-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UpNCC8ONi7A1TWjp3Pr8U7MPkh6ry+ULk5IrJpE1q93KGwSg/dWJZa1PUVQvUqXe oAP8bfgVfbaxmk+W50hoAg== /in/edgar/work/0000912057-00-050163/0000912057-00-050163.txt : 20001116 0000912057-00-050163.hdr.sgml : 20001116 ACCESSION NUMBER: 0000912057-00-050163 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BLUESTONE SOFTWARE INC CENTRAL INDEX KEY: 0001039242 STANDARD INDUSTRIAL CLASSIFICATION: [7372 ] IRS NUMBER: 222964141 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26613 FILM NUMBER: 768416 BUSINESS ADDRESS: STREET 1: 1000 BRIGGS RD CITY: MT LAUREL STATE: NJ ZIP: 08054 BUSINESS PHONE: 6097274600 MAIL ADDRESS: STREET 1: 1000 BRIGGS ROAD CITY: MT LAUREL STATE: NJ ZIP: 08054 10-Q 1 a2030615z10-q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------------- FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number: 0-26613 ----------------------------- BLUESTONE SOFTWARE, INC. (Exact name of registrant as specified in its charter) DELAWARE 22-2964141 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
300 STEVENS DRIVE PHILADELPHIA, PENNSYLVANIA 19113 (Address of principal executive offices, including zip code) (610) 915-5000 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / As of October 31, 2000, there were 20,825,126 shares of the registrant's common stock outstanding. INDEX PART I. FINANCIAL INFORMATION Item 1. CONSOLIDATED FINANCIAL STATEMENTS. Consolidated balance sheets as of September 30, 2000 (unaudited) and December 31, 1999. Consolidated statements of operations (unaudited) for the three and nine months ended September 30, 2000 and 1999. Consolidated statements of cash flows (unaudited) for the nine months ended September 30, 2000 and 1999. Notes to consolidated financial statements. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS. Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Item 3. DEFAULTS UPON SENIOR SECURITIES. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Item 5. OTHER INFORMATION. Item 6. EXHIBITS AND REPORTS ON FORM 8-K. SIGNATURE 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Bluestone Software, Inc. Consolidated Balance Sheets (IN THOUSANDS)
September 30, December 31, 2000 1999 ------------- ------------ (unaudited) ASSETS Current assets: Cash and cash equvalents $149,084 $ 66,160 Marketable securities 37,677 0 Accounts receivable, net 9,576 4,079 Prepaid expenses and other 2,278 1,043 -------- -------- Total current assets 198,615 71,282 Investments in non marketable securities 6,043 0 Property, equipment, software, net 3,477 2,495 Other assets, net 9,096 363 -------- -------- Total assets $217,231 $ 74,140 ======== ======== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 0 $ 429 Accounts payable -- trade 1,363 2,259 Accrued expenses 8,345 3,083 Deferred revenue 3,737 1,966 -------- -------- Total current liabilities 13,445 7,737 Long-term debt 0 439 -------- -------- Stockholders' equity: Common stock 21 18 Common stock warrants 1,205 1,205 Deferred stock-based compensation (878) (1,133) Additional paid-in capital 257,227 100,790 Accumulated deficit (53,789) (34,916) -------- -------- Total stockholders' equity 203,786 65,964 Total liabilities & stockholders' equity $217,231 $ 74,140 ======== ========
The accompanying notes are an integral part of these statements. 3 Bluestone Software, Inc. Consolidated Statements of Operations (IN THOUSANDS, EXCEPT PER SHARE INFORMATION) (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Net revenues: Software license fees $ 9,058 $ 3,147 $ 21,249 $ 7,874 Services 2,544 856 7,006 2,721 -------- -------- -------- -------- Total net revenues 11,602 4,003 28,255 10,595 Cost of revenues: Software license fees 243 54 746 210 Services 2,827 945 8,220 3,412 -------- -------- -------- -------- Total cost of revenues 3,070 999 8,966 3,622 -------- -------- -------- -------- Gross profit 8,532 3,004 19,289 6,973 -------- -------- -------- -------- Operating expenses: Sales and marketing 12,725 4,515 29,898 10,701 Product development 3,316 1,219 7,169 3,087 General and administrative 2,542 989 6,024 3,113 Write-off of acquired in-process research and development 2,200 0 2,200 0 Amortization of stock-based compensation 85 85 255 197 Amortization expense 534 0 534 0 -------- -------- -------- -------- Total operating expenses 21,402 6,808 46,080 17,098 -------- -------- -------- -------- Operating loss (12,870) (3,804) (26,791) (10,125) Interest income (expense), net 3,099 113 7,918 (1,035) -------- -------- -------- -------- Net loss (9,771) (3,691) (18,873) (11,160) Accretion of preferred stock redemption value 0 (857) 0 (1,636) -------- -------- -------- -------- Net loss available to common shareholders $ (9,771) $ (4,548) $(18,873) $(12,796) ======== ======== ======== ======== Basic and diluted net loss per share: Net loss $ (0.47) $ (0.93) $ (0.94) $ (3.48) Accretion of preferred stock redemption value -- (0.22) -- (0.51) -------- -------- -------- -------- $ (0.47) $ (1.15) $ (0.94) $ (3.99) ======== ======== ======== ======== Shares used in computing net loss per share 20,783 3,968 20,112 3,204 ======== ======== ======== ========
The accompanying notes are an integral part of these statements. 4 Bluestone Software, Inc. Consolidated Statements of Cash Flows (IN THOUSANDS) (UNAUDITED)
For the Nine Months Ended, September 30, -------------------------- 2000 1999 --------- ---------- Operating Activities: Net Loss ($ 18,873) ($ 11,160) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,278 447 Write-off of acquired in-process research and development 2,200 0 Provision for doubtful accounts 571 206 Amortization of stock-based compensation 255 197 Issuance of Bridge loan warrants 0 1,100 Issuance of common stock options to non-employees 0 191 Changes in operating assets and liabilities: Accounts receivable (5,987) (794) Prepaid expenses and other assets (1,904) (190) Accounts payable and accrued expenses 4,172 3,077 Deferred revenues 1,771 (1,731) --------- --------- Net cash used in operating activities (16,517) (8,657) --------- --------- Investing Activities: Purchases of property and equipment (1,696) (404) Net purchases of marketable securities (37,677) 0 Arjuna acquisition costs, net (3,613) 0 Purchase of non marketable securities (6,000) 0 --------- --------- Net cash used in investing activities (48,986) (404) --------- --------- Financing activities: Repayments of long-term debt (868) (253) Proceeds from issuance of preferred stock, net 0 23,060 Issuance of common stock, net 145,837 54,816 Net repayments to related party (74) (161) Net proceeds from line of credit 0 39 Proceeds from exercise of common stock options 3,532 222 --------- --------- Net cash provided by financing activities 148,427 77,723 --------- --------- Net increase in cash and cash equivalents 82,924 68,662 Cash and cash equivalents, beginning of period 66,160 2,535 --------- --------- Cash and cash equivalents, end of period $ 149,084 $ 71,197 ========= ========= Supplemental cash flow information: Cash paid for interest $ 63 $ 773 Non-cash investing and financing activities: Conversion of related party subordinated note to common stock $ 0 $ 500 Conversion of preferred stock and all accrued dividends thereon to common stock $ 0 $ 41,310
The accompanying notes are an integral part of these statements. 5 BLUESTONE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared by the Company and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of results for the interim periods presented. These financial statements and notes included herein should be read in conjunction with the Company's audited financial statements and notes for the year ended December 31, 1999 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2000. NOTE 2. NET LOSS 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 the three and nine months ended September 30, 1999 and 2000, diluted EPS is equal to basic EPS as all common stock equivalents were anti-dilutive for all periods presented. NOTE 3. INVESTMENTS IN NON MARKETABLE SECURITIES Investments as of September 30, 2000 includes the purchase of 1,000,000 shares of Series B Preferred Stock of S2 Systems, Inc., a strategic partner and customer of Bluestone for $6.0 million. Bluestone received revenues of $4.4 million from S2 Systems, Inc. during the nine months ending September 30, 2000. NOTE 4. ACCRUED EXPENSES Accrued expenses at September 30, 2000 includes $3.9 million in accrued wages and $499,000 in accrued payroll taxes. Accrued expenses at December 31, 1999 includes $892,000 in accrued wages and $628,000 in accrued payroll taxes. NOTE 5. PUBLIC OFFERING On February 22, 2000, the Company completed a public offering of 3,500,000 shares of its common stock. Of the 3,500,000 total shares offered, 1,750,000 shares were offered by the Company and 1,750,000 shares were offered by certain selling stockholders. The Company received proceeds of $145.8 million, net of underwriting discounts and offering expenses. NOTE 6. RECENT PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133. "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative and hedging activities. Under the adoption of SFAS No. 133 all derivatives are required to be recognized in the balance sheet as either assets or liabilities and measured at fair value. In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133--an amendment for FASB Statement No. 133," deferring the effective date for implementation of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company believes the adoption of SFAS No. 133 will not have an impact on its financial position and results of operations as the Company has not currently entered into any such instruments or hedging activities. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101"). SAB No. 101 summarizes certain of the Staff's views in applying generally accepted accounting principles to recognition, presentation and disclosure of revenue in financial statements. Compliance with SAB No. 101 is required no later than the fourth quarter of the fiscal years beginning after December 15, 1999. The Company has determined that its revenue recognition policies are in accordance with SAB No. 101. NOTE 7. ARJUNA ACQUISITION On July 3, 2000, the Company acquired all of the outstanding share capital of Arjuna Solutions Limited, a development stage software company based in Newcastle and London, England. Initial acquisition consideration consisted of cash of 6 $3.6 million including approximately $247,000 of acquisition costs, and 277,803 shares of the company's common stock. Additional contingent consideration is payable upon the completion of certain products by Arjuna on or before February 1, 2001 or waiver of such delivery conditions and will consist of approximately $375,000 of cash and 82,725 shares of common stock. The acquisition was accounted for under the purchase method of accounting, whereby the purchase price was allocated to the assets acquired and the liabilities assumed, based on their fair market values at the acquisition date. The excess of the purchase price over the estimated fair market value of the net tangible assets acquired was assigned to identifiable intangibles and in-process research and development. The Company assigned $2.2 million to in-process research and development based on an independent appraisal and such amount was charged to operations in the accompanying statement of operations during the three months ended September 30, 2000. The Company also recorded goodwill of $8.5 million, which is being amortized on a straight-line basis over four years. Pro-forma financial information has not been provided as it is not materially different than Bluestone historical financial information. IN-PROCESS RESEARCH AND DEVELOPMENT In connection with the acquisition of Arjuna, the Company allocated $2.2 million of the purchase price to in-process research and development projects. This allocation represented the estimated fair value based on risk-adjusted cash flows related to the incomplete research and development projects. At the date of acquisition, the development of these projects had not yet reached technological feasibility and the research and development in progress had no alternative future uses. Accordingly, these costs were expensed as of the acquisition date. At the acquisition date, Arjuna was conducting design, development, engineering and testing activities associated with the completion of java-based wireless transaction platform, as well as new application technologies. The projects under development at the valuation date represent innovative technologies that are expected to address emerging market demands for wireless transaction services. At the acquisition date, the technologies under development were 75 to 85 percent complete based on engineering man-month data and technological process. Arjuna had spent approximately $500,000 on the in-process projects and expected to spend approximately $1.8 million to compete all phases of the R&D. Anticipated completion dates ranged from 3 to 9 months, at which times the Company expects to begin benefiting from developed technologies. In making its purchase price allocation, management considered present value calculations of income, an analysis of project accomplishments and remaining outstanding items, an assessment of overall contributions, as well as project risks. The value assigned to purchased in-process technology was determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting net cash flows from the projects, and discounting the net cash flows to their present value. The revenue projection used to value the in-process research and development was based on estimates of relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new products introduction by the Company and its competitors. Projected expenses were based on management's estimates of cost of sales, operating expenses, and income taxes from such projects. Aggregate revenues from the Arjuna development products were estimated to grow at a compounded annual growth rate of approximately 36 percent for the three years following the introduction, assuming the successful completion and market acceptance of the major R&D programs. The estimated revenues for the in-process projects were expected to peak within three or four years of acquisition and then decline sharply as other new products and technologies are expected to enter the market. 7 The rates utilized to discount the net cash flows to their present values were based on estimated cost of capital calculations. Due to the risks associated with the projected cash flow forecast, a discount rate of 25 percent was considered appropriate for the in-process R&D. The selected rate is higher than the Company's overall weighted average cost of capital due to the inherent uncertainties surrounding the successful development of the purchased in-process technology, the useful life of such technology, and the uncertainty of technological advances that are unknown at this time. If these projects are not successfully developed, the sales and profitability of the combines company may be adversely affected in future periods. Additionally, the value of other acquired intangible asset may become impaired. NOTE 8. SALE TO HEWLETT-PACKARD COMPANY SUBSEQUENT TO SEPTEMBER 30, 2000 On October 24, 2000, the Company and Hewlett-Packard Company, reached a definitive agreement under which Hewlett-Packard Company will acquire the Company in a stock-for-stock transaction. Under the terms of the agreement, the Company's stockholders will receive 0.4866 of Hewlett-Packard Company common stock (after giving effect to a 2 for 1 stock split, in the form of a stock dividend, of Hewlett-Packard Company shares effective October 27, 2000) for each share of the Company's common stock. The completion of the transaction is subject to closing conditions and the approval of the Company's stockholders. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our audited Financial Statements and Notes thereto for the year ended December 31, 1999 included in our Annual Report on Form 10-K that was filed with the Securities and Exchange Commission on February 15, 2000. The information in this discussion contains forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Such factors include those described in "Risk Factors." The forward-looking statements included in this report 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. OVERVIEW 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, Total-e-Server, which is the foundation of our Total-e-Business product suite, is a framework for Java Web application servers and is currently in Release 7.2. 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. In January 1999, we released Bluestone XML-Server, which represented a new generation of specialized Web application server focused on Internet commerce. 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 June 2000, we released our Total-e-B2B, Total-e-B2C, Total-e-Mobile and Total-e-Global products that are based on our Total-e-Business platform. 