the
Leased Premises, Tenant shall pay to Landlord, as additional rent if, and at the
time of any such credit of surpluses, an amount equal to all such surpluses so
credited. For example: if (i) the property is subject to an annual assessment of
<PAGE>
$1,000.00, and (ii) a surplus of $200.00 is credited towards the current year's
assessment which reduces the assessment amount shown on the property tax bill
from $1,000.00 to $800.00, Tenant shall, upon receipt of notice from Landlord,
pay to Landlord said $200.00 credit as Additional Rent.
50. ASSIGNMENT AND SUBLETTING (CONTINUED):
A. In addition to and notwithstanding anything to the contrary in Paragraph
19 of this Lease, Landlord hereby agrees to consent to Tenant's assigning or
subletting said Lease to: (i) any parent or subsidiary corporation, or
corporation with which Tenant merges or consolidates provided that the net worth
of said parent or subsidiary corporation, or said corporation has a net worth
equal to or greater than the net worth of Tenant (a) at the time of Lease
execution or (b) at the time of such assignment, merger, or consolidation
(whichever is greater); or (ii) any third party or entity to whom Tenant sells
all or substantially all of its assets; provided, that the net worth of the
resulting or acquiring corporation has a net worth after the merger,
consolidation or acquisition equal to or greater than the net worth of Tenant
(a) at the time of Lease execution or (b) at the time of such merger,
consolidation or acquisition (whichever is greater). No such assignment or
subletting will release the Tenant from its liability and responsibility under
this Lease to the extent Tenant continues in existence following such
transaction. Notwithstanding the above, Tenant shall be required to (a) give
Landlord written notice prior to such assignment or subletting to any party as
described in (i) and (ii) above, (b) execute Landlord's consent document
prepared by Landlord reflecting the assignment or subletting and (c) pay
Landlord's costs for processing said Consent prior to the effective date of said
assignment or sublease.
B. Notwithstanding the foregoing, Landlord and Tenant agree that it shall
not be unreasonable for Landlord to refuse to consent to a proposed assignment,
sublease or other transfer ("Proposed Transfer") if the Premises or any other
portion of the Property would become subject to additional or different
Government Requirements as a direct or indirect consequence of the Proposed
Transfer and/or the Proposed Transferee's use and occupancy of the Premises and
the Property. However, Landlord may, in its sole discretion, consent to such a
Proposed Transfer where Landlord is indemnified by Tenant and (i) Subtenant or
(ii) Assignee, in form and substance satisfactory to Landlord's counsel, by
Tenant and/or the Proposed Transferee from and against any and all costs,
expenses, obligations and liability arising out of the Proposed Transfer and/or
the Proposed Transferee's use and occupancy of the Premises and the Property.
C . Any and all sublease agreement(s) between Tenant and any and all
subtenant(s) (which agreements must be consented to by Landlord, pursuant to the
requirements of this Lease) shall contain the following language:
"If Landlord and Tenant jointly and voluntarily
elect, for any reason whatsoever, to terminate the Master
Lease prior to the scheduled Master Lease termination date,
then this Sublease (if then still in effect) shall terminate
concurrently with the
<PAGE>
termination of the Master Lease. Subtenant expressly
acknowledges and agrees that (1) the voluntary termination of
the Master Lease by Landlord and Tenant and the resulting
termination of this Sublease shall not give Subtenant any
right or power to make any legal or equitable claim against
Landlord, including without limitation any claim for
interference with contract or interference with prospective
economic advantage, and (2) Subtenant hereby waives any and
all rights it may have under law or at equity against Landlord
to challenge such an early termination of the Sublease, and
unconditionally releases and relieves Landlord, and its
officers, directors, employees and agents, from any and all
claims, demands, and/or causes of action whatsoever
(collectively, "Claims"), whether such matters are known or
unknown, latent or apparent, suspected or unsuspected,
foreseeable or unforeseeable, which Subtenant may have arising
out of or in connection with any such early termination of
this Sublease. Subtenant knowingly and intentionally waives
any and all protection which is or may be given by Section
1542 of the California Civil Code which provides as follows:
"A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at the
time of executing the release, which if known by him must have
materially affected his settlement with debtor.
The term of this Sublease is therefore subject to
early termination. Subtenant's initials here below evidence
(a) Subtenant's consideration of and agreement to this early
termination provision, (b) Subtenant's acknowledgment that, in
determining the net benefits to be derived by Subtenant under
the terms of this Sublease, Subtenant has anticipated the
potential for early termination, and (c) Subtenant's agreement
to the general waiver and release of Claims above.
Initials: ________ Initials: ________"
Subtenant Tenant
51. BANKRUPTCY AND DEFAULT: Paragraph 22 is modified to provide that with
respect to non-monetary defaults not involving Tenant's failure to pay Basic
Rent or Additional Rent, Tenant shall not be in default of any non-monetary
obligation if (i) more than thirty (30) days is required to cure such
non-monetary default, and (ii) Tenant commences cure of such default as soon as
reasonably practicable after receiving written notice of such default from
Landlord and thereafter continuously and with due diligence prosecutes such cure
to completion.
<PAGE>
52. ABANDONMENT: Paragraph 23 is modified to provide that Tenant shall not be in
default under the Lease if it leaves all or any part of Premises vacant so long
as (i) Tenant is performing all of its other obligations under the Lease
including the obligation to pay Basic Rent and Additional Rent (ii) Tenant
provides on-site security during normal business hours for those parts of the
Premises left vacant, (iii) such vacancy does not materially and adversely
affect the validity or coverage of any policy of insurance carried by Landlord
with respect to the Premises, and (iv) the utilities and heating and ventilation
system are operated and maintained to the extent necessary to prevent damage to
the Premises or its systems.
53. HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with respect to
the existence or use of "Hazardous Materials" (as defined herein) on, in, under
or about the Premises and real property located beneath said Premises and the
common areas of the Complex (hereinafter collectively referred to as the
"Property"):
A. As used herein, the term "Hazardous Materials" shall mean any material,
waste, chemical, mixture or byproduct which is or hereafter is defined, listed
or designated under Environmental Laws (defined below) as a pollutant, or as a
contaminant, or as a toxic or hazardous substance, waste or material, or any
other unwholesome, hazardous, toxic, biohazardous, or radioactive material,
waste, chemical, mixture or byproduct, or which is listed, regulated or
restricted by any Environmental Law (including, without limitation, petroleum
hydrocarbons or any distillates or derivatives or fractions thereof,
polychlorinated biphenyls, or asbestos). As used herein, the term "Environmental
Laws" shall mean any applicable Federal, State of California or local government
law (including common law), statute, regulation, rule, ordinance, permit,
license, order, requirement, agreement, or approval, or any determination,
judgment, directive, or order of any executive or judicial authority at any
level of Federal, State of California or local government (whether now existing
or subsequently adopted or promulgated) relating to pollution or the protection
of the environment, ecology, natural resources, or public health and safety.
B. Tenant shall obtain Landlord's written consent, which may be withheld in
Landlord's discretion, prior to the occurrence of any Tenant's Hazardous
Materials Activities (defined below); provided, however, that Landlords consent
shall not be required for normal use in compliance with applicable Environmental
Laws of customary household and office supplies (Tenant shall first provide
Landlord with a list of said materials use), such as mild cleaners, lubricants
and copier toner. As used herein, the term "Tenant's Hazardous Materials
Activities" shall mean any and all use, handling, generation, storage, disposal,
treatment, transportation, release, discharge, or emission of any Hazardous
Materials on, in, beneath, to, from, at or about the Property, in connection
with Tenant's use of the Property, or by Tenant or by any of Tenant's agents,
employees, contractors, vendors, invitees, visitors or its future subtenants or
assignees. Tenant agrees that any and all Tenant's Hazardous Materials
Activities shall be conducted in strict, full compliance with applicable
Environmental Laws at Tenant's expense, and shall not result in any
contamination of the Property or the environment. Tenant agrees to provide
Landlord with prompt written notice of any spill or release of Hazardous
Materials at the
<PAGE>
Property during the term of the Lease of which Tenant becomes aware, and further
agrees to provide Landlord with prompt written notice of any violation of
Environmental laws in connection with Tenant's Hazardous Materials Activities of
which Tenant becomes aware. If Tenant's Hazardous Materials Activities involve
Hazardous Materials other than normal use of customary household and office
supplies, Tenant also agrees at Tenant's expense: (i) to install such Hazardous
Materials monitoring, storage and containment devices as Landlord reasonably
deems necessary (Landlord shall have no obligation to evaluate the need for any
such installation or to require any such installation); (ii) provide Landlord
with a written inventory of such Hazardous Materials, including an update of
same each year upon the anniversary date of the Commencement Date of the Lease
("Anniversary Date"); and (iii) on each Anniversary Date, to retain a qualified
environmental consultant, acceptable to Landlord, to evaluate whether Tenant is
in compliance with all applicable Environmental Laws with respect to Tenant's
Hazardous Materials Activities. Tenant, at its expense, shall submit to Landlord
a report from such environmental consultant which discusses the environmental
consultant's findings within two (2) months of each Anniversary Date. Tenant, at
its expense, shall promptly undertake and complete any and all steps necessary,
and in full compliance with applicable Environmental Laws, to fully correct any
and all problems or deficiencies identified by the environmental consultant, and
promptly provide Landlord with documentation of all such corrections.
C. Prior to termination or expiration of the Lease, Tenant, at its expense,
shall (i) properly remove from the Property all Hazardous Materials which come
to be located at the Property in connection with Tenant's Hazardous Materials
Activities, and (ii) fully comply with and complete all facility closure
requirements of applicable Environmental Laws regarding Tenant's Hazardous
Materials Activities, including but not limited to (x) properly restoring and
repairing the Property to the extent damaged by such closure activities, and (y)
obtaining from the local Fire Department or other appropriate governmental
authority with jurisdiction a written concurrence that closure has been
completed in compliance with applicable Environmental Laws. Tenant shall
promptly provide Landlord with copies of any claims, notices, work plans, data
and reports prepared, received or submitted in connection with any such closure
activities.
D. If Landlord, in its sole discretion, believes that the Property has
become contaminated as a result of Tenant's Hazardous Materials Activities,
Landlord in addition to any other rights it may have under this Lease or under
Environmental Laws or other laws, may enter upon the Property and conduct
inspection, sampling and analysis, including but not limited to obtaining and
analyzing samples of soil and groundwater, for the purpose of determining the
nature and extent of such contamination. Tenant shall promptly reimburse
Landlord for the costs of such an investigation, including but not limited to
reasonable attorneys' fees Landlord incurs with respect to such investigation,
that discloses Hazardous Materials contamination for which Tenant is liable
under this Lease. Except as may be required of Tenant by applicable
Environmental Laws, Tenant shall not perform any sampling, testing, or drilling
to identify the presence of any Hazardous Materials at the Property, without
Landlord's prior written consent which may be withheld in Landlord's discretion.
Tenant shall promptly provide Landlord with
<PAGE>
copies of any claims, notices, work plans, data and reports prepared, received
or submitted in connection with any sampling, testing or drilling performed
pursuant to the preceding sentence.
E. Tenant shall indemnify, defend (with legal counsel acceptable to
Landlord, whose consent shall not unreasonably be withheld) and hold harmless
Landlord, its employees, assigns, successors, successors-in-interest, agents and
representatives from and against any and all claims (including but not limited
to third party claims from a private party or a government authority),
liabilities, obligations, losses, causes of action, demands, governmental
proceedings or directives, fines, penalties, expenses, costs (including but not
limited to reasonable attorneys', consultants' and other experts' fees and
costs), and damages, which arise from or relate to: (i) Tenant's Hazardous
Materials Activities; (ii) any Hazardous Materials contamination caused by
Tenant prior to the Commencement Date of the Lease; or (iii) the breach of any
obligation of Tenant under this Paragraph 53 (collectively, "Tenant's
Environmental Indemnification"). Tenant's Environmental Indemnification shall
include but is not limited to the obligation to promptly and fully reimburse
Landlord for losses in or reductions to rental income, and diminution in fair
market value of the Property. Tenant's Environmental Indemnification shall
further include but is not limited to the obligation to diligently and properly
implement to completion, at Tenant's expense, any and all environmental
investigation, removal, remediation, monitoring, reporting, closure activities,
or other environmental response action (collectively, "Response Actions").