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. During the three months ended September 30, 2000 four of our customers individually accounted for 8 greater than 10% of our total revenues. During the nine months ended September 30, 2000, one customer accounted for greater than 10% of our total revenues. Our top 10 customers represented 81.2% of total revenues during the three months ended September 30, 2000 and 53.4% of total revenues during the nine months ended September 30, 2000. In the future, we expect to continue to have individual customers account for a significant portion of our revenues during a given period. SOFTWARE LICENSE FEES. Typically, our end-user 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 sites, developer seats and server interactions. Pricing models based on enterprise-wide deployment or the number of processors are also available. We also sell annual and multi-year licenses to independent software vendors that allow for the integration of our products into their software. We generally require a written license contract that typically provides for payment within 30-90 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 contract beyond one year are not deemed to be fixed or determinable and therefore are deferred and recognized as revenue when the payments become due. Prior to 1998, software licenses were principally the result of direct sales to end-users. Beginning in 1998, we began to focus on channel sales and marketing. This has resulted in significant sales of products through independent software vendors, resellers and systems integrators. We believe that these alliances have increased our exposure in the marketplace. Furthermore, we have experienced, and expect to continue to experience, significant variation in the size of individual licensing transactions, ranging from small sales of perpetual developer licenses to large, multi-year licensing arrangements with independent software vendors. We generally recognize license fee revenue when a formal agreement exists, delivery of the product has occurred, no production, modification, customization or implementation obligations remain, the license fee is deemed fixed or determinable and collectibility is probable. Revenue from arrangements with distributors and resellers is not recognized until our product is delivered to the end-user. SERVICES REVENUE. Services revenue consists principally of revenue derived from consulting services provided to customers during implementation and integration of our software products, training of customers' employees and fees for ongoing maintenance, which consists of customer technical support services and unspecified product upgrades/enhancements on a when-and-if-available basis. Consulting and training services are typically delivered on a time and material basis. 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 consist primarily of salary and benefit costs of our consulting, support and training organizations, as well as the costs of outside consultants engaged to meet customer demand, and are expensed when incurred. SALES AND MARKETING. We license our products primarily through our indirect channels and direct sales force. Sales and marketing expenses consist primarily of personnel costs, commissions to employees, office facilities, travel and promotional events such as trade shows, advertising and public relations programs. PRODUCT DEVELOPMENT. We maintain an in-house development staff to enhance our existing products and to develop new ones. Product development expenditures are generally charged to operations as incurred. Statement of Financial Accounting Standards No. 86 requires the capitalization of certain software development costs subsequent to the establishment of technological feasibility. We establish technological feasibility upon the completion of a working model. To date, we have expensed all software development costs due to the minimal level of development costs incurred subsequent to the establishment of technological feasibility. GENERAL AND ADMINISTRATIVE. General and administrative expenses include our personnel and other costs of our corporate, finance, human resources and information services activities. 9 WRITE OFF OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. We are recording a one-time charge in an amount equal to the market value of the in-process research and development that was acquired when we purchased Arjuna Solutions Limited (see notes to financial statements). 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. AMORTIZATION EXPENSE. We are recording an expense for the amortization of goodwill associated with our acquisition of Arjuna Solutions Limited which is being amortized equally over a four year period. THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999 SOFTWARE LICENSE FEES License fees were $9.1 million and $3.1 million for the three months ended September 30, 2000 and 1999, respectively. This increase of 187.8% was primarily due to an increased presence in the market, as well as an increase in the number of licenses with independent software vendors, which has increased the amount of license revenue per customer during the third quarter of 2000 versus the same period in 1999. SERVICES REVENUE Services revenue was $2.5 million and $856,000 for the three months ended September 30, 2000 and 1999, respectively, an increase of 197.2%. Services revenue increased between the two periods primarily due to five large consulting engagements that were performed and concluded during the third quarter of 2000, as well as an increase of maintenance revenues due to a larger base of installed software. GROSS MARGIN-LICENSE FEES Our license fee gross margin remained relatively consistent at 97.3% for the three months ended September 30, 2000 compared to 98.3% for the same period in 1999. GROSS MARGIN-SERVICES REVENUE Our services gross margin remained relatively consistent at (11.1)% for the three months ended September 30, 2000 compared to (10.4)% for the same period in 1999. Our services gross margin remained negative primarily due to the hiring and training of additional internal personnel and external consultants to support our growing installed base of customers and anticipated increases in future revenues, as well as the training of our existing internal and external consultants on our Total-e-Business products. We anticipate that our services gross margin will improve and will be approaching a breakeven point towards the end of the fourth quarter of 2000. SALES AND MARKETING Sales and marketing expenses were $12.7 million and $4.5 million for the three months ended September 30, 2000 and 1999, respectively, an increase of 181.8%. Of this increase, $2.7 million was due to increases in payroll and related costs, $540,000 in recruiting costs, $622,000 in training costs and $638,000 in travel and entertainment costs as a result of the growth in the number of sales personnel, $982,000 in office and occupancy expense due to the expansion of our sales offices throughout the United States and Europe, $900,000 was due to increased trade show, direct mail, advertising and public relations expenses, and $1 million was due to increased commissions expense as a result of higher sales volume. We also incurred increases in variable marketing expenses due to increased printing and collateral and outside service providers. We intend to continue to aggressively increase 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 three months ended September 30, 2000 was 142 compared to 64 for the three months ended September 30, 1999. These costs as a percentage of revenue were 109.7% and 112.8% for the three months ended September 30, 2000 and 1999, respectively. 10 PRODUCT DEVELOPMENT Product development expenses were $3.3 million and $1.2 million for the three months ended September 30, 2000 and 1999, respectively, an increase of 172.0%. These increases were associated with the development and enhancement of our Bluestone Total-e-Business products and were due to an increase in payroll and related costs of $1.1 million, hiring costs of $100,000, an increase in sub-contract expense of $343,000 related to outside consultants involved in development projects and an increase of $277,000 in office and occupancy expenses due to the growth in our development personnel. Average development headcount for the three months ended September 30, 2000 and 1999 was 65 and 34, respectively. We believe that our continued increases in product development investment are essential for us to maintain our market and technological competitiveness. These costs as a percentage of revenue were 28.6% and 30.5% for the three months ended September 30, 2000 and 1999, respectively. GENERAL AND ADMINISTRATIVE General and administrative expenses were $2.5 million and $1.0 million for the three months ended September 30, 2000 and 1999, respectively, an increase of 157.0%. Of this increase $502,000 was due to increases in payroll and related costs, $371,000 was due to an increase in office and occupancy expense in order to accommodate our expanding personnel size, $164,000 was due to increases in our insurance costs related to new directors and officers insurance, $64,000 was due to increases in public reporting costs and $42,000 was due to increases in sub-contracting expenses for temporary employees. General and administrative expenses as a percentage of revenue were 21.9% and 24.7% for the three months ended September 30, 2000 and 1999, respectively. The average number of general administrative employees for the three months ended September 30, 2000 was 44 compared to 33 for the three months ended September 30, 1999. We expect that our general administrative expenses will continue to increase to the extent we continue to expand geographically and add personnel and administrative resources to support the growth of our business. WRITE OFF OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT The write off of acquired in-process research and development was $2.2 million for the three months ended September 30, 2000. This expense was related to our purchase of Arjuna Solutions Limited, a development stage software company (see notes to financial statements). AMORTIZATION OF STOCK-BASED COMPENSATION Amortization of stock-based compensation was $85,000 for each of the three months ended September 30, 2000 and 1999. 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 related to the hiring of key employees and directors during the third 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, 2000, we had an aggregate of $878,000 of deferred compensation to be amortized through June 30, 2003. AMORTIZATION EXPENSE Amortization expense was $534,000 for the three months ended September 30, 2000. This expense arose due to the goodwill associated with our purchase of Arjuna Solutions Limited, which is being amortized on a straight-line basis over a four year period. INTEREST INCOME (EXPENSE), NET Net interest income was $3.1 million for the three months ended September 30, 2000 and net interest income was $113,000 for the three months ended September 30, 1999. The additional interest income was due to interest earned on a higher cash balance during the third quarter of 2000 as compared to the third quarter of 1999 resulting from $54.8 million of net proceeds generated from our initial public offering of common stock in September 1999 and $145.8 million of net proceeds generated from our follow-on public offering in February 2000. 11 NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999 SOFTWARE LICENSE FEES License fees were $21.2 million and $7.9 million for the nine months ended September 30, 2000 and 1999, respectively. This increase of 169.9% was primarily due to an increased presence in the market, as well as an increase in the number of licenses with independent software vendors, which has increased the amount of license revenue per customer during the first nine months of 2000 versus the same period in 1999. SERVICES REVENUE Services revenue was $ 7.0 million and $2.7 million for the nine months ended September 30, 2000 and 1999, respectively, an increase of 157.5%. Services revenue increased between the two periods primarily due to eight large consulting engagements performed during the first nine months of 2000, as well as an increase in maintenance revenues due to a larger base of installed software. GROSS MARGIN-LICENSE FEES Our license fee gross margin remained relatively consistent at 96.5% for the nine months ended September 30, 2000 compared to 97.3% for the same period in 1999. This slight decrease was primarily due to an increase in the cost of third-party software products embedded in our product offerings in 2000. GROSS MARGIN-SERVICES REVENUE Our services gross margin improved to (17.3)% for the nine months ended September 30, 2000 from (25.4)% for the same period in 1999. Our services gross margin remained negative however in 2000 primarily due to the hiring and training of additional internal personnel and external consultants to support our growing installed base of customers and anticipated increases in future revenues, as well as the training of our existing internal and external consultants on our Total-e-Business products. We anticipate that our services gross margin will improve and will be approaching a breakeven point towards the end of the fourth quarter of 2000. SALES AND MARKETING Sales and marketing expenses were $29.9 million and $10.7 million for the nine months ended September 30, 2000 and 1999, respectively, an increase of 179.4%. Of this increase, $6.2 million was due to increases in payroll and related costs, $1.1 million in recruiting costs, $860,000 in training expenses and $1.6 million in travel and entertainment costs as a result of the growth in the number of sales personnel, $2.1 million in office and occupancy expense due to the expansion of our sales offices throughout the U.S. and Europe, $1.3 million in sub-contractor's expense for the use of outside consultants, $2.6 million was due to increased trade show, direct mail, advertising, promotion and public relations expenses, and $2.0 million was due to increased commissions expense as a result of higher sales volume. We also incurred increases in variable marketing expenses due to increased printing and collateral and outside service providers in order to increase market awareness and gain market acceptance of our products. We intend to continue to aggressively increase 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, 2000 was 128 compared to 54 for the nine months ended September 30, 1999. These costs as a percentage of revenue were 105.8% and 101.0% for the nine months ended September 30, 2000 and 1999, respectively. PRODUCT DEVELOPMENT Product development expenses were $7.2 million and $3.1 million for the nine months ended September 30, 2000 and 1999, respectively, an increase of 132.2%. These increases were associated with the development and enhancement of our Bluestone Total-e-Business products and were due to an increase in payroll and related costs of $2.4 million, $188,000 in recruiting costs and an increase in sub-contractor expense of $655,000 related to outside consultants involved in development projects and an increase of office and occupancy expense of $505,000. Average development headcount for the nine months ended September 30, 2000 and 1999 was 58 and 30, respectively. We believe that our continued product development investment is essential for us to maintain 12 our market and technological competitiveness. These costs as a percentage of revenue were 25.4% and 29.1% for each of the nine months ended September 30, 2000 and 1999 respectively. GENERAL AND ADMINISTRATIVE General and administrative expenses were $6.0 million and $3.1 million for the nine months ended September 30, 2000 and 1999, respectively, an increase of 93.5%. Of this increase $657,000 of payroll related expenses, $599,000 in office and occupancy expenses, $165,000 of recruiting expenses were due to increased personnel to support the growth of our business. Additionally, $420,000 of additional insurance costs related to new directors and officers insurance, an increase of $299,000 in public operating costs and an increase of $191,000 in professional fees was incurred. The average number of general and administrative employees for the nine months ended September 30, 2000 was 42 compared to 31 for the nine months ended September 30, 1999. General and administrative expenses as a percentage of revenue were 21.3% and 29.4% for the nine months ended September 30, 2000 and 1999, respectively. WRITE OFF OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT The write off of acquired in-process research and development was $2.2 million for the nine months ended September 30, 2000. This expense was related to our purchase of Arjuna Solutions Limited, a development stage software company (see notes to financial statements). AMORTIZATION OF STOCK-BASED COMPENSATION Amortization of stock-based compensation was $255,000 and $197,000 for the nine months ended September 30, 2000 and 1999, 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 related to the hiring of key employees and directors during the third 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. AMORTIZATION EXPENSE Amortization expense was $534,000 for the nine months ended September 30, 2000. This expense arose due to the goodwill associated with our purchase of Arjuna Solutions Limited, which is being amortized on a straight-line basis over a four year period. INTEREST INCOME (EXPENSE), NET Net interest income was $7.9 million for the nine months ended September 30, 2000 and net interest expense was $1.0 million for the nine months ended September 30, 1999. The net interest income was due to interest earned on a higher cash balance during the first nine months of 2000 as compared to the first nine months of 1999 resulting from $54.8 million of net proceeds generated from our initial public offering of common stock in September 1999 and $145.8 million of net proceeds generated from our follow-on public offering in February 2000. LIQUIDITY AND CAPITAL RESOURCES In February 2000, we completed our secondary public offering of shares of our common stock. Of the 3,500,000 total shares offered, 1,750,000 shares were offered by the Company and 1,750,000 shares were offered by certain selling stockholders. We realized net proceeds from the offering of $145.8 million. In September 1999, we completed our initial public offering of 4,000,000 shares of our common stock, realizing net proceeds of $54.8 million. Prior to these offerings, 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 the business. As of September 30, 2000 our primary sources of liquidity consisted of cash, cash equivalents and short term marketable securities totaling approximately $186.8 million and available borrowings under our two revolving lines of credit which are secured by substantially all of our assets. As of September 30, 2000, we had a total of $2.0 million of available borrowings under both the $3.0 million and $500,000 revolving lines of credit. 