Tenant shall promptly provide Landlord with copies of any claims, notices, work
plans, data and reports prepared, received or submitted in connection with any
Response Actions.
F. Landlord hereby informs Tenant, and Tenant hereby acknowledges, that the
Premises and adjacent properties overlie a former solid waste landfill site
commonly known as the Westport Landfill ("Former Landfill"). Landlord further
informs Tenant, and Tenant hereby acknowledges, that (i) prior testing has
detected the presence of low levels of certain volatile and semi-volatile
organic compounds and other contaminants in the groundwater, in the leachate
from the landfilled solid waste, and/or in certain surface waters of the
Property, as more fully described in Section 2.3.2 of the report entitled
"Revised Discharge Monitoring Plan, Westport Landfill Site, Redwood City,
California" prepared by Geomatrix Consultants, dated May 1996 ("Discharge
Plan"), (ii) methane gas is or may be generated by the landfilled solid waste
(item "i" immediately preceding and this item "ii" are hereafter collectively
referred to as the "Landfill Contamination"), and (iii) the Premises and the
Former Landfill are subject to the California Regional Water Quality Control
Board's ("Regional Board") Waste Discharge Requirements Order No. 94-181 (the
"Order"). The Order is attached hereto as EXHIBIT C. As evidenced by their
initials set forth immediately below, Tenant acknowledges that Landlord has
provided Tenant with copies of the environmental reports listed on EXHIBIT D,
and Tenant acknowledges that Tenant and Tenant's experts (if any) have had ample
opportunity to review such reports and that Tenant has satisfied itself as to
the environmental conditions of the Property and the suitability of such
conditions for Tenant's intended use of the Property.
Initial: ____________ Initial: ____________
Tenant Landlord
<PAGE>
G. Landlord shall indemnify, defend, and hold harmless Tenant against any
and all claims asserted by third parties (excluding any agents employees,
contractors, vendors, invitees, visitors, future subtenants and assignees of
Tenant, and excluding any other parties related to Tenant), including all
liabilities, judgments, damages, suits, orders, government directives, costs and
expenses in connection with such claims, which arise from (i) the Landfill
Contamination, or (ii) the Order, as may be amended ("Landlord's Environmental
Indemnity"); PROVIDED HOWEVER that Landlord's Environmental Indemnity shall be
subject to the following limitations and conditions:
(1) Landlord's Environmental Indemnity shall not apply to any economic or
consequential damages suffered by Tenant, including but not limited
to loss of business or profits.
(2) Landlord's Environmental Indemnity shall not apply, without
limitation, to any releases caused by Tenant's Hazardous Materials
Activities.
(3) Tenant acknowledges that Landlord must comply with the Order, as may
be amended, and with directives of government authorities including
the Regional Board, with respect to the Contamination and the Former
Landfill. Tenant further acknowledges that groundwater monitoring
wells, methane recovery wells and equipment, and other environmental
control devices are located on and about the Premises and may be
modified or added to during the term of the Lease (collectively,
"Environmental Equipment"), and that environmental investigation,
monitoring, closure and post-closure activities (collectively,
"Environmental Activities")will be performed on the Premises during
the term of the Lease. Tenant shall allow Landlord, and any other
party named as a discharger under the Order, as may be amended, and
their respective agents, consultants and contractors, and agents of
governmental environmental authorities with jurisdiction ("Government
Representatives") to enter the Premises to access the Environmental
Equipment and to perform Environmental Activities during the term of
the Lease, provided that Tenant's use and occupancy of the Premises
shall not unreasonably be disturbed.
(4) Tenant and Landlord shall reasonably cooperate with each other
regarding any Environmental Activities to be performed, and regarding
any Environmental Equipment to be installed, maintained, or removed
on the Premises during the term of the Lease.
(5) Tenant shall be responsible at its expense for repairing any
Environmental Equipment damaged due to the negligence of Tenant or
Tenant's agents, employees, contractors, vendors, invitees, visitors,
future subtenants or assignees (such terms "invitees" and "visitors"
as used in this Paragraph 53
<PAGE>
shall not include Landlord or any other party named
as a discharger under the Order as may be amended, or
any of their respective agents, consultants or
contractors, or any Government Representatives).
It is agreed that the Tenant's responsibilities related to Hazardous
Materials will survive the expiration or termination of this Lease and that
Landlord may obtain specific performance of Tenant's responsibilities under this
Paragraph 53.
54. WAIVER OF LANDLORD'S LIEN. Said Lease does not create a lien with respect to
the personal property of Tenant; provided, however, such waiver shall not be
deemed to constitute a waiver of any rights or remedies of Landlord, if and when
applicable, as a judgment lien creditor.
55. QUIET ENJOYMENT: Landlord covenants with respect to actions by Landlord,
that Tenant, on paying the Rent (including Basic Rent and Additional Rent) and
performing all the covenants of this Lease on its part to be performed, shall
and may peaceably and quietly hold and enjoy the Premise s for the Term of this
Lease subject to and in accordance with the terms, covenants, conditions and
provisions of this Lease, including the rights expressly reserved to Landlord as
set forth in this Lease.
<PAGE>
EXHIBIT 10.42
FOURTH LOAN MODIFICATION AGREEMENT
This Fourth Loan Modification Agreement is entered into as of December
1, 1999 by and between BLUESTONE SOFTWARE, INC., a Delaware corporation with its
principal place of business at 1000 Briggs Road, Mount Laurel, New Jersey
08054-4101 ("Borrower") and SILICON VALLEY BANK, a California-chartered bank
("Bank"), with its principal place of business at 3003 Tasman Drive, Santa
Clara, CA 95054 and with a loan production office located at 5 Radnor Corporate
Center, Suite 555, 100 Matsonford Road, Radnor, Pennsylvania 19087.
1. DESCRIPTION OF EXISTING INDEBTEDNESS. Among other indebtedness which
may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to a
loan arrangement dated as of December 8, 1997, evidenced by, among other
documents, a certain Loan and Security Agreement dated as of December 8, 1997
between Borrower and Bank, as amended by a First Loan Modification Agreement
dated as of August 16, 1998, as amended by a Second Loan Modification Agreement
dated as of January 21, 1999, and as amended by a Third Loan Modification
Agreement dated as of March 30, 1999 (as amended, the "Loan Agreement"). The
Loan Agreement established in favor of the Borrower: (i) a revolving line of
credit in the maximum principal amount of One Million Seven Hundred Fifty
Thousand Dollars ($1,750,000.00) (the "Committed Revolving Line"), and (ii) an
equipment line of credit in the maximum principal amount of Two Million Dollars
($2,000,000.00) (the "1998 Committed Equipment Line"). Capitalized terms used
but not otherwise defined herein shall have the same meaning as in the Loan
Agreement.
Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as
the "Indebtedness".
2. DESCRIPTION OF COLLATERAL. Repayment of the Indebtedness is secured by
the Collateral as described in the Loan Agreement (together with any other
collateral security granted to Bank, the "Security Documents").
Hereinafter, the Security Documents, together with all other documents
evidencing or securing the Indebtedness shall be referred to as the "Existing
Loan Documents".
3. DESCRIPTION OF CHANGE IN TERMS.
A. MODIFICATION(S) TO LOAN AGREEMENT.
1. All references to "Committed Equipment Line" in the
Loan Agreement shall mean and refer to the "1998
Committed Equipment Line".
2. The Loan Agreement shall be amended by deleting the
following definition appearing in Section 1.1
thereof:
""Committed Revolving Line" shall mean a
credit extension of up to One Million Seven
Hundred Fifty Thousand Dollars
($1,750,000.00)."
and inserting in lieu thereof the following:
""Committed Revolving Line" shall mean an
Advance or Advances of up to Three Million
Dollars ($3,000,000.00)."
3. The Loan Agreement shall be amended by deleting the
following definition appearing in Section 1.1
thereof:
<PAGE>
""Credit Extension" means each Advance,
Equipment Advance or any other extension of
credit by Bank for the benefit of Borrower
hereunder."
and inserting in lieu thereof the following:
""Credit Extension" means each Advance,
Equipment Advance, Letter of Credit or any
other extension of credit by Bank for the
benefit of Borrower hereunder."
4. The Loan Agreement shall be amended by deleting the
following definition appearing in Section 1.1
thereof:
""Equipment Advance" has the meaning set
forth in Section 2.1.1."
and inserting in lieu thereof the following:
""Equipment Advance" or "Equipment Advances"
shall mean any advance made pursuant to
Sections 2.1.2, 2.1.2.A or 2.1.2.B hereof."
5. The Loan Agreement shall be amended by deleting the
following definition appearing in Section 1.1
thereof:
""Maturity Date" means the later of the
Second Equipment Maturity Date or the
Revolving Maturity Date."
and inserting in lieu thereof the following:
""Maturity Date" means, as applicable, (i)
the Revolving Maturity Date for Advances
pursuant to Section 2.1.1; (ii) the
Equipment Maturity Date for Equipment
Advances pursuant to Section 2.1.2; (iii)
the Second Equipment Maturity Date for
Equipment Advances pursuant to Section
2.1.2.A; and (iv) the 1999 Equipment
Maturity Date No. 1 and 1999 Equipment
Maturity Date No. 2 for Equipment Advances
pursuant to Section 2.1.2.B."
6. The Loan Agreement shall be amended by deleting the
following definition appearing in Section 1.1
thereof:
""Obligations" means all debt, principal,
interest, Bank Expenses and other amounts
owed to Bank by Borrower pursuant to this
Agreement or any other agreement, whether
absolute or contingent, due or to become
due, now existing or hereafter arising,
including any interest that accrues after
the commencement of an Insolvency Proceeding
and including any debt, liability, or
obligation owing from Borrower to others
that Bank may have obtained by assignment or
otherwise."
and inserting in lieu thereof the following:
""Obligations" means all debt, principal,
interest, Bank Expenses and other amounts
owed to Bank by Borrower pursuant to this
Agreement or any other agreement, including,
without limitation, all Obligations under
the EXIM Agreement, whether absolute or
contingent, due or to become due, now
existing or hereafter arising, including any
interest that accrues after
2
<PAGE>
the commencement of an Insolvency Proceeding
and including any debt, liability, or
obligation owing from Borrower to others
that Bank may have obtained by assignment or
otherwise."
7. The Loan Agreement shall be amended by deleting the
following definition appearing in Section 1.1
thereof:
""Payment Date" means the first calendar day
of each month commencing on the first such
date after the Closing Date and ending on
the Revolving Maturity Date."
and inserting in lieu thereof the following:
""Payment Date" means the first calendar day
of each month commencing on the first such
date after the Closing Date and ending on
the Maturity Date."
8. The Loan Agreement shall be amended by deleting the
following definition appearing in Section 1.1
thereof:
""Revolving Maturity Date" shall mean April
1, 2000."
and inserting in lieu thereof the following:
""Revolving Maturity Date" shall mean
December 1, 2000."
9. The Loan Agreement shall be amended by incorporating
into Section 1.1 thereof the following new
definitions:
"EXIM Agreement" is that certain
Export-Import Bank Loan and Security
Agreement dated as of December 1, 1999 by
and between the Borrower and the Bank and
all documents, instruments and agreements
executed in conjunction therewith.
"Letter of Credit" means a letter of credit
or similar undertaking issued by Bank
pursuant to Section 2.1.3.
"Letter of Credit Reserve" has the meaning
set forth in Section 2.1.3.
"1999 Committed Equipment Line" shall mean
an Equipment Advance or Equipment Advances
of up to Five Hundred Thousand Dollars
($500,000.00).
"1999 Equipment Availability End Date No. 1"
has the meaning set forth in Section 2.1.2.
B.
"1999 Equipment Availability End Date No. 2"
has the meaning set forth in Section 2.1.2.
B.
"1999 Equipment Maturity Date No. 1" means
that date which is thirty-six (36) months
following the 1999 Equipment Availability
End Date No. 1.
3
<PAGE>
"1999 Equipment Maturity Date No. 2" means
that date which is thirty-six (36) months
following the 1999 Equipment Availability
End Date No. 2.