13 We did not have an outstanding balance on either line of credit. The reduced borrowing availability is due to several outstanding letters of credit. Borrowings under the $3.0 million revolving line of credit are subject to a borrowing base of 80% of eligible domestic accounts receivable and borrowings under the $500,000 revolving line of credit are subject to a borrowing base of 90% of eligible foreign accounts receivable. Interest is payable monthly at a rate of prime plus .5% on both lines of credit. Net cash used in operating activities was $16.5 and $8.7 million for the nine months ended September 30, 2000 and 1999, respectively. The cash used in operating activities in the first nine months of 2000 was attributable primarily to net losses of $18.9 million, offset by certain non-cash items and changes in operating assets and liabilities. The cash used in operating activities for the nine months ended September 30, 1999 was attributable primarily to net losses of $11.2 million offset by certain non-cash items and increases in working capital items. Net cash used in investing activities was $49.0 million and $404,000 for the nine months ended September 30, 2000 and 1999, respectively. The cash used in investing activities for the nine months ended September, 2000 related primarily to the purchase of short term marketable securities, the purchase of 1,000,000 shares of Series B Preferred Stock of S2 Systems, Inc., a strategic partner of Bluestone, for $6.0 million, $3.6 million related to the Arjuna Solutions Limited acquisition and the purchase of fixed assets of $1.7 million. The cash used in investing activities for the nine months ended September 30, 1999 related to purchases of computers and software for internal use. Net cash provided by financing activities was $148.4 million for the nine months ended September 30, 2000. During the nine months ended September 30, 2000, net proceeds of $145.8 million was provided from the follow on public offering of shares of our common stock. Additionally, we received proceeds of $3.5 million from the exercise of common stock options and made repayments of $868,000 of long-term debt. Net cash provided by financing activities for the nine months ended September 30, 1999 was $77.7 million. This was primarily due to net proceeds of $54.8 million provided from our initial public offering of common stock and the sale of 9,191,176 shares of Series C convertible preferred stock for net proceeds of $23.1 million. We plan to continue to expand our operations throughout the U.S. and internationally within the next 12 months and we expect to continue to incur increases in our sales and marketing, product development and general and administrative expenditures to support such growth. These expenditures will use large amounts of cash. Furthermore, we have committed to pay approximately $375,000 as additional deferred consideration to certain former stockholders of Arjuna Solutions Limited if certain products are delivered to Bluestone by Arjuna Solutions Limited by no later than February 1, 2001 or if we waive the delivery requirements. We believe that our existing capital resources are sufficient to meet our capital requirements for at least the next 12 months. 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 REPORT INCLUDES FORWARD-LOOKING STATEMENTS THAT ARE BASED ON MANAGEMENT'S BELIEFS AND ASSUMPTIONS AND ON INFORMATION CURRENTLY AVAILABLE TO MANAGEMENT. RISKS ASSOCIATED WITH THE PROPOSED MERGER WITH HEWLETT-PACKARD On October 24, 2000 we entered into an agreement and plan of merger with Hewlett-Packard Company. The proposed stock for stock merger is subject to customary closing conditions, including the approval by Bluestone stockholders. Hewlett-Packard filed a Form S-4 registration statement on November 9, 2000 with the Securities and Exchange Commission which contains a preliminary proxy statement of Bluestone and which describes the proposed merger in detail, including the risks posed by such proposed transaction. Such risks include but are not limited to the following: - The value of Hewlett-Packard common stock to be received by Bluestone stockholders in exchange for their Bluestone common stock will fluctuate and is affected by factors different from the factors affecting the price of our shares; - Hewlett-Packard and Bluestone may encounter difficulties in integrating their operations or achieving the desired benefits of the acquisition; 14 - Certain directors and officers have interests in the proposed merger that differ form the interests of the other Bluestone stockholders; - The failure to consummate the merger could negatively impact our stock price, future business and operations; - The merger may cause our customers to delay or later purchasing decisions and/or cause strategic partners to alter or sever their relationship with Bluestone; - The merger may adversely our ability to attraqct and retain key employees; and - If we fail to obtain certain required consents and waivers, third parties may terminate or alter their existing contracts with Bluestone. 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 $11.6 million and $15.1 million for the years ended December 31, 1998 and 1999, respectively and $18.9 million for the nine months ended September 30, 2000. Our losses have resulted in an accumulated deficit of approximately $53.8 million as of September 30, 2000. 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. Additionally, our planned acceleration of expenditures may have an adverse effect on our operating results. We may not be profitable in any future period and our net losses may increase in the next several quarters. 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 15 governing bodies both within and outside the United States, decides to alter materially the current approach to, and level of, regulation of the Internet, we may need to adapt our technology. Any required adaptation could cause us to spend significant amounts of time and money. If use of the Internet does not continue to grow or grows more slowly than expected, if the infrastructure for the Internet does not effectively support growth that may occur, if government regulations change, or if the Internet does not become a viable commercial marketplace, our business could suffer. WE DEPEND ON OUR SOFTWARE 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 software products were $11.7 million or 74% of total revenues in 1999 and $21.2 million or 75.2% of total revenues in the first nine months of 2000. We expect to continue to be dependent upon our software products in the future, and any factor adversely affecting the market for Web application server and e-business platform software in general, or our software in particular, would adversely affect our ability to generate revenues. The market for Web application server and e-business platform 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 our software products and enhance the brand awareness of our 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. The foundation of our Total-e-Business product suite is Total-e-Server, our web application server which 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. Acquisitions of several of our competitors by large software companies and other market activities of industry participants have increased the competition in our market. Our competitors consist of a number of private and public companies including, among others: BEA Systems which acquired WebLogic; IBM; Microsoft; Oracle; and Sun Microsystems, which acquired NetDynamics and the rights to Netscape's Application Server. In addition, we face competition from in-house software developers who may develop some or all of the functionality that our products provide. Many of our competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, 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 16 customer bases and abilities to offer a broad solution and price these new products as incremental add-ons to existing systems could provide them with a significant competitive advantage. OUR CUSTOMERS ARE CONCENTRATED AND THE LOSS OF ONE OF OUR LARGEST CUSTOMERS COULD CAUSE OUR REVENUES TO DROP QUICKLY AND UNEXPECTEDLY. Our top ten customers for the year ended December 31, 1999 and the nine months ended September 30, 2000 in the aggregate accounted for approximately 56.0% and 53.4%, respectively, of our revenues. One customer accounted for more than 10% of our revenues for the year ended December 31, 1999 and one customer accounted for more than 10% of our revenues for the nine months ended September 30, 2000. 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 and e-business platforms in which we participate is subject to rapid technological change, changing customer needs, frequent new product introductions and evolving industry standards that may render existing products and services obsolete. Our growth and future operating results will depend in part upon our ability to enhance existing applications and develop and introduce new applications or components that: - meet or exceed technological advances in the marketplace; - meet changing customer requirements; - achieve market acceptance; - integrate successfully with third party software; and - respond to competitive products. Our product development and testing efforts have required, and are expected to continue to require, substantial investment. We may not possess sufficient resources to continue to make the necessary investments in technology. In addition, we may not successfully identify new software opportunities and develop and bring new software to market in a timely and efficient manner. If we are unable, for technological or other reasons, to develop and introduce new and enhanced software in a timely manner, we may lose existing customers and fail to attract new customers, resulting in a decline in revenues. OUR STOCK 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, and it may 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 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 17 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 ACQUISITIONS COULD ADVERSELY AFFECT OUR BUSINESS. We acquired Arjuna Solutions Limited in July 2000 and we may acquire other 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; - 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 18 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. In the first quarter of 2000, we established a U.K. subsidiary and opened a branch office in London, England. In the third quarter we established a branch office in Sweden and an independent distributorship in Italy. We may continue to expand our international operations and international sales and marketing efforts. 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 a significant portion of our license revenues through a limited number of independent software vendors, systems integrators, distributors and resellers. Although we intend to increase our marketing and direct sales efforts, we expect that a limited number of these indirect channels will continue to account for a significant portion of our revenues in any given quarter in the foreseeable future. To be successful, we must continue to foster and maintain our existing indirect channels, as well as develop new relationships. The loss of, or reduction in orders through, existing indirect channels or the failure to develop new indirect channel relationships could cause our revenues to decline and have a material adverse effect on our business. IF WE LOSE OUR KEY PERSONNEL, OR FAIL TO ATTRACT AND RETAIN ADDITIONAL PERSONNEL, THE SUCCESS AND GROWTH OF OUR BUSINESS MAY SUFFER. A significant portion of our senior management team has been in place for a relatively short period of time. Our success will depend to a significant extent on their ability to gain and maintain 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. 19 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 involve a significant commitment of resources by our customers. A customer's decision to license our software generally involves the evaluation of the available alternatives by a significant number of personnel in various functional and geographic areas, each often having specific and conflicting requirements. Accordingly, we typically must expend substantial resources educating prospective customers about the value of our 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 our software. Our failure or the failure of our alliance partners, our customers or our third party integrators to implement successfully our software could result in dissatisfied customers which could adversely affect our reputation. WE MAY REQUIRE FUTURE ADDITIONAL FUNDING TO STAY IN BUSINESS. Over time, we may require additional financing for our operations. Additionally, we periodically review other companies' product lines and technologies for potential acquisition. Any material acquisitions or joint ventures could require additional financing. This additional financing may not be available to us on a timely basis if at all, or, if available, on terms acceptable to us. Moreover, additional financing may cause dilution to existing stockholders. CAPACITY RESTRICTIONS COULD REDUCE THE DEMAND AND UTILITY OF OUR PRODUCTS. Concurrency restrictions can limit Internet deployment and use capacity. The boundaries of our Total-e-Server software, Bluestone XML server and Bluestone Total-e-Business capacity, in terms of numbers of concurrent users or interactions, are unknown because, to date, no customer or testing environment has reached these boundaries. These 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 any of our products' 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 20 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 resold, and may in the future resell, under license, certain third party software that enables our software to interact with other software systems or databases. In addition, we license certain software technology used to develop our software. The loss or inability to maintain any of these software licenses could result in delays or reductions in product shipments until equivalent software could be identified and licensed or compiled, which could adversely affect our business. WE MAY BE SUBJECT TO FUTURE PRODUCT LIABILITY CLAIMS AND OUR PRODUCTS' REPUTATIONS MAY SUFFER. Many of our installations involve projects that are critical to the operations of our customers' businesses and provide benefits that may be difficult to quantify. Any failure in a customer's system could result in a claim for substantial damages against us, regardless of our responsibility for the failure. Although our license agreements with our customers typically contain provisions designed to limit contractually our liability for damages arising from negligent acts, errors, mistakes or omissions, it is possible that these provisions will not be enforceable in certain instances or would otherwise not protect us from liability for damages. Although we maintain general liability insurance coverage, this coverage may not continue to be available on reasonable terms or at all, or may be insufficient to cover one or more large claims. We have entered into and plan to continue to enter into agreements with strategic alliance partners whereby we license our software products for integration with the alliance partners' software. If an alliance partner's software fails to meet customer expectations or causes a failure in its customer's systems, the reputation of our software products could be materially and adversely affected even if our software products performed in accordance with their functional specifications. OUR EXECUTIVE OFFICERS AND DIRECTORS AND THEIR AFFILIATES OWN A LARGE PERCENTAGE OF OUR VOTING STOCK AND WILL HAVE THE ABILITY TO MAKE DECISIONS THAT COULD ADVERSELY AFFECT OUR STOCK PRICE. Currently, our executive officers, directors and their affiliates beneficially own approximately 33% of the outstanding shares of common stock. As a result, these stockholders are able to influence to a substantial degree all matters requiring stockholder approval and, thereby, our management and affairs. Matters that require stockholder approval include: - election of directors; - approval of mergers or consolidations; and - sale of all or substantially all of our assets. 