10. The Loan Agreement shall be amended by deleting the
following text appearing as the first sentence of
paragraph (a) of Section 2.1.1 entitled "Credit
Extensions":
"Subject to and upon the terms and
conditions of this Agreement, Bank agrees to
make Advances to Borrower in an aggregate
outstanding amount not to exceed the
Committed Revolving Line or the Borrowing
Base, whichever is less."
and inserting in lieu thereof the following:
"Subject to and upon the terms and
conditions of this Agreement, Bank agrees to
make Advances to Borrower in an aggregate
outstanding amount not to exceed: (i) the
Committed Revolving Line or the Borrowing
Base, whichever is less, minus (ii) the face
amount of all outstanding Letters of Credit
(including drawn but unreimbursed Letters of
Credit)."
11. No further Equipment Advances shall be made under
Sections 2.1.2 and 2.1.2.A. All Equipment Advances
currently amortizing under Sections 2.1.2 and 2.1.2.A
shall continue to be repaid as provided in Sections
2.1.2 and 2.1.2.A.
12. The Loan Agreement shall be amended by inserting
after Section 2.1.2.A thereof entitled "1998-1999
Equipment Advances" the following new section:
"2.1.2.B. 1999 EQUIPMENT ADVANCES.
(a) Subject to and upon the terms and
conditions of this Agreement, Bank agrees to
make advances (each an "Equipment Advance"
and collectively, the "Equipment Advances")
to Borrower under this Section 2.1.2.B in an
aggregate amount not to exceed the 1999
Committed Equipment Line in the following
manner: (i) at any time through June 1, 2000
(the "1999 Equipment Availability End Date
No. 1") in an aggregate amount not greater
than the 1999 Committed Equipment Line (the
"1999 Equipment Line No. 1"), and (ii) at
any time from the 1999 Equipment
Availability End Date No. 1 through that
date which is six (6) months following the
1999 Equipment Availability End Date No. 1
(the "1999 Equipment Availability End Date
No. 2"), in an aggregate amount not to
exceed the 1999 Committed Equipment Line,
less the outstanding principal amounts
advanced pursuant to 1999 Equipment Line No.
1 (the "1999 Equipment Line No. 2"). To
evidence the Equipment Advance or Equipment
Advances, Borrower shall deliver to Bank, at
the time of each Equipment Advance request,
an invoice for the equipment to be
purchased. The Equipment Advances under this
Section 2.1.2.B shall be used only to
purchase Equipment and shall not exceed One
Hundred Percent (100%) of the invoice amount
of such equipment approved from time to time
by Bank, excluding taxes, shipping, warranty
charges, freight discounts and installation
expense. Software shall be limited to
twenty-five percent (25.0%) of aggregate
Equipment Advances under this Section
2.1.2.B.
4
<PAGE>
(b) Interest shall accrue from the date
of each Equipment Advance under this Section
2.1.2.B at the per annum rate equal to the
aggregate of the Prime Rate PLUS Three
Quarters of One percent (0.75%), and shall
be payable monthly on the Payment Date of
each month. Any Equipment Advances made
pursuant to the 1999 Equipment Line No. 1
that are outstanding on the 1999 Equipment
Availability End Date No. 1 will be payable
in Thirty-Six (36) equal monthly
installments of principal, plus all accrued
interest, beginning on the Payment Date of
the month following the 1999 Equipment
Availability End Date No. 1 and ending on
the 1999 Equipment Maturity Date No. 1. Any
Equipment Advances made pursuant to the 1999
Equipment Line No. 2 that are outstanding on
the 1999 Equipment Availability End Date No.
2 will be payable in Thirty-Six (36) equal
monthly installments of principal, plus all
accrued interest, beginning on the Payment
Date of the month following the 1999
Equipment Availability End Date No. 2 and
ending on the 1999 Equipment Maturity Date
No. 2. Equipment Advances, once repaid, may
not be reborrowed. Equipment Advances may be
prepaid at any time in whole or in part
without penalty or premium.
(c) When Borrower desires to obtain an
Equipment Advance, Borrower shall notify
Bank (which notice shall be irrevocable) by
facsimile transmission to be received no
later than 3:00 p.m. Eastern time one (1)
Business Day before the day on which the
Equipment Advance is to be made. Such notice
shall be substantially in the form of
Exhibit B. The notice shall be signed by a
Responsible Officer or its designee and
include a copy of the invoice for the
Equipment to be financed."
13. The Loan Agreement shall be amended by inserting
after Section 2.1.2.B thereof the following new
section:
"2.1.3 LETTERS OF CREDIT.
(a) Subject to the terms and conditions
of this Agreement, Bank agrees to issue or
cause to be issued Letters of Credit for the
account of Borrower in an aggregate
outstanding face amount not to exceed (i)
the Committed Revolving Line or the
Borrowing Base, whichever is less, minus
(ii) the then outstanding principal balance
of the Advances; PROVIDED that the face
amount of outstanding Letters of Credit
(including drawn but unreimbursed Letters of
Credit and any Letter of Credit Reserve)
shall not in any case exceed One Million
Dollars ($1,000,000.00). Each Letter of
Credit shall have an expiry date no later
than one hundred eighty (180) days after the
Maturity Date provided that Borrower's
Letter of Credit reimbursement obligation
shall be secured by cash on terms acceptable
to Bank at any time after the Maturity Date
if the term of this Agreement is not
extended by Bank. All Letters of Credit
shall be, in form and substance, acceptable
to Bank in its sole discretion and shall be
subject to the terms and conditions of
Bank's form of standard Application and
Letter of Credit Agreement.
(b) The obligation of Borrower to
reimburse Bank within two (2) business days
of notice by Bank for drawings made under
Letters of Credit shall be absolute,
unconditional and irrevocable, and shall be
performed strictly in
5
<PAGE>
accordance with the terms of this Agreement
and such Letters of Credit, under all
circumstances whatsoever. Borrower shall
indemnify, defend, protect, and hold Bank
harmless from any loss, cost, expense or
liability, including, without limitation,
reasonable attorneys' fees, arising out of
or in connection with any Letters of Credit,
except for losses, costs, expenses or
liability resulting from gross negligence or
willful misconduct of Bank.
(c) Borrower may request that Bank
issue a Letter of Credit payable in a
currency other than United States Dollars.
If a demand for payment is made under any
such Letter of Credit, Bank shall treat such
demand as an Advance to Borrower of the
equivalent of the amount thereof (plus cable
charges) in United States currency at the
then prevailing rate of exchange in San
Francisco, California, for sales of that
other currency for cable transfer to the
country of which it is the currency.
(d) Upon the issuance of any letter of
credit payable in a currency other than
United States Dollars, Bank shall create a
reserve (the "Letter of Credit Reserve")
under the Committed Revolving Line for
letters of credit against fluctuations in
currency exchange rates, in an amount equal
to ten percent (10%) of the face amount of
such letter of credit. The amount of such
reserve may be amended by Bank from time to
time to account for fluctuations in the
exchange rate. The availability of funds
under the Committed Revolving Line shall be
reduced by the amount of such reserve for so
long as such letter of credit remains
outstanding."
14. The Loan Agreement shall be amended by deleting the
following text appearing as Section 2.2 entitled
"Overadvances":
"2.2 OVERADVANCES. If, at any time or
for any reason, the amount of Obligations
owed by Borrower to Bank pursuant to Section
2.1.1 of this Agreement is greater than the
lesser of (i) the Committed Revolving Line
or (ii) the Borrowing Base, Borrower shall
immediately pay to Bank, in cash, the amount
of such excess."
and inserting in lieu thereof the following:
"2.2 OVERADVANCES. If, at any time or
for any reason, the amount of Obligations
owed by Borrower to Bank pursuant to Section
2.1.1 and 2.1.3 of this Agreement is greater
than: (i) the lesser of the Committed
Revolving Line or the Borrowing Base, minus
(ii) the face amount of all outstanding
Letters of Credit (including drawn but
unreimbursed Letters of Credit), Borrower
shall immediately pay to Bank, in cash, the
amount of such excess."
15. The Loan Agreement shall be amended by deleting the
following text appearing as paragraph (a) of Section
2.3 entitled "Interest Rates, Payments, and
Calculations":
"(a) INTEREST RATE. Except as set forth
in Section 2.3(b) any Advances made pursuant
to Section 2.1.1 shall bear interest, on the
average daily balance thereof, at a per
annum rate equal to Three Quarters of One
percentage point (0.75%) above the Prime
Rate. Notwithstanding the foregoing, if the
Borrower fails to achieve the Net Revenue
Requirement
6
<PAGE>
for ANY fiscal quarter, any Advances shall
bear interest (except as set forth in
Section 2.3(b)), on an average daily balance
thereof, effective as of the first day of
the month following the quarter end in which
Borrower failed to achieve such Net Revenue
Requirement, at a per annum rate equal to
the aggregate of the Prime Rate, PLUS One
and One-Quarter percent (1.25%). The
effective interest rate shall not decrease
as a result of the compliance by the
Borrower with the Net Revenue Requirement
for subsequent periods."
and inserting in lieu thereof the following:
"(a) INTEREST RATE. Except as set forth
in Section 2.3(b): (i) any Advances made
pursuant to Section 2.1.1 shall bear
interest, effective as of December 1, 1999,
on the average daily balance thereof, at a
per annum rate equal to the aggregate of the
Prime Rate PLUS One Half of One percent
(0.50%), (ii) any Equipment Advances made
pursuant to Section 2.1.2 shall bear
interest in accordance with terms of Section
2.1.2, (iii) any Equipment Advances made
pursuant to Section 2.1.2.A shall bear
interest in accordance with terms of Section
2.1.2.A, and (iv) any Equipment Advances
made pursuant to Section 2.1.2.B shall bear
interest in accordance with terms of Section
2.1.2.B."
16. The Loan Agreement shall be amended by incorporating
into Section 4.1 entitled "Grant of Security
Interest" the following text to appear as the last
sentence in Section 4.1:
"Notwithstanding the foregoing, it is
expressly acknowledged and agreed that the
security interest created in this Agreement
only with respect to EXIM Eligible Foreign
Accounts (as such term is defined in the
EXIM Agreement) is subject to and
subordinate to the security interest granted
to the Bank in the EXIM Agreement with
respect to such EXIM Eligible Foreign
Accounts, but only to the extent any
advances are actually made to the Borrower
under the EXIM Agreement based upon such
EXIM Eligible Foreign Accounts."
17. The Loan Agreement shall be amended by deleting the
following text appearing in the first paragraph of
Section 6.3 entitled "Financial Statements, Reports,
Certificates":
"(a) as soon as available, but in any
event within twenty-five (25) days after the
end of each month, a company prepared
consolidated balance sheet and income
statement covering Borrower's consolidated
operations during such period, in a form and
certified by an officer of Borrower
reasonably acceptable to Bank;"
and inserting in lieu thereof the following:
"(a) as soon as available, but in any
event within thirty (30) days after the end
of each month, a company prepared
consolidated balance sheet and income
statement covering Borrower's consolidated
operations during such period, in a form and
certified by an officer of Borrower
reasonably acceptable to Bank;"
7
<PAGE>
18. The Loan Agreement shall be amended by deleting the
following text appearing as the second paragraph of
Section 6.3 entitled "Financial Statements, Reports,
Certificates":
"Borrower shall deliver to Bank, on a
semi-monthly basis within seven (7) business
days of the fifteenth (15th) and last day of
each month, a Borrowing Base Certificate
signed by a Responsible Officer in
substantially the form of EXHIBIT C hereto,
together with aged listings of accounts
receivable. Notwithstanding the foregoing,
if at any time during the preceding month
the outstanding principal balance under the
Committed Revolving Line is no greater than
$1,000,000.00, the Borrowing Base
Certificate and the aged listings of
accounts receivable shall be delivered by
Borrower to Bank within fifteen (15) days of
the last day of each such month."
and inserting in lieu thereof the following:
"Within thirty (30) days after the last day
of each month, Borrower shall deliver to
Bank a Borrowing Base Certificate signed by
a Responsible Officer in substantially the
form of EXHIBIT C hereto, together with aged
listings of accounts receivable."