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 restricts the ability of stockholders to call a special meeting. Our bylaws allow the board of directors to expand its size and fill any vacancies without stockholder approval. FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE. The market price of our common stock could decline as a result of sales by our existing stockholders or the perception that those sales may occur. These sales could also make it more difficult for us to raise funds through equity offerings in the future at a time and at a price that we think is appropriate. 21 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 or are eligible to sell the common stock pursuant to Rule 144. If these holders, by exercising their registration rights or through sales pursuant to Rule 144, 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. 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 and are not otherwise aware of any material Year 2000 problems experienced 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. 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. Additionally our insurance coverage may not cover or be adequate to offset these and other business risks related to the Year 2000. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Until the first quarter of 2000, we developed our products in the U.S. and sold them primarily in North America. As a result, our historical financial results were not affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Since the first quarter of 2000, we established a U.K. subsidiary, acquired Arjuna Solutions Limited in Newcastle, England, opened branch offices in London, England and Sweden, established an independent distributorship in Italy and generated approximately $800,000 of revenue from international operations to date. Such revenue was denominated in U.S. dollars. In the future, we may increase our international operations which could increase our exposure to these factors. Our holdings of financial instruments are comprised of a mix of corporate debt, government securities and commercial paper. All such instruments are classified as securities available for sale. Our portfolio represents funds held temporarily pending use in our business and operations. We seek reasonable assuredness of the safety of principal and market liquidity by investing in rated fixed income securities while at the same time seeking to achieve a favorable rate of return. Our market risk exposure consists principally of exposure to changes in interest rates. Our holdings are also exposed to the risks of changes in the credit quality of issuers. We typically invest in the shorter end of the maturity spectrum. We believe that there is no material market risk exposure relating to these investments. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. (c) Issuance of unregistered securities On July 3, 2000, the Company acquired all of the outstanding share capital of Arjuna Solutions Limited. Initial acquisition consideration consisted in part of 277,803 shares of common stock issued to the shareholders of Arjuna. Additional consideration, consisting in part of 82,725 shares of common stock, is payable upon the earlier of completion by Arjuna of certain products on or before February 1, 2001 or waiver of the delivery date or requirements by the Company. Our shares were issues pursuant to exemptions from registration under Regulation D and S under the Securities Act of 1933, as amended since the issuance of shares was made to a limited number of non-U.S. persons. (d) Use of Proceeds 22 On September 23, 1999, the Securities and Exchange Commission declared effective our registration statement on Form S-1 (File No. 333-82213) relating to our initial public offering of our common stock. We received net proceeds of approximately $54.8 million after deducting underwriting discounts and offering expenses. Although we cannot distinguish the net proceeds from our initial public offering from the net proceeds from our prior financing activities, the net proceeds of $145.8 million from our follow-on public offering in February 2000, or other cash on hand at September 30, 1999, we used $20.9 million in cash for operating activities since September 30, 1999 (approximately the date of closing of our initial public offering) and believe that approximately 69.0% of such amount was used for sales and marketing activities, 14.0% was used for product development and 17.0% was used for general corporate purposes. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: 2.1 Agreement for the sale and purchase of the entire issued share capital of Arjuna Solutions Limited between Bluestone, Bluestone Software Europe Limited and Vendors of Arjuna Solutions Limited dated July 3, 2000. 10.1 Stock Purchase and Investor Rights Agreement between Bluestone and S2 Systems, Inc. dated August 18, 2000. 10.2 Lease for Irwin Road facility in Mount Laurel, New Jersey between Bluestone and Partners Creek, II LLC dated August 9, 2000. 10.3 Licence Agreement for the Supply of Office Facilities between Bluestone and Regus (UK) Ltd. dated February 7, 2000. 10.4 Licence Agreement for the Supply of Office Facilities between Citibase Plc and Arjuna Solutions Limited dated September 15, 2000. 27.1 Financial Data Schedule (in electronic format only). (b) Reports on Form 8-K: None. 23 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BLUESTONE SOFTWARE, INC. Dated: November 14, 2000 By: /s/ S. Craig Huke ----------------------------- S. Craig Huke EXECUTIVE VICE-PRESIDENT & CHIEF FINANCIAL OFFICER 24 EX-2.1 2 a2030615zex-2_1.txt AGREEMENT EXHIBIT 2.1 THIS AGREEMENT dated July 2000 PARTIES: (1) THE PERSONS whose names and addresses are set out in Column (1) of Schedule 1 (the "VENDORS"); (2) BLUESTONE SOFTWARE EUROPE LIMITED a company registered in England and Wales with registered number 3944350 and having its registered office at Central House, Upper Woburn Place, London WC1H 0QA ("EUROPE"); (3) BLUESTONE SOFTWARE, INC. a company registered in the State of Delaware and having its principal address at 300 Stevens Drive, Philadelphia PA 19113-1597 USA ("BLUESTONE") RECITALS: (A) Arjuna Solutions Limited (the "COMPANY") is a private company limited by shares. Further details of the Company and its Subsidiary are set out in of Schedule 2 and 3 respectively. (B) The Vendors are the registered holders and beneficial owners of the numbers of Sale Shares shown opposite their respective names in Column (2) of Schedule 1 such numbers of Sale Shares comprising in aggregate the entire issued and allotted share capital of the Company. (C) The Vendors have agreed to sell and Bluestone has agreed to purchase the Sale Shares for the consideration and upon the terms and conditions set out in this Agreement. (D) Europe is a wholly-owned subsidiary of Bluestone which is a party to this Agreement for the purposes of receiving the benefit of the Warranties. IT IS AGREED as follows: 1. DEFINITIONS AND INTERPRETATION 1.1 DEFINITIONS 1.1.1 In this Agreement unless the context requires otherwise:- "ACCOUNTING DATE" means in respect of the Company, 31st December 1999, and in respect of the Subsidiary, 18 April 2000; "ACCOUNTS" means:- (a) the balance sheet of the Company and the audited balance sheet of the Subsidiary as at the Accounting Date; and (b) the profit and loss account of the Company and the audited profit and loss accounts of the Subsidiary for the accounting reference period ending on the Accounting Date; and (c) the cash flow statements (if any) and the directors' reports relating to (a) and (b) above; including all notes to such accounts and all documents required by law to be annexed to such accounts and to be sent or made available to shareholders in any relevant financial year (as defined in section 223 of the 1985 Act); "AGREEMENT" means this agreement including the Schedules and the Recitals; 1 "ASSOCIATE" means: a) in relation to a person, an associated company of that person or a person who is connected with that person (and whether a person is an associated company or is so connected shall be determined in accordance with Sections 416 and 839 of the Taxes Act save that in construing Section 839 the term 'control' shall have the meaning given by Section 840 or Section 416 of that Act so that there shall be control wherever either of the said Sections would so require); and b) in relation to a company, any subsidiary or subsidiary undertaking or holding company of such company and any other subsidiary or subsidiary undertaking of any holding company of such company; "BLUESTONE'S SOLICITORS" means McGrigor Donald, Solicitors, 63 Queen Victoria Street, London EC4A 4ST; "BLUESTONE STOCK" means such of the Common Stock issued to the Vendors in accordance with clause 3; "BUSINESS" means any business carried on by the Company or the Subsidiary at the Completion Date or at any time within the period of 12 months ending on the Completion Date; "COMMON STOCK" means the common stock of $0.001 par value of Bluestone; "COMPANIES ACTS" means the 1985 Act, the Business Names Act 1985, the Companies Consolidation (Consequential Provisions) Act 1985, the Company Directors Disqualification Act 1986, the 1989 Act and Part V of the Criminal Justice Act 1993, and any other statute from time to time in force regulating companies, together; "COMPLETION" means completion of the sale and purchase of the Sale Shares by virtue of the performance by the Vendors and Bluestone of the obligations assumed by them respectively under clause 4; "COMPLETION CONSIDERATION" means the Consideration payable at Completion as specified in clause 4; "COMPLETION DATE" means the date hereof; "CONFIDENTIAL INFORMATION" means all confidential information of the Company and the Subsidiary (in whatever medium stored) including but without limitation, all business, financial, operational, customer and marketing information and trade secrets in relation to the Business and including all information which is received or obtained as a result of entering into or performing, or supplied by or on behalf of a party in the negotiations leading to, this Agreement and which relates to:- (a) the Company, the Subsidiary and their respective Associates; (b) any aspect of the Business; (c) the provisions of this Agreement; (d) the negotiation of this Agreement; or (e) the subject matter of this Agreement; and any information in respect of which any member of the Group is bound by an obligation of confidence to a third party; "CONSIDERATION" means the consideration payable for the Sale Shares as specified in clause 3; 2 "COPYRIGHT" means copyright, design rights, topography rights and database rights whether registered or unregistered (including any applications for registration of any such thing) and any similar or analogous rights to any of the foregoing whether arising or granted under the law of England or of any other jurisdiction; "CRITICAL EMPLOYEE" means Steven Caughey, David Ingham, Mark Little, Stuart Wheater, Peter Furniss and Alastair Green; "DEFERRED BLUESTONE STOCK" means an aggregate of 82,725 shares of Common Stock conditionally issuable to the Warrantors in the amounts set out in Column 6 of Schedule 1 pursuant to clause 3.1.2; "DEFERRED CONSIDERATION PERIOD" means the period commencing on the Completion Date and terminating on the date that the final instalment of the Restricted Bluestone Stock is issued; "DELIVERY REQUIREMENTS" means the compliance with the terms of Schedule 10; "DEPARTING EMPLOYEES" means Grainne Marie Walshe, Rosie Woodward and John Barry Hodgson; "DETERMINED CLAIM" means all claims under this Agreement or the Taxation Undertaking (each a "CLAIM") which (i) has been agreed or settled between the Vendors and Bluestone and/or Europe (as the case may be) in writing; or (ii) in respect of which a judgment has been given by a court of competent jurisdiction with no right of appeal or the time limit within which any appeal may be made has expired (and includes the costs forming part of such settlement or judgment); "DIRECTORS" means the directors of the Company and/or the Subsidiary named in Schedules 2 and 3; "DISCLOSURE LETTER" means a letter described as such of even date from the Warrantors delivered to, and acknowledged in writing with specific reference to this Agreement by, Bluestone prior to Bluestone's execution hereof; "EMPLOYEES" means all of the current employees of the Company and/or the Subsidiary; "ENCUMBRANCE" means in respect of any property, asset or right, any interest or equity of any person (including but without limitation any right to acquire, option or right of pre-emption) or any mortgage, charge, pledge, lien, assignment, hypothecation, security interest, title retention or other security or third party agreement or arrangement of whatsoever nature over or in that property, asset or right; "ESCROW STOCK" means the number of the Bluestone Stock listed in Column 7 of Schedule 1; "ESCROW CASH" means the sum of US$575,921 retained by the Purchaser from the Consideration payable to the Vendors at Completion pursuant to the provisions of clause 5.1.3 as reduced in accordance with clause 5; "FINANCIAL CAP" means the sum of L8,745,084; "FSA" means the Financial Services Act 1986; "FUNDAMENTAL REPRESENTATIONS" means the statements and representations in Parts 1, 3 and 4 of Schedule 5 to this Agreement; "GROUP" means together the Company and the Subsidiary; "INITIAL BLUESTONE STOCK" means an aggregate of 277,803 shares of Common Stock to be issued to the Warrantors in the amounts set out in Column 4 of Schedule 1 at Completion; "INTELLECTUAL PROPERTY" means such of the following as may be owned, used or enjoyed by the Company or the Subsidiary:- 3 (a) Patents; (b) Trade Marks; (c) Know How; (d) Copyright; and (e) IP Matter; "IP MATTER" means all documents, records, tapes, discs, diskettes and any other material whatsoever containing Copyright works, Know-How or Software; "KNOW-HOW" means trade secrets and confidential business information including details of supply arrangements, customer lists and pricing policy; sales targets, sales statistics, market share statistics, marketing surveys and reports; marketing research; unpatented technical and other information including inventions, discoveries, processes and procedures, ideas, concepts, formulae, specifications, procedures for experiments and tests and results of experimentation and testing; information comprised in Software; together with all common law or statutory rights protecting the same including by any action for breach of confidence and any similar or analogous rights to any of the foregoing whether arising or granted under the law of England or any other jurisdiction; "KNOWLEDGE WARRANTY" means the representations given by each of the Non-participating Warrantors in clause 5.1.2(b); "LEAVER" means any Vendor who is employed by or provides consulting services to the Company or another member of the Group and who dies or who ceases to be an employee of the Group. In this definition any reference to the date of cessation of employment (or similar) shall be the date upon which the relevant Vendor's contract of employment terminates; "LONGSTOP DATE" means 15 February 2001; "NASDAQ" means the National Market of The Nasdaq Stock Market, Inc.; "NON-PARTICIPATING WARRANTORS" means Grainne Marie Walshe and Hannes Wolfgang Miller; "1985 ACT" means the Companies Act 1985; "1989 ACT" means the Companies Act 1989; "PATENTS" means patent applications or patents, author certificates, inventor certificates, utility certificates, improvement patents and models and certificates of addition including any divisions, renewals, continuations, refilings, confirmations-in-part, substitutions, registrations, confirmations, additions, extensions or reissues thereof and any similar or analogous rights to any of the foregoing whether arising or granted under the law of England or any other jurisdiction; "PRE-COMPLETION PERIOD" means the period commencing on the Accounting Date and ending on the Completion Date (both days inclusive); "PROPERTY" means the property held by the Company and/or the Subsidiary on leasehold title, a brief description of which, including rent and commencement, review and expiry dates, is set out in Schedule 4; "PROPERTY AND ENVIRONMENTAL WARRANTIES" means the statements and representations set out in Part 4 of Schedule 5; "PROTECTED BUSINESS" means the business of developing software products and components in whole or in part, designed to provide transacting servers or services as carried on by the Group at the date hereof; 4 "RESTRICTED PERIOD" means 24 months from the Completion Date or, in the event that a general offer is made for Bluestone as a result of which Bluestone becomes a wholly-owned subsidiary of a third party or the business of Bluestone is acquired in its entirety by a third party other than as a result of a corporate reconstruction of Bluestone and its Associates, 12 months from the Completion Date; "REGISTERED INTELLECTUAL PROPERTY" means the registered Intellectual Property listed Schedule 6; "RESTRICTED BLUESTONE STOCK" means the number of shares of Common Stock calculated and issuable in accordance with clause 3.4; "SALE SHARES" means the 75,000 'A' Ordinary Shares of 1p each and 32,406 'B' Ordinary Shares of 1p each in the capital of the Company; "SECURITIES ACT" means the US Securities Act of 1933; as amended; "SERVICE CONTRACTS" means the terms and conditions at employment and employee confidentiality agreements in the agreed form; "SOFTWARE" means any and all computer programs in both source and object code form, including all modules, routines and sub-routines thereof and all source and other preparatory materials relating thereto, including use requirements, functional specifications and programming specifications, ideas, principles, programming languages, algorithms, flow charts, logic, logic diagrams, orthographic representations, file structures, coding sheets, coding and including any manuals or other documentation relating thereto and computer generated works identified, categorised and briefly described in Schedule 7; "SUBSIDIARY" means the subsidiary of the Company named in Schedule 3; "TAXATION" has the meaning ascribed in the Taxation Undertaking; "TAXES ACT" means the Income and Corporation Taxes Act 1988; "TAXATION UNDERTAKING" means the taxation undertaking, in the agreed form, granted by the Vendors to Bluestone at Completion; "TAX WARRANTIES" means the statements and representations set out in Part 3 of Schedule 5; "THIRD PARTY CLAIM" means a claim by a person who is not a party to this Agreement for damages or an injunction or any other relief or remedy; "TITLE WARRANTIES" means the statements and representations set out in Part 1 of Schedule 5; "TRADE MARKS" means trade or service mark applications or registered trade or service marks, registered protected designations or origin, registered protected geographic origins, refilings, renewals or reissues thereof, unregistered trade or service marks, get-up and company names in each case with any and all associated goodwill and all rights or forms of protection of a similar or analogous nature including rights which protect goodwill whether arising or granted under the law of England or of any other jurisdiction; "TRADE UNION" means as defined in section 1, TULCRA; "TULCRA" means the Trade Union and Labour Relations (Consolidation) Act 1992; "US" means the United States of America; "VENDORS' SOLICITORS" means Toller Hales & Collcutt Solicitors, of 53-57 High Street, Corby, Northants NN17 1UY; "WARRANTIES" means the statements and representations set out in Parts 2 and 5 of Schedule 5; 5 "WARRANTORS" means all of the Vendors other than the Non-Participating Warrantors; 1.1.2 Further definitions are set out elsewhere in this Agreement and in Parts 2, 3, 4 and 5 of Schedule 5. 1.2 INTERPRETATION In this Agreement, unless otherwise specified or the context otherwise requires:- 1.2.1 words importing the singular only and shall include the plural and VICE VERSA; 1.2.2 words importing any gender shall include all other genders; 1.2.3 reference to a clause or Recital is to a clause or recital of this Agreement; 1.2.4 reference to a Schedule or a specific Part thereof is to the schedule to this Agreement or the relevant part thereof; 1.2.5 reference to a paragraph is to a paragraph in a Schedule; 1.2.6 words importing natural persons shall include companies, corporations, unincorporated associations and partnerships and in each case vice versa; 1.2.7 words importing the whole shall be treated as including a reference to any part thereof; and 1.2.8 subject to clause 5.10.9, reference to any statute, regulation, directive, treaty or part thereof shall be construed as reference thereto as amended or re-enacted or as the application thereof is modified by other provisions from time to time (whether before or after the date of this Agreement) and shall be construed as including references to any order, instrument, regulation or other subordinate legislation made pursuant thereto. 1.3 SUBSIDIARY In Schedule 5 the expression "THE COMPANY" shall, unless otherwise specified or the context otherwise requires, mean the Company and the Subsidiary severally so that each Warranty is given with respect to each such company individually. 1.4 EXCLUSION OF RULES In construing this Agreement:- 1.4.1 the CONTRA PROFERENTEM rule will not apply; and 1.4.2 the EJUSDEM GENERIS rule shall not apply and accordingly the interpretation of general words shall not be restricted by being preceded by words indicating a particular class of acts, matters or things or being followed by particular examples. 1.5 HEADINGS In this Agreement the Table of Contents and the headings to clauses, Paragraphs and Parts of the Schedule are inserted for convenience only and shall not affect the construction or interpretation of this Agreement. 1.6 OTHER REFERENCES 1.6.1 Words and expressions defined in the Taxation Undertaking shall to the extent not inconsistent bear the same meaning in this Agreement. 1.6.2 References to any English legal term for any action, remedy, method of judicial proceeding, legal document, legal status, court, official or any legal concept, state of affairs or thing shall in respect of any 6 jurisdiction other than England be deemed to include that which most approximates in that jurisdiction to the English legal term. 1.6.3 A reference to "WRITING" or "WRITTEN" includes faxes and any non-transitory form of visible reproduction or words but excludes electronic mail. 1.6.4 A reference to a "BUSINESS DAY" means a day, other than a Saturday or a Sunday, on which clearing banks are open for commercial business in London and New York. 1.6.5 A reference to a document being "IN THE AGREED FORM" means that it shall be either:- (a) in the form agreed by the Vendors' Solicitors and Bluestone's Solicitors and for identification signed, prior to Bluestone's execution hereof, by or on behalf of Bluestone and the Vendors as listed in Schedule 11; or (b) granted, entered into or delivered and accepted at Completion. 1.6.6 A reference to a "SUBSIDIARY" means a subsidiary within the meaning ascribed to such expression by sections 736 and 736A, of the 1985 Act. 1.6.7 A reference to a "SUBSIDIARY UNDERTAKING" means a subsidiary undertaking within the meaning ascribed to such expression by section 258, of the 1985 Act. 1.6.8 A reference to a "PERSON" includes any individual, firm, company, corporation, body corporate, government, state or agency of state, trust or foundation, or any association, partnership or unincorporated body (whether or not having separate legal personality) of two or more of the foregoing; 1.6.9 References to times of the day are to London time and references to a day are to a period of 24 hours running from midnight. 1.6.10 The Schedule and Recitals form part of this Agreement and have the same full force and effect as if expressly set out in their entirety in the operative part of this Agreement. 1.6.11 Words and phrases defined in any part of this Agreement bear the same meanings throughout this Agreement. 1.6.12 Obligations and liabilities assumed by more than one person in this Agreement are assumed jointly and severally unless otherwise specified. 2 SALE AND PURCHASE 2.1 OBLIGATION TO SELL AND PURCHASE Each Vendor shall sell with full title guarantee, and Bluestone shall purchase, the number of Sale Shares set opposite the name of such Vendor in column (2) of Schedule 1 free from any Encumbrance and with all rights attached thereto. 2.2 WAIVER OF RIGHTS Each of the Vendors hereby waives or agrees to procure the waiver of any pre-emption rights which may exist in relation to the Sale Shares pursuant to the Articles of Association of the Company or otherwise. 2.3 SALE OF ALL SALE SHARES On the Completion Date, Bluestone shall not be obliged to complete the purchase of any of the Sale Shares unless the purchase of all the Sale Shares is completed simultaneously but completion of the purchase of some of the Sale Shares shall not affect the rights of Bluestone with respect to the others. 7 2.4 IMPLIED COVENANTS The Law of Property (Miscellaneous Provisions) Act 1994 (LPMPA) applies to all dispositions of property made under or pursuant to this Agreement save that the word "reasonably" shall be deleted from the covenant set out in Section 2(1)(b), LPMPA, and the covenant set out in Section 3(1), LPMPA shall not be qualified by the words "other than any charges, encumbrances or rights which that person does not and could not reasonably be expected to know about". 3 CONSIDERATION 3.1 CONSIDERATION The Consideration for the Sale Shares shall be the aggregate of the following: 3.1.1 the aggregate cash sum of L1,829,085 and US$575,921 to the Vendors and the issue to the Warrantors of the Initial Bluestone Stock (the "INITIAL CONSIDERATION"); 3.1.2 subject to Delivery Requirements being satisfied in full on or before the Longstop Date (but not otherwise), the further cash sum of L247,877/ and the issue to the Warrantors of the Deferred Bluestone Stock (the "DEFERRED CONSIDERATION"); and 3.1.3 subject always to the provisions of clause 3.4 the issue to the Warrantors (other than Santosh Shrivastava) of the Restricted Bluestone Stock in accordance with clause 3.4. 3.2 BLUESTONE STOCK TO RANK PARI PASSU The Bluestone Stock shall be issued credited as fully paid up and shall rank pari passu in all respects with the existing Common Stock at the date of issue. 3.3 ENTITLEMENT TO CONSIDERATION The Consideration shall be divided amongst the Vendors in the proportions set opposite their respective names in Column (3), (4), (5) and (6) of Schedule 1. 3.4 RESTRICTED BLUESTONE STOCK 3.4.1 On each of the four anniversaries of the Completion Date, and subject always to the provisions of clause 3.4.3, each of the Vendors who shall be entitled, at any time during the Exercise Period, to give notice to Bluestone to have issued to him all, but not some only of, the number of shares of Restricted Bluestone Stock (if any) calculated as follows: C X (A - B) RS = ---------- A where: A = the closing price of Common Stock on the relevant Anniversary (or if such day is not a business day then the next following business day) as reported by NASDAQ. B = the closing price of Common Stock on the Completion Date as reported by NASDAQ. C = the reference number set against the relevant Warrantor's name in Column 9 of Schedule 1. RS = the number of shares of Restricted Bluestone Stock to be issued; provided that, if RS is a negative number, then no shares of Restricted Bluestone Stock shall be issued. 8 3.4.2 For the purposes of this clause 3.4: (i) "EXERCISE PERIOD" in respect of each relevant Anniversary means the period commencing on the relevant Anniversary and terminating on the tenth anniversary of the Completion Date; and (ii) the calculation of RS shall be adjusted in such manner as the auditors of Bluestone shall, in their absolute discretion determine, consider necessary or desirable to take account of any changes in the constitution of Bluestone (including, but not limited to, any consolidation or sub-division of the Common Stock or any re-organisation or buy back of Common Stock) without impairing the intent of this clause 3.4. 3.4.3 Each of the Warrantors hereby agrees that if he becomes a Leaver during the Deferred Consideration Period he shall cease to be entitled to and he hereby irrevocably and unconditionally waives any right to receive any Restricted Bluestone Stock which he is not already entitled to give notice to have issued to him. Subject thereto, if a Leaver retains the right to receive Restricted Bluestone Stock he shall be entitled to exercise the option referred to in clause 3.4.1 in respect thereof at any time during the period referred to therein. 4 COMPLETION 4.1 TIME AND PLACE Completion shall take place at the offices of Bluestone's Solicitors on the Completion Date. 4.2 VENDORS' OBLIGATIONS At Completion the Vendors shall deliver to Bluestone:- (a) SHARE TRANSFERS: transfers of the Sale Shares duly executed by the registered holders thereof in favour of Bluestone, or such nominee of Bluestone as Bluestone may nominate, together with the definitive certificates in respect thereof in the names of such registered holders; (b) POWERS OF ATTORNEY: a certified copy of any power of attorney under which this Agreement or any document referred to herein or executed in pursuance hereof is executed on behalf of any of the parties thereto and such other evidence as Bluestone may reasonably require of the authority of any person executing on behalf of any of the Vendors; (c) WAIVERS AND CONSENTS TO TRANSFER: such waivers, consents or documents which may reasonably be required by Bluestone to vest in Bluestone the full beneficial ownership of the Sale Shares and enable Bluestone to procure them to be registered in the name of Bluestone or its nominees; (d) WAIVER OF CLAIMS: a written waiver in the agreed form from the Vendors and the Departing Employees of the Group in respect of any claims which the Vendors or the Departing Employees of the Group may have against the Company and the Subsidiary as at Completion and releasing the Company and the Subsidiary from all and any liabilities which may be owing to the Vendors or the Departing Employees of the Group by the Company or the Subsidiary; (e) CONSTITUTIONAL DOCUMENTS: the certificate of incorporation, any certificate of incorporation on change of name, common seal (which failing a certificate in the agreed form from the Warrantors certifying that there is no common seal), statutory registers and minute and other record books (fully written up to the time immediately prior to Completion) and share certificate books of the Company and each of the Subsidiary together with all unused forms of share certificates of the Company and each of the Subsidiary; (f) SUBSIDIARY SHARE CERTIFICATES: definitive certificates in respect of all the shares beneficially owned by the Company and any of its nominees in the Subsidiary together with duly executed transfers in blank, or, as Bluestone may require, in favour of Bluestone or its nominee, in respect of all shares in the Subsidiary not registered in the name of the Company; 9 (g) BANK CERTIFICATES ETC: a statement from each bank at which the Company and the Subsidiary maintains an account of the amount standing to the credit or debit of all accounts of the Company and the Subsidiary as at close of business on the latest available business day prior to the Completion Date together with the cash book balances of the Company and the Subsidiary at Completion and statements reconciling such cash book balances and relevant cheque books with the balances on each such bank account; (h) BANK MANDATES: copies of all bank mandates of the Company and the Subsidiary together with appropriate forms to amend the mandate in respect of each bank account maintained by the Company and each of the Subsidiary; (i) CHEQUE BOOKS ETC: the cheque books relating to all bank accounts of the Company and each of the Subsidiary together with confirmation that no cheques have been written by the Company or the Subsidiary since preparation of the statements referred to in clause 4.2(g) above; (j) SATISFACTION OF INDEBTEDNESS: evidence in the agreed form that all debts and accounts between any member of the Group or any Associate of any member of the Group (of the one part) and the Vendors and any Associate of any of the Vendors (of the other part) have been fully paid and settled; (k) DEEDS AND PROPERTY TITLE DOCUMENTS: all deeds and documents of title to or otherwise relating to the Property; (l) TITLE TO REGISTERED INTELLECTUAL PROPERTY: original certificates evidencing title of the Company and the Subsidiary to the Registered Intellectual Property (if any); (m) STATEMENTS OF RENT AND SERVICE CHARGE: the latest statements of and receipts for rent and service charge paid in respect of the Property each to be given in an unqualified form; (n) RESIGNATION OF OFFICERS: a written resignation (executed as a deed) in the agreed form of all of the directors and the secretary of the Company and of the Subsidiary in each case taking effect from Completion and confirming that he/she has no claim against the relevant company for remuneration, fees or expenses or compensation including, without prejudice to the generality of the foregoing, any payment under the ERA or damages for loss of office or otherwise, save in respect of the terms of the new employment contracts; (o) RESIGNATION OF AUDITORS: a written resignation (in duplicate) in the agreed form to take effect from Completion from the auditors of the Subsidiary which shall contain the statement required to be made pursuant to section 394(1) of the 1985 Act and confirming that:- (i) they shall deposit such statement in accordance with section 394 (2) of the 1985 Act; and (ii) as at Completion no sums are due to such auditors by the Company or the Subsidiary in respect of outstanding invoices or in respect of work carried out but not invoiced; (p) THE TAXATION UNDERTAKING: the Taxation Undertaking duly executed by the Vendors; (q) NEW EMPLOYMENT CONTRACTS: the Service Contracts duly executed by each of the parties thereto; (r) DEED OF TERMINATION OF SHAREHOLDERS AGREEMENT: the deed of termination in the agreed form duly executed by each of the Vendors. 