19. The Loan Agreement shall be amended by deleting the
following text appearing as the third paragraph of
Section 6.3 entitled "Financial Statements, Reports,
Certificates":
"Within twenty-five (25) days after the last
day of each month, Borrower shall deliver to
Bank with the monthly financial statements a
Compliance Certificate signed by a
Responsible Officer in substantially the
form of EXHIBIT D hereto."
and inserting in lieu thereof the following:
"Within thirty (30) days after the last day
of each month, Borrower shall deliver to
Bank with the monthly financial statements a
Compliance Certificate signed by a
Responsible Officer in substantially the
form of EXHIBIT D hereto."
20. The Loan Agreement shall be amended by deleting the
following text appearing as Section 6.8 thereof:
"6.8 TANGIBLE NET WORTH. Borrower shall
maintain, as of the last day of each
calendar month, a Tangible Net Worth of not
less than: (i) One Million Seven Hundred
Fifty Thousand Dollars ($1,750,000.00) for
each month through the month ending May 31,
1999, (ii) Three Million Dollars
($3,000,000.00) for the months ending June
30, 1999, July 31, 1999 and August 31, 1999,
and (iii) Four Million Five Hundred Thousand
Dollars ($4,500,000.00) for each month
thereafter. The Bank hereby reserves the
right, in its sole and absolute discretion,
to reset such Tangible Net Worth covenant
upon a public offering of stock by the
Borrower. For purposes hereof, Tangible Net
Worth shall be defined as Borrower's equity
plus Subordinated Debt less intangible
assets."
8
<PAGE>
and inserting in lieu thereof the following:
"6.8 TANGIBLE NET WORTH. Borrower shall
maintain, as of the last day of each
calendar month, a Tangible Net Worth plus
Subordinated Debt of not less than the
aggregate of (i) Eight Million Dollars
($8,000,000.00), PLUS (ii) fifty percent
(50.0%) of the amount of cash received by
Borrower from any new equity issued by
Borrower (except for issuances pursuant to
employee or director stock option plans of
Borrower)."
21. The Loan Agreement shall be amended by deleting the
following text appearing as paragraph (a) of Section
9.1 entitled "Rights and Remedies":
"(a) Declare all Obligations, whether
evidenced by this Agreement, by any of the
other Loan Documents, or otherwise,
immediately due and payable (provided that
upon the occurrence of an Event of Default
described in Section 8.5 all Obligations
shall become immediately due and payable
without any action by Bank);"
and inserting in lieu thereof the following:
"(a) Declare all Obligations (including,
without limitation, all obligations under
the EXIM Agreement), whether evidenced by
this Agreement, by any of the other Loan
Documents, or otherwise, immediately due and
payable (provided that upon the occurrence
of an Event of Default described in Section
8.5 all Obligations shall become immediately
due and payable without any action by
Bank);"
22. The Loan Agreement shall be amended in Section 9.1
entitled "Rights and Remedies" by incorporating
therein immediately after paragraph (i) the following
new paragraph:
"(j) Demand that Borrower (i) deposit
cash with Bank in an amount equal to the
amount of any Letters of Credit remaining
undrawn, as collateral security for the
repayment of any future drawings under such
Letters of Credit, and Borrower shall
forthwith deposit and pay such amounts, and
(ii) pay in advance all Letters of Credit
fees scheduled to be paid or payable over
the remaining term of the Letters of
Credit."
23. An Event of Default under the EXIM Agreement shall be
an Event of Default under the Loan Agreement, as
amended hereby.
24. The Borrower hereby ratifies, confirms and reaffirms,
all and singular, the terms and conditions of a
certain Negative Pledge Agreement dated as of August
16, 1998 between Borrower and Bank, and acknowledges,
confirms and agrees that said Negative Pledge
Agreement shall remain in full force and effect.
25. The Borrowing Base Certificate appearing as EXHIBIT C
to the Loan Agreement is hereby replaced with the
Borrowing Base Certificate attached as EXHIBIT A
hereto.
26. The Compliance Certificate appearing as EXHIBIT D to
the Loan Agreement is hereby replaced with the
Compliance Certificate attached as EXHIBIT B hereto.
9
<PAGE>
4. FEE. Borrower shall pay to Bank the following fully earned and
non-refundable modification fees: (i) a working capital line commitment fee
equal to Six Thousand Two Hundred Fifty Dollars ($6,250.00), which fee shall be
due on the date hereof, and (ii) an equipment line commitment fee equal to Two
Thousand Five Hundred Dollars ($2,500.00), which fee shall be due on the date
hereof. The Borrower shall also reimburse Bank for all legal fees and expenses
incurred in connection with this amendment to the Existing Loan Documents.
5. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.
6. RATIFICATION OF LOAN DOCUMENTS. Borrower hereby ratifies, confirms, and
reaffirms all terms and conditions of all security or other collateral granted
to the Bank, and confirms that the indebtedness secured thereby includes,
without limitation, the Indebtedness.
7. NO DEFENSES OF BORROWER. Borrower agrees that, as of this date, it has
no defenses against the obligations to pay any amounts under the Indebtedness.
8. CONTINUING VALIDITY. Borrower understands and agrees that in modifying
the existing Indebtedness, Bank is relying upon Borrower's representations,
warranties, and agreements, as set forth in the Existing Loan Documents. Except
as expressly modified pursuant to this Loan Modification Agreement, the terms of
the Existing Loan Documents remain unchanged and in full force and effect.
Bank's agreement to modifications to the existing Indebtedness pursuant to this
Loan Modification Agreement in no way shall obligate Bank to make any future
modifications to the Indebtedness. Nothing in this Loan Modification Agreement
shall constitute a satisfaction of the Indebtedness. It is the intention of Bank
and Borrower to retain as liable parties all makers of Existing Loan Documents,
unless the party is expressly released by Bank in writing. No maker will be
released by virtue of this Loan Modification Agreement.
9. JURISDICTION/VENUE. Borrower accepts for itself and in connection with
its properties, unconditionally, the non-exclusive jurisdiction of any state or
federal court of competent jurisdiction in the Commonwealth of Massachusetts in
any action, suit, or proceeding of any kind against it which arises out of or by
reason of this Loan Modification Agreement; provided, however, that if for any
reason Bank cannot avail itself of the courts of the Commonwealth of
Massachusetts, then venue shall lie in Santa Clara County, California.
10. COUNTERSIGNATURE. This Loan Modification Agreement shall become
effective only when it shall have been executed by Borrower and Bank (provided,
however, in no event shall this Loan Modification Agreement become effective
until signed by an officer of Bank in California).