4.3 MEETING At Completion the Vendors shall procure the transaction of the following business to Bluestone's satisfaction at a duly convened and quorate meeting of the board of directors of the Company and, where appropriate, the Subsidiary: 10 4.3.1 approval for registration (subject only to their being re-presented duly stamped) of the transfers of the Sale Shares and the entry in the register of members of the Company of Bluestone; 4.3.2 appointment of such directors, secretary and auditors as Bluestone may nominate; 4.3.3 revocation of all existing bank mandates and instructions for the operation of bank accounts and the issue of new bank mandates and instructions giving authority to persons nominated by Bluestone; 4.3.4 change of the registered office of the Company and of the Subsidiary to such address as Bluestone may nominate; 4.3.5 change of the accounting reference date of the Company and of each of the Subsidiary to such date as Bluestone may nominate; and shall deliver to Bluestone duly signed Minutes of all such meetings together with duly completed forms 288b, 287 and 225 in the prescribed form for filing with the Registrar of Companies. 4.4 BLUESTONE'S OBLIGATIONS 4.4.1 At Completion, and subject to the compliance by the Vendors with the obligations incumbent on them under clauses 4.2 and 4.3, Bluestone shall procure that there shall be delivered to the Vendors' Solicitors (who are hereby irrevocably authorised to receive the same and whose receipt therefor shall be a sufficient discharge to Bluestone who shall not be concerned with the distribution thereof to and among the Vendors or be answerable for the loss or misapplication of such sum) the sum of L1,829,085 by electronic transfer for same day value to the following bank account: Name of account: Toller, Hales & Collcutt client account Name and address of bank: Lloyds TSB, 2 Market Square, Kettering, Northants Account number: 00134407 Sort Code: 30-94-68. 4.4.2 Following Completion, Bluestone undertakes with the Vendors not to give instructions to the Company's bankers to stop any of the payments made by cheque listed in the bank reconciliation statement referred to in clause 4.2 (g) provided that nothing in this clause 4.4.2 shall oblige Bluestone to ensure that the Company has sufficient funds at Completion to enable such bank to honour such cheques. 5 WARRANTIES AND FUNDAMENTAL REPRESENTATIONS 5.1 EXTENT OF THE WARRANTIES AND FUNDAMENTAL REPRESENTATIONS In consideration of Bluestone agreeing to purchase the Sale Shares on the terms of this Agreement:- 5.1.1 the Warrantors jointly and severally warrant, represent and undertake to Bluestone and separately to Europe that each of the Fundamental Representations (other than the Title Warranties) and the Warranties is, when read in conjunction with the information disclosed in accordance with clause 5.2 in the Disclosure Letter, and each of the Title Warranties is true and accurate in all respects and not misleading; and each of the Non-participating Warrantors separately warrants, represents and undertakes to Bluestone and separately to Europe that: (a) each of the Title Warranties is true and accurate in all respects and not misleading; and (b) having made a full and diligent review of each of the statements set out in Parts 2, 4, and 5 of Schedule 5 (the "NON-TITLE STATEMENTS") he/she is not actually aware of any fact, matter or information which may constitute an exception to the Non-Title Statements which is not 11 set out in full in the Disclosure Letter and has not wilfully withheld any such fact, matter or information from Europe or Bluestone. 5.2 DISCLOSURES Each disclosure in the Disclosure Letter shall:- 5.2.1 be made with specific reference to and shall provide full, fair and precise details of the nature and extent of the particular exception to the Fundamental Representations (other than the Title Warranties) or the Warranties the subject thereof; 5.2.2 (if it refers to any separate documents) identify precisely the nature of such document and the terms of or provisions in such document which are relied upon and a copy of the relevant document shall be attached to the Disclosure Letter; and 5.2.3 constitute a warranty that the matters set forth or referred to therein are true and accurate in all material respects and give a true and fair view of the nature and extent of the exceptions to the Fundamental Representations (other than the Title Warranties) or Warranties. 5.3 WARRANTORS' KNOWLEDGE Where any of the Fundamental Representations or Warranties are qualified by the expression "TO THE BEST OF THE KNOWLEDGE, INFORMATION AND BELIEF OF THE WARRANTORS" or "SO FAR AS THE WARRANTORS ARE AWARE" or any similar expressions or otherwise qualified by the knowledge of the Warrantors or any of them, each of the Warrantors shall be deemed to have, in addition to his own, the knowledge, information and belief of each of the other Warrantors and the Non-participating Warrantors but the knowledge of a Warrantor shall be qualified in the manner stated only to the extent that all of the Warrantors can establish on the balance of probabilities that they made all reasonable enquiries to establish the truth and accuracy of the relevant Fundamental Representations or Warranties. 5.4 INFORMATION SUPPLIED BY THE COMPANY AND SUBSIDIARY Any information supplied by or on behalf of the Company or on behalf of the Subsidiary (or by any officer, employee or agent of any of them) to the Vendors or their advisers in connection with the Warranties, the Fundamental Representations or the Taxation Undertaking or the information disclosed in the Disclosure Letter shall not constitute a warranty, representation or guarantee as to the accuracy of such information in favour of the Vendors and the Vendors hereby undertake to Bluestone and to Europe to waive any and all claims which they might otherwise have against the Company or the Subsidiary or against any officer, employee or agent of any of them in respect of such claims but so that this shall not preclude any Vendor from claiming against any other Vendor under any right of contribution or indemnity to which he may be entitled. 5.5 NO COUNTERCLAIM OR SET-OFF Each of the Vendors hereby irrevocably and unconditionally undertakes not to exercise any right of counterclaim or set-off or any other claim or right of recovery against the Company or the Subsidiary or any of their respective officers, employees, agents or advisers in relation to any claim which may be made in respect of this Agreement, the Fundamental Representations, the Warranties, the Knowledge Warranty or the Taxation Undertaking. Nothing in this clause 5.5 shall prevent any Vendor from claiming against any other Vendor for a contribution in respect of any liability under a Claim as a result of the Vendors' joint and several liability under clause 5.1. 5.6 SEPARATE AND INDEPENDENT WARRANTIES AND FUNDAMENTAL REPRESENTATIONS Each of the Fundamental Representations and the Warranties shall be separate and independent and save as expressly otherwise provided in this Agreement shall not be limited by reference to any other such Warranty or Fundamental Representation or by anything in this Agreement or the Taxation Undertaking. 12 5.7 RELIANCE The Vendors acknowledge that Bluestone has entered into this Agreement upon the basis of and in reliance upon the Warranties, the Fundamental Representations, the Taxation Undertaking and the Disclosure Letter (and the documents referred to therein) but on no other information provided by the Vendors. 5.8 BUSINESS OUTSIDE THE UK Each of the Vendors agrees that the Fundamental Representations and the Warranties shall (MUTATIS MUTANDIS) apply to any business of the Company carried on outside the United Kingdom and for the purpose of construction the references to any statutory provision enacted, or accounting principles applying, in the United Kingdom shall include references to any corresponding provision in the local legislation and (where relevant) to generally accepted accounting principles, and the references to any governmental or administrative authority or agency shall include references to the equivalent local governmental or administrative authority or agency. 5.9 RECOVERY 5.9.1 Without restricting the rights of Bluestone or Europe or the ability of Bluestone or Europe to claim damages on any basis available to it, if after Completion it shall be agreed or determined that any of the Fundamental Representations or the Warranties was, when read in conjunction with the information disclosed in the Disclosure Letter, not true and accurate or was misleading on the date when given or when repeated when read in conjunction with the information disclosed in the Disclosure Letter, then the Warrantors shall, in such event, pay to Bluestone and/or Europe on demand (at Bluestone's and Europe's option): (a) the cash amount sufficient to compensate Bluestone and Europe against all loss suffered by it in consequence of the Fundamental Representations or the Warranties not being true and accurate or being misleading taking into account, in particular, the resulting diminution as at Completion in the value of the Sale Shares; or (b) by way of indemnity the cash amount necessary to put the Company and/or Bluestone and/or Europe, as the case may be, into the position which would have existed if the Fundamental Representations or the Warranties, when read in conjunction with the information disclosed in accordance with clause 5.2 in the Disclosure Letter had been true and accurate and not misleading or had the matter or thing which occurred not occurred; provided that any amount so payable shall be increased so as to ensure that the net amount received by Bluestone and Europe shall after Taxation be equal to that which would have been received had the payment and any increased payment not been subject to Taxation. 5.9.2 Without restricting the rights of Bluestone and/or Europe or the ability of Bluestone and/or Europe to claim damages on any basis available to it, if after Completion it shall be agreed or determined that any of the Title Warranties or the Knowledge Warranty given by one of the Non-Participating Warrantors was not true and accurate or was misleading on the date when given or when repeated, then that Non-Participating Warrantor shall, in such event, pay to Bluestone and Europe on demand (at Bluestone's and Europe's option): (a) the cash amount sufficient to compensate Bluestone and Europe against all loss suffered by it in consequence of the Title Warranties or the Knowledge Warranty not being true and accurate or being misleading taking into account, in particular, the resulting diminution as at Completion in the value of the Sale Shares; or (b) by way of indemnity the cash amount necessary to put the Company and/or the Subsidiary and/or Bluestone and/or Europe, as the case may be, into the position which would have existed if the Title Warranties or the Knowledge Warranty had been true and accurate and not misleading or had the matter or thing which occurred not occurred; 13 provided that any amount so payable shall be increased so as to ensure that the net amount received by Bluestone and Europe shall after Taxation be equal to that which would have been received had the payment and any increased payment not been subject to Taxation. 5.10 LIMITATIONS ON VENDORS' LIABILITY 5.10.1 No liability shall attach to the Vendors in respect of claims under the Fundamental Representations, Warranties, the Knowledge Warranty or the Taxation Undertaking unless the aggregate amount of the liability of the Vendors in respect of all such claims shall exceed L52,880, in which event the Vendors shall be liable for the whole of such liability and not merely the excess; Provided that such limitation shall not apply to: (a) any claim under the Fundamental Representations, the Warranties, the Knowledge Warranty or the Taxation Undertaking which arises as a result of the fraud or wilful neglect or wilful default of any of the Vendors; or (b) any claim under the Fundamental Representations, the Warranties, the Knowledge Warranty or the Taxation Undertaking which arises out of a matter of which any of the Vendors were actually aware at the date hereof and which was not disclosed in the Disclosure Letter. 5.10.2 The aggregate liability of the Vendors in respect of all claims under the Warranties shall not exceed 50 per cent of the Financial Cap. 5.10.3 The aggregate liability of the Vendors in respect of all claims under the Fundamental Representations or the Taxation Undertaking shall not exceed the Financial Cap. 5.10.4 Without prejudice to the joint and several liability of each of the Warrantors hereunder the individual liability of each of the Vendors in respect of all Determined Claims shall not exceed the aggregate of the Deemed Value (as defined below) of the Bluestone Stock issued to him (if any) and the cash Consideration payable to him pursuant to this Agreement. 5.10.5 Claims against the Vendors under the Warranties shall be wholly barred and unenforceable unless written particulars thereof (giving all reasonably available details of the specific matter or claim in respect of which such claim is made) shall have been given to each of the Vendors within a period of one year from the Completion Date; Provided that such time limits shall not apply where the claim in question arises as a result of the fraud or wilful neglect or wilful default of the Vendors, the Company or the Subsidiary or any of them. 5.10.6 Claims against the Vendors under the Knowledge Warranty, the Taxation Undertaking or the statements set out in Parts 3 and 4 of Schedule 5 shall be wholly barred and unenforceable unless written particulars thereof (giving all reasonably available details of the specific matter or claim in respect of which such claim is made) shall have been given to each of the Vendors within a period of four years from the Completion Date; Provided that such time limits shall not apply where the claim in question arises as a result of the fraud or wilful neglect or wilful default of the Vendors, the Company or the Subsidiary or any of them. 5.10.7 Claims against the Vendors in respect of the Title Warranties shall be wholly barred and unenforceable unless written particulars thereof (giving all reasonably available details of the specific matter or claim in respect of which such claim is made) shall have been given to each of the Vendors within a period of six years from the Completion Date; Provided that such time limits shall not apply where the claim in question arises as a result of the fraud or wilful neglect or wilful default of the Vendors, the Company or the Subsidiary or any of them. 5.10.8 In the event that the Vendors pay to Bluestone and/or Europe any amount in respect of a breach of any of the Warranties, the Knowledge Warranty or the Fundamental Representations and Bluestone and/or Europe specifically recovers from a third party a sum in respect of such breach, Bluestone and/or Europe shall as soon as is reasonably practicable inform the Vendors in writing of such recovery and shall repay to such Vendors in proportion to the amount each Vendor paid to Bluestone and/or Europe in respect of such breach the net amount so recovered (less the actual cost of recovery) provided 14 nevertheless that the amount so repaid shall not exceed the amount previously paid to Bluestone and/or Europe by the Vendors in respect of such breach. 5.10.9 Any Claim shall (if it has not previously been settled or withdrawn) be deemed to have been withdrawn on the date which is twelve months after it has been notified unless prior to that date a notice of reference to arbitration or notice of the issue of court proceedings shall have been served upon the Vendors. 5.10.10 The Vendors shall not be liable to Bluestone and/or Europe under the Warranties, the Knowledge Warranty, the Fundamental Representations or under the Taxation Undertaking to the extent that the Claim arises or is increased as the result of the passing of any legislation (or the making of any subordinate legislation) with retrospective effect which is announced after the Completion Date. 5.10.11 If any claim is made against the Group or Bluestone and/or Europe by a third party in respect of which the Vendors shall be liable to Bluestone and/or Europe for a breach of any of the Warranties, the Knowledge Warranty or the Fundamental Representations Bluestone and/or Europe shall:- (a) not knowingly make any admission of liability, agreement or compromise with any person, body or authority in relation thereto without the prior consent of the Vendors (such consent not to be unreasonably withheld or delayed); and (b) give the Vendors and their professional advisers reasonable confidential access to any documents and records of the Group to enable the Vendors and their professional advisors to examine such documents and records and to take copies thereof at their own expense; and (c) take such action as the Vendors shall reasonably require to avoid dispute, resist appeal, compromise or defend the matter which gives rise to any claim provided that the Vendor shall have secured Bluestone and/or Europe to its reasonable satisfaction and fully indemnified it as to all liabilities, costs, damages and expenses which it may reasonably incur by reason of such action. If the Vendors shall not request Bluestone and/or Europe to take any such action, or shall fail to indemnify and secure the liabilities, costs, damages and expenses as aforesaid within 14 days after written notice shall have been given to the Vendors then Bluestone and/or Europe shall be free to pay or settle the claim on such terms as it shall, in its absolute discretion, think fit. 5.10.12 In the event that Bluestone and/or Europe is entitled to claim under more than one of the Warranties, the Knowledge Warranty, Fundamental Representations or under the Taxation Undertaking in respect of the same subject matter, Bluestone and/or Europe may choose to claim under more than one of the Warranties, the Knowledge Warranty, Fundamental Representations or under the Taxation Undertaking but shall not be entitled to recover more than once in respect of the same loss. 5.10.13 Bluestone shall not, following Completion, be entitled to treat the Vendors as having repudiated this Agreement or be entitled to rescind this Agreement. 5.11 SATISFACTION OF CLAIMS 5.11.1 Bluestone and Europe shall be entitled, without prejudice to any other rights or remedies available to them, to satisfy the amount of any outstanding Determined Claims by the disposal of or cancellation of any or all of the Escrow Stock and/or by set off against the Escrow Cash and (to the extent not satisfied therefrom) to set-off against the amount of the Deferred Consideration any amounts due to it from the Vendors, or any of them, the amount of any outstanding Determined Claims. 5.11.2 Bluestone and Europe shall, subject to clauses 5.11.3 and 5.11.4 be entitled without prejudice to any other rights or remedies available to it (including the right of set-off set out in clause 5.11.1) to withhold payment of the Escrow Cash and Deferred Consideration to the extent of any claims which are outstanding in respect of any breach of the Fundamental Representations, the Warranties, the Knowledge Warranty or the Taxation Undertaking provided that the opinion of Counsel has been obtained indicating that on the basis of the information known to Bluestone and/or Europe made available to such Counsel, 15 Bluestone and/or Europe would have a reasonable prospect of making a valid claim under the Fundamental Representations, the Warranties, the Knowledge Warranty or the Taxation Undertaking until such claims become Determined Claims or the Vendors cease to have liability in respect of such claims pursuant to the terms of this Agreement or the Taxation Undertaking. 5.11.3 In the event Bluestone intends to withhold payment of the Escrow Cash and/or Deferred Consideration, it shall forthwith notify the Vendors accordingly in writing, providing all reasonable details of its reasons for such withholding and, in such event: (a) the Vendors shall be entitled to refer the matter in question to a member of Counsel agreed between the Vendors and Bluestone (failing such agreement as appointed by the President of the Bar Association from time to time) requesting such Counsel to provide within 40 Business Days his opinion as to whether Bluestone and/or Europe has a reasonable prospect of making a valid claim under the Fundamental Representations, the Warranties, the Knowledge Warranty or the Taxation Undertaking; (b) Counsel shall be entitled to consult with the Vendors' Solicitors and Bluestone's Solicitors and/or any other party which he deems appropriate for the purposes of giving his opinion; (c) in giving his opinion, Counsel shall act as expert and not arbitrator and any costs or expenses incurred in connection with the obtaining of Counsel's opinion shall be borne by: (i) in the event the matter of the opinion becomes a Determined Claim, the Vendors; or (ii) otherwise, by Bluestone or as Counsel may otherwise direct; and (d) each of the Vendors and Bluestone hereby agree and undertake to provide or procure as provided, access to all books, records, accounts, information and personnel as Counsel may deem necessary for the purposes of giving his opinion. 5.11.4 Any monies which Bluestone and/or Europe intends to withhold in accordance with clause 5.11.2 shall be deposited in an interest bearing deposit account held in the joint names of Bluestone's Solicitors and the Vendors' Solicitors; such amount to be released: (a) to the extent the matter the subject of Counsel's opinion does not become a Determined Claim within 2 years of the date hereof, to the Vendors; and (b) to the extent the matter the subject of Counsel's opinion becomes a Determined Claim within 2 years of the date hereof, to Bluestone in which event the Vendors hereby waive any entitlement they may have to receive the relevant part of the Deferred Consideration. Interest on any amounts held in such joint account shall follow, and be released, with the principal monies to which such interest relates. 5.12 ESCROW STOCK The Vendors agree that Bluestone shall be entitled to retain the certificates of the Escrow Stock and shall, in its absolute discretion, and without prejudice to any other rights or remedies available to it, be authorised and entitled to dispose of or cancel such stock in or towards satisfaction of any Determined Claim. For the purposes of calculating the number of shares of Escrow Stock to be disposed or cancelled the Escrow Stock shall have a fixed deemed value of L16.98 per share of Escrow Stock (the "DEEMED VALUE") and the Vendors shall neither be obliged to make up any shortfall nor have any right to receive any excess in the actual proceeds of the disposal of the Escrow Stock received by Bluestone. To the extent that no Claim shall have been made on or before the first anniversary of Completion, Bluestone undertakes to deliver to the Vendors certificates for 50 per cent of such Escrow Stock on such date. In the event that no Claims have been made on or before the second anniversary of Completion, Bluestone undertakes to deliver to the Vendors certificates for the balance of the Escrow Stock on such date. In the event that any Claims are made prior to such period the Escrow Stock, to the extent not already released and only to the extent of such Claim, shall be 16 retained pending resolution of such Claims and the provision of clauses 5.11.2, 5.11.3 and 5.11.4 shall apply to such amounts retained. 5.13 ESCROW CASH The Vendors agree that Bluestone shall be entitled to retain the Escrow Cash and shall, in its absolute discretion, and without prejudice to any other rights or remedies available to it, be entitled to set off against the Escrow Cash (to the extent possible) the amount of any Determined Claim. To the extent that no Claim has been made on or before the first anniversary of Completion, Bluestone undertakes to remit to the Vendors' Solicitors by electronic transfer within 3 business days thereof to the account details set out in this Agreement (whose receipt shall be a sufficient discharge to Bluestone which shall not be concerned with the distribution thereof to and among the Vendors or be answerable for the loss or misapplication of such sum) 50% of the Escrow Cash. In the event that no Claim has been made on or before the second anniversary of Completion, Bluestone undertakes to remit to the Vendors' Solicitors by electronic transfer within 3 business days thereof to the account details set out in this Agreement (whose receipt shall be a sufficient discharge to Bluestone which shall not be concerned with the distribution thereof to and among the Vendors or be answerable for the loss or misapplication of such sum) the balance of the Escrow Cash. In the event that any Claims are made prior to such period the Escrow Cash, to the extent not already released and only to the extent of such Claim, shall be retained pending resolution of such Claims and the provision of clauses 5.11.2, 5.11.3 and 5.11.4 shall apply to such amounts retained. Any payments made by Bluestone to the Vendors pursuant to this clause 5.13 shall be paid together with a further sum calculated as the amount (less any withholding taxes or other lawfully required deductions) which could have been earned on such payment if it had been held on deposit for the period commencing on the Completion Date and terminating on the date of payment (both dates exclusive) on an account attracting interest at a rate equivalent to the rate achieved by Bluestone for deposits of a comparable amount. 5.14 SETTLEMENT OF DETERMINED CLAIMS In the event of, and to the extent that, Determined Claims have not being satisfied pursuant to clauses 5.12 and 5.13 the Vendors shall at their discretion settle any Determined Claims by either the surrender or transfer of the number of shares of Bluestone Stock calculated by reference to the Deemed Value or by a payment in cash; but if any Determined Claim shall remain outstanding for a period in excess of 30 days and the relevant Vendor holds Bluestone Stock, then Bluestone shall be entitled, but not obliged, upon written notice to the relevant Vendor, to cancel such number of shares of Bluestone Stock as, when valued at the Deemed Value, equal the value of the Determined Claim outstanding. 6 REGULATION 'S' RESTRICTIONS ON THE BLUESTONE STOCK 6.1 Each of the Vendors acknowledges that the Bluestone Stock has not been registered under the Securities Act and may not be offered or sold in the U.S. or to U.S. persons unless the Bluestone Stock is registered under the Securities Act or an exemption from the registration requirements is available. Furthermore, hedging transactions involving the Bluestone Stock may not be conducted unless in compliance with the Securities Act. Bluestone must refuse to register any attempted transfer of the Bluestone Stock not made in accordance with the provisions of Regulation S or not made pursuant to registration under the Securities Act or an available exemption therefrom. 6.2 Each of the Vendors represents to Bluestone that he is not a U.S. person pursuant to Rule 902(k) of Regulation S under the Securities Act. For this purpose, a U.S. person means: 6.2.1 any natural person resident in the U.S.; 6.2.2 any partnership or corporation organised or incorporated under U.S. law; 6.2.3 any estate of which any executor or administrator is a U.S. person; 6.2.4 any trust of which any trustee is a U.S. person; 17 6.2.5 any non-discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a U.S. person; 6.2.6 any discretionary account or similar (other than an estate or trust) held by a dealer or other fiduciary organised, incorporated, or (if an individual) resident in the U.S.; and 6.2.7 any partnership or corporation if: (a) organised or incorporated under the laws of any foreign jurisdiction; and (b) formed by a U.S. person principally for the purpose of investing in securities not registered under the Securities Act, unless it is organised or incorporated, and owned, by accredited investors (as defined in regulation D under the Securities Act) who are not natural persons, estates or trusts. 6.3 Each of the Vendors represents and warrants to Bluestone that (i) any offer and sales of the Bluestone Stock will be made in accordance with Regulation S, pursuant to registration of the securities under the Securities Act, or pursuant to another available exemption from the registration requirements of the Securities Act, and (ii) it will not engage in hedging transactions with regard to the Bluestone Stock prior to the expiration of one year from the Completion Date. 7 RESTRICTION AS TO DISPOSAL OF BLUESTONE STOCK Each of the Vendors irrevocably undertakes with Bluestone that he will not for the Relevant Period transfer, charge or otherwise sell, transfer or otherwise dispose of any legal or beneficial interest in any Relevant Bluestone Stock (as hereinafter defined) unless he receives the prior written consent of Bluestone; Provided that the foregoing restrictions shall not apply to:- 7.1 any disposal made in acceptance of a general offer for the whole of the Common Stock that has been recommended by the board of directors of Bluestone or has become unconditional in all respects; or 7.2 a sale by any Vendor at any time after the first anniversary of the date of issue of any of the Bluestone Stock to raise monies to satisfy any claim under the Fundamental Representations, the Warranties or the Taxation Undertaking; For the purpose of clause 7.1 "RELEVANT BLUESTONE STOCK" means: 7.2.1.1 in respect of the Initial Bluestone Stock (i) for the purposes of the 12 months immediately following the Completion Date the number of Initial Bluestone Stock set out against his name in Column (4) of Schedule 1; and (ii) for the purpose of the 12 months immediately following the first anniversary of the Completion Date, 50 per cent of the number of Initial Bluestone Stock set against his name in Column (4) Schedule 1; and 7.2.1.2 in respect of the Deferred Bluestone Stock (i) for the purposes of the 12 months immediately following the date of issuance thereof, the number of Deferred Bluestone Stock set out against his name in Column (6) of Schedule 1; and (ii) for the purposes of the 7 months immediately following the first anniversary of the date of issuance thereof, 50 per cent of the number of Deferred Bluestone Stock set against his name in Column (6) of Schedule 1; 7.2.1.3 in respect of the Restricted Bluestone Stock, for the purposes of the 12 months immediately following the date of issuance thereof, the entirety of the Restricted Bluestone Stock; and in each case together with any additional shares of Common Stock allotted or issued to the Vendor by virtue of the holding of those shares of Common Stock or any of them other than Common Stock issued to them pursuant to a subsequent issue by way of rights or like issue (but not bonus issue) where such stock is paid for by the application of subscription monies; and 18 "RELEVANT PERIOD" means: (a) in respect of Initial Bluestone Stock, the period commencing on the Completion Date and ending 24 months from the Completion Date; (b) in respect of each share of the Deferred Bluestone Stock, the period commencing on the date of issuance of such stock and ending 19 months from such date; and (c) in respect of each share of the Restricted Bluestone Stock, the period commencing on the date of issuance of such stock and ending 12 months from such date. 8 PROTECTION OF GOODWILL 8.1 UNDERTAKINGS As further consideration for Bluestone agreeing to purchase the Sale Shares and with the intent of securing to Bluestone the full benefit and value of the goodwill and connections of the Company and the Subsidiary and as an essential part of the agreement for the purchase and sale of the Sale Shares, each of the Warrantors severally undertakes to Bluestone that he will not except as directors or employees of the Company or of the Subsidiary or except with the prior written consent of Bluestone: 8.1.1 during the Restricted Period: (a) so as to compete with the Business solicit business from or canvass any customer or prospective customer in respect of Protected Business; (b) so as to compete with the Business accept orders from, act for or have any business dealings with, any customer or prospective customer in respect of Protected Business; (c) so as to compete with the Business, be employed or engaged or at all interested in a person which is involved in any Protected Business if that business is or is about to be in competition with the Business. Nothing contained in this clause 8.1.1 shall preclude any Warrantor from holding any shares or loan capital (not exceeding 3% of the shares or loan capital of the class concerned then in issue) in any company competing with the Business whose shares are listed or dealt in on a recognised investment exchange as defined in the Financial Services Act 1986); (d) solicit or induce or endeavour to solicit or induce a Critical Employee to cease working for or providing services to the Company and/or the Subsidiary, whether or not any such person would thereby commit a breach of contract; (e) employ or otherwise engage any Critical Employee in any Protected Business; (f) solicit or induce or endeavour to solicit or induce any Supplier to cease to deal with the Company and/or the Subsidiary and shall not interfere in any way with any relationship between a Supplier and the Company and/or the Subsidiary; and 8.1.2 following the Completion Date:- (a) directly or indirectly, divulge or make use of any Confidential Information or Know How relating or belonging to the Company and/or any of the Subsidiary, unless ordered to do so by a court of competent jurisdiction; and (b) represent himself as being in any way connected with the Company and/or the Subsidiary nor in any way make use of any corporate, business or product name which is identical or similar to or likely to be confused with the corporate name or any business or product name used by the Company and/or the Subsidiary at Completion or which might suggest a connection with the Company and/or the Subsidiary. 