10
<PAGE>
This Loan Modification Agreement is executed as a sealed instrument
under the laws of the Commonwealth of Massachusetts as of the date first written
above.
BORROWER: BANK:
BLUESTONE SOFTWARE, INC. SILICON VALLEY BANK
By:_______________________________________ By:__________________________________
Name:__________________________________ Name:________________________________
Title:_________________________________ Title:_______________________________
11
<PAGE>
EXHIBIT A
BORROWING BASE CERTIFICATE
Borrower: BLUESTONE SOFTWARE, INC. Bank: Silicon Valley Bank
Commitment Amount: $3,000,000.00
ACCOUNTS RECEIVABLE
1) Accounts Receivable Book Value as of______
$__________
2) Additions (please explain on reverse)
$__________
3) TOTAL ACCOUNTS RECEIVABLE
$__________
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4) Amounts over 90 days due
$__________
5) Balance of 50% over 90 day accounts
$__________
6) Concentration Limits
$__________
7) Foreign Accounts
$__________
8) Governmental Accounts
$__________
9) Contra Accounts
$__________
10) Promotion or Demo Accounts
$__________
11) Intercompany/Employee Accounts
$__________
12) Other (please explain on reverse)
$__________
13) TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS
$__________
14) Eligible Accounts (#3 minus #13)
$__________
15) LOAN VALUE OF ACCOUNTS (80.0% of #14)
$__________
BALANCES
16) Maximum Loan Amount
$__________
17) Total Funds Available [Lesser of #16 or #15]
$__________
18) Present balance owing on Line of Credit
$__________
19) Outstanding under Sublimit (Letters of Credit)
$__________
20) RESERVE POSITION (#17 minus #18 and #19)
$__________
12
<PAGE>
THE UNDERSIGNED REPRESENTS AND WARRANTS THAT THE FOREGOING IS TRUE, COMPLETE AND
CORRECT, AND THAT THE INFORMATION REFLECTED IN THIS BORROWING BASE CERTIFICATE
COMPLIES WITH THE REPRESENTATIONS AND WARRANTIES SET FORTH IN THE LOAN AND
SECURITY AGREEMENT BETWEEN THE UNDERSIGNED AND SILICON VALLEY BANK, INCLUDING,
WITHOUT LIMITATION, THOSE APPEARING IN SECTION 2.1.1 OF THE LOAN AND SECURITY
AGREEMENT, AS AMENDED.
COMMENTS:
___________________________
By: _______________________
Authorized Signer
13
<PAGE>
EXHIBIT B
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: BLUESTONE SOFTWARE, INC.
The undersigned authorized officer of BLUESTONE SOFTWARE, INC. hereby
certifies that in accordance with the terms and conditions of the Loan and
Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is
in complete compliance for the period ending with all required covenants except
as noted below and (ii) all representations and warranties of Borrower stated in
the Agreement are true and correct in all material respects as of the date
hereof. Attached herewith are the required documents supporting the above
certification. The Officer further certifies that these are prepared in
accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes. The Officer expressly acknowledges that no
borrowings may be requested by the Borrower at any time or date of determination
that Borrower is not in compliance with any of the terms of the Agreement, and
that such compliance is determined not just at the date this certificate is
delivered.
<TABLE>
<CAPTION>
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER
"COMPLIES" COLUMN.
Reporting Covenant Required Complies
------------------ -------- --------
<S> <C> <C> <C>
Monthly financial statements & CC Monthly within 30 days Yes No
Annual (CPA Audited) FYE within 120 days Yes No
BBC & A/R Agings Monthly within 30 days Yes No
<CAPTION>
Financial Covenant Required Actual Complies
------------------ -------- ------ --------
<S> <C> <C> <C> <C>
Maintain on a Monthly Basis:
Minimum Adjusted Quick Ratio 1.50:1.0 ____:1.0 Yes No
Minimum Tangible Net Worth $8,000,000 plus 50% of $________ Yes No
new equity (except for
stock option plans)
</TABLE>
COMMENTS REGARDING EXCEPTIONS:
Sincerely,
_______________________ Date:_______________
SIGNATURE
_______________________
TITLE
14
<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
January 31, 2000
<PAGE>
Exhibit 23.3
CONSENT OF INTERNATIONAL DATA CORPORATION
International Data Corporation ("IDC") hereby consents to the inclusion in
the Bluestone Software, Inc. registration statement of the following
information attributed to IDC and derived from IDC reports and consents to the
filing of the consent as an exhibit to the registration statement:
The increase of users and business activities on the Web has created a large and
growing market for Web application software as existing businesses and new
Web-based enterprises foster new revenue streams, significantly broaden
information deployment, enable inter-enterprise collaboration and strive to
reduce the cost of maintaining an ever-changing technology infrastructure. An
International Data Corporation report estimates that Internet-centric software,
which accounted for $4.0 billion in revenue in 1997, will approach $16.0 billion
in revenue by 2000 due to aggressive corporate adoption.
International Data Corporation
By: /s/ R. Paul Mason
- -------------------------------------------
Name: R. Paul Mason
Title: V.P. Information Software Research
Dated: January 1, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 71,197,247
<SECURITIES> 0
<RECEIVABLES> 4,208,035
<ALLOWANCES> 250,314
<INVENTORY> 0
<CURRENT-ASSETS> 75,478,788
<PP&E> 3,137,786
<DEPRECIATION> 1,732,221
<TOTAL-ASSETS> 76,933,414
<CURRENT-LIABILITIES> 7,696,951
<BONDS> 0
0
0
<COMMON> 17,606
<OTHER-SE> 68,175,986
<TOTAL-LIABILITY-AND-EQUITY> 76,933,414
<SALES> 7,874,322
<TOTAL-REVENUES> 10,595,748
<CGS> 210,729
<TOTAL-COSTS> 3,622,411
<OTHER-EXPENSES> 17,098,552
<LOSS-PROVISION> 250,314
<INTEREST-EXPENSE> 1,034,767
<INCOME-PRETAX> (11,159,982)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,159,982)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,159,982)
<EPS-BASIC> (3.99)
<EPS-DILUTED> (3.99)
</TABLE>