19 8.2 INDEPENDENCE OF UNDERTAKINGS Each undertaking contained in clause 8.1 shall be read and construed independently of the other undertakings in clause 8.1 as an entirely separable and severable undertaking. 8.3 SEVERABILITY OF UNDERTAKINGS 8.3.1 It is agreed that, whilst the restrictions set out in clause 8.1 are considered by the parties to be fair and reasonable, having regard in particular to first, the necessity to protect the goodwill, secrets and customer connections of the Business and secondly, to the amount of the consideration payable by Bluestone pursuant to this Agreement, if it should be found by any competent court that any of such restrictions is void or unenforceable for any reason and if by altering or deleting part of the wording or substituting shorter periods of time or more restricted ranges of activities it would not be void or unenforceable then there shall be made such alteration or deletion or be substituted such no less extensive periods and/or limit and/or activities as shall render the relevant restriction valid and enforceable. 8.3.2 The Warrantors hereby jointly and severally agree at the request and at the cost of Bluestone to enter into any further deeds and/or documents as may be necessary to give effect to the said restrictions (or any of them) with such modifications as Bluestone may deem reasonably necessary so to make them valid and effective. 9 ANNOUNCEMENTS 9.1 RESTRICTIONS ON ANNOUNCEMENTS Subject to clause 9.2, no party to this Agreement shall issue any press release or other public document containing, or make any public statement or otherwise disclose to any person who is not a party, information which relates to or is connected with or arises out of this Agreement or the matters contained in it, without the prior written approval of the other parties hereto as to its content and the manner, timing and extent of its publication. The parties shall consult together upon the form of any such press release, document or statement and the other party shall promptly provide such information and comment as the party issuing such press release, document or statement may from time to time reasonably request. 9.2 EXCEPTIONS TO RESTRICTIONS The provisions of clause 9.1 shall not apply to disclosure of matters required to be made: 9.2.1 by virtue of the regulations of NASDAQ; 9.2.2 by any court or governmental or administrative authority competent to require the same; or 9.2.3 by any applicable law or regulation. 9.3 TIME LIMIT The restrictions contained in this clause 9 shall apply after Completion without limit in time. 10 ASSIGNMENT 10.1 PERMITTED ASSIGNMENT Bluestone and Europe shall be entitled, without the consent of or notice to any other party hereto, to assign or transfer in whole or in part the benefit of this Agreement and the Taxation Undertaking or any right of Bluestone or Europe under this Agreement and the Taxation Undertaking to: 10.1.1 any transferee of the share capital of the Company or the Subsidiary; 20 10.1.2 any transferee of the business of the Company or the Subsidiary; 10.1.3 any company or corporate entity with which Bluestone and/or Europe shall merge; and such transferee shall be entitled to enforce the same against the Vendors or any of them as if it were named in this Agreement and the Taxation Undertaking as Bluestone and/or Europe. 10.2 BAR Save as provided in clause 10.1, neither party shall be entitled without the prior written consent of the others to assign or transfer either the benefit or burden of this Agreement or any right and/or obligation under this Agreement. 11 FURTHER ASSURANCE Each of the Vendors jointly and severally undertake to Bluestone that he shall at the cost of the Vendors do, execute and perform all such further deeds, documents, assurances, acts and things as Bluestone may reasonably require to carry the provisions of this Agreement into full force and effect and for vesting in Bluestone the Sale Shares and the full benefit of this Agreement. 12 NO PARTNERSHIP OR AGENCY Nothing in this Agreement is intended to or shall operate to create a partnership or joint venture of any kind between the parties or any of them, or to authorise any party to act as agent for any other, and no party shall have authority to act in the name or on behalf of or otherwise to bind any other in any way (including but not limited to the making of any representation or warranty, the assumption of any obligation or liability and the exercise of any right or power). 13 SEVERANCE 13.1 If any provision of this Agreement is or becomes illegal, invalid or unenforceable in any jurisdiction, that shall not affect: 13.1.1 the legality, validity or enforceability in that jurisdiction of any other provision of this Agreement; or 13.1.2 the legality, validity or enforceability in any other jurisdiction of that or any other provision of this Agreement. 13.2 If any provision of this Agreement is or becomes illegal, invalid or unenforceable in any jurisdiction but would be legal, valid and enforceable if some part of the provision were deleted or modified, the provision in question shall apply in that jurisdiction with such modification(s) as may be necessary to make it valid. 13.3 The parties agree, in the circumstances referred to in clause 13.1 and if clause 13.2 does not apply, to attempt to substitute for any such illegal, invalid or unenforceable provision a legal, valid and enforceable provision which achieves to the greatest extent possible the same effect as would have been achieved by the illegal, invalid or unenforceable provision. The obligations of the parties under any invalid or unenforceable provision of this Agreement shall be suspended while an attempt at such substitution is made. 14 AMENDMENTS No amendment or variation of this Agreement or any of the documents referred to in it shall be effective unless contained in a written instrument signed by or on behalf of each of the parties. Such instrument may consist of several instruments in the like form each executed by or on behalf of one or more of the parties. References herein to documents "IN THE AGREED FORM" shall, where appropriate, be construed as references to such documents as so amended. 21 15 SURVIVAL OF OBLIGATIONS 15.1 Notwithstanding Completion each and every right and obligation of Bluestone, Europe and the Vendors under this Agreement shall, except in so far as fully performed at Completion, continue in full force and effect. 15.2 Any provision of this Agreement which is expressed or intended to have effect on, or to continue in force after, the termination of this Agreement shall have such effect, or, as the case may be, continue in force, after such termination. 16 TIME LIMITS Where any obligation under this Agreement is expressed to require performance within a specified time limit that obligation shall continue to be binding and enforceable after the expiry of that time limit if the party so obliged fails to perform that obligation within that time limit (but without prejudice to all rights and remedies available against such party by reason of such party's failure to perform that obligation within the time limit). 17 CONSENTS Any consent given by a party under any provision of this Agreement shall be effective only in the instance and for the purpose for which it is given and the giving of any such consent in respect of any act or thing shall not operate as a waiver of any requirement on the party to whom the consent is given not to do that or any other act or thing at any time in the future without such consent. 18 POWER OF ATTORNEY 18.1 Each of the Vendors by their execution of this Agreement appoints Bluestone to be his Attorney from and after Completion granting to Bluestone full power on his behalf to exercise all voting and other related rights attaching to the Sale Shares sold by that Vendor including in particular, but without prejudice to the foregoing generality, power: 18.1.1 to execute a form of proxy in favour of such person or persons as Bluestone may think fit to attend and vote as that Vendor's proxy at any general meeting of the members, or separate class meeting of any class of members, of the Company in respect of such Sale Shares in such manner as Bluestone may decide; 18.1.2 to consent to the convening and holding of any such meeting and the passing of the resolutions to be submitted at any such meeting on short notice; 18.1.3 to settle the terms of such resolutions; and 18.1.4 generally to procure that Bluestone or its nominees are duly registered as the holders of all the Sale Shares. 18.2 Each Vendor hereby ratifies and confirms and hereby undertakes to ratify and confirm all and whatsoever Bluestone shall lawfully do or cause to be done in pursuance of the power of attorney granted by clause 18.1. 18.3 Each Vendor hereby declares that the power of attorney granted by clause 18.1 shall be irrevocable until the later of the date of registration of the transfer of the Sale Shares sold by the relevant Vendor in the books of the Company and the expiry of the period of three months from the Completion Date. 19 WAIVERS AND REMEDIES 19.1 The rights of Bluestone and Europe in respect of a breach of any provision of this Agreement shall not be affected by Completion nor by the giving of any time or other indulgence by Bluestone and Europe to any person nor by any other cause whatsoever except a specific waiver or release by Bluestone and Europe in writing and any such waiver or release shall not prejudice or affect any remaining rights of Bluestone and Europe. 22 The rights of each party under this Agreement: 19.1.1 may be exercised as often as necessary; 19.1.2 are cumulative and not exclusive of rights under the general law; and 19.1.3 may be waived only in writing and specifically. Any delay in exercising or failure to exercise any right shall not be a waiver of such right. 20 SUCCESSORS 20.1 This Agreement shall be binding on the Vendors and their respective executors, personal representatives and successors whomsoever and, unless the context otherwise requires, references to the Vendors shall include references to such executors, personal representatives and successors. 20.2 This Agreement shall be binding on, and shall enure for the benefit, of any person to whom any right and/or obligation is validly assigned or transferred pursuant to clause 10. 21 COSTS AND STAMP DUTY 21.1 PAYMENT OF COSTS, LOSSES AND EXPENSES Save as otherwise stated in this Agreement, each party shall pay its own costs and expenses in relation to the negotiation, preparation, execution and carrying into effect of this Agreement and the other agreements forming part of the transaction. 21.2 COMPANY AND SUBSIDIARY TO PAY NO COSTS For the avoidance of doubt, neither the Company nor the Subsidiary shall pay any legal or other professional charges and expenses in connection with any investigation of the affairs of the Group or the negotiation, preparation, execution and carrying into effect of this Agreement. 21.3 STAMP DUTY Bluestone shall be responsible for payment of all stamp duty in respect of this Agreement and the carrying into effect thereof. 22 CONFIDENTIALITY 22.1 PROHIBITION ON DISCLOSURE Each of the Vendors undertakes to Bluestone that he will and will procure that his Associates and any officer or employee of that Vendor will at all times hereafter preserve the confidentiality of, and not directly or indirectly reveal, report, publish, disclose or transfer or use for his own or any other purposes Confidential Information except:- 22.1.1 in the circumstances set out in clause 22.2 below; 22.1.2 to the extent otherwise expressly permitted by this Agreement; or 22.1.3 with the prior consent in writing of the party to whose affairs such Confidential Information relates; and will on demand made by Bluestone at any time deliver up to Bluestone, or destroy or erase, all notes and records on whatever media (including copies) containing Confidential Information, in each case being in that Vendor's custody, control or possession Provided that nothing in this clause 22 will require any of the Vendors to deliver up, destroy or erase anything which it or he is required to retain by law, any court or competent jurisdiction or any regulatory authority regulating the business of the Vendor in question. 23 22.2 PERMITTED DISCLOSURES The circumstances referred to in clause 22.1.1 above are:- 22.2.1 where the Confidential Information, before it is furnished to any of the Vendors, is in the public domain; 22.2.2 where the Confidential Information, after it is furnished to any of the Vendors, enters the public domain otherwise than as a result of (i) a breach by any of the Vendors of its obligations in this clause 22 or (ii) a breach by the person who disclosed that Confidential Information of a confidentiality obligation and any of the Vendors is aware of such breach; and 22.2.3 if and to the extent the Vendors make disclosure of the Confidential Information to any person: (i) in compliance with any requirement of law; (ii) in response to a requirement of the Stock Exchange or the Panel on Take-overs and Mergers or any applicable regulatory authority to which the Vendors are subject where such requirement has the force of law; or (iii) in order to obtain tax or other clearances or consents from the Inland Revenue or other relevant taxing or regulatory authorities. Provided that any such information disclosable pursuant to sub-clauses (i), (ii) or (iii) of clause 22.2.3 shall be disclosed only to the extent required by law and only after reasonable prior consultation with Bluestone. 22.3 The restrictions contained in this clause 22 shall continue to apply after Completion without limit in time. 23 NOTICES 23.1 Any notice or other communication to be given under, or in connection with the matters contemplated by, this Agreement shall be in writing and signed by or on behalf of the party giving it and shall be served by delivering it personally or sending it by pre-paid recorded delivery or registered post or by facsimile to the address and for the attention of the relevant party set out in clause 23.2 (or as otherwise notified by that party hereunder). Any such notice shall be deemed to have been received:- 23.1.1 if delivered personally, at the time of delivery; 23.1.2 in the case of pre-paid recorded delivery or registered post, 48 hours from the date of posting if the addressee and the addressor are both in the same country or 5 days if either of them are overseas in relation to the other; and 23.1.3 in the case of fax, at the time of receipt by the sending party of a successful fax transmission notice generated by the transmitting fax machine; Provided that if deemed receipt occurs before 9am on a business day the notice shall be deemed to have been received at 9am on that day and if deemed receipt occurs after 5pm on a business day, or on a day which is not a business day, the notice shall be deemed to have been received at 9am on the next business day. For the purpose of this clause, "BUSINESS DAY" means any day which is not a Saturday, a Sunday or a public holiday in the place at or to which the notice is left or sent. 23.2 The addresses and facsimile numbers of the parties for the purposes of clause 23.1 are: VENDORS as set out in Schedule 1 BLUESTONE AND EUROPE Address: 300 Stevens Drive, Philadelphia PA 19113-1597 USA For the attention of: Paul T Porrini Fax number: 001 610 915 5010
24 or such other address or facsimile number in the United Kingdom as may be notified in writing from time to time by the relevant party to the other parties. 23.3 NO ELECTRONIC SERVICE For the avoidance of doubt notice given under this Agreement shall not be validly served if sent by e-mail. 24 UK COMPETITION The parties shall, at the request of any one of them, jointly notify the Director General of Fair Trading of this Agreement or of any agreement or arrangement of which this Agreement forms part under the Competition Act 1998 and apply to him for guidance and/or a decision and/or request the grant of an exemption in respect of it and the parties acting in good faith shall co-operate fully and use all commercially reasonable endeavours in preparing any such notification and in making any necessary submission. The parties shall use all commercially reasonable endeavours in maintaining and/or renewing and/or defending any such guidance, decision or exemption. Bluestone shall bear all reasonable and proper costs in connection with the foregoing unless otherwise agreed. 25 COUNTERPARTS 25.1 EXECUTION IN COUNTERPARTS This Agreement may be executed in any number of counterparts and by the parties on different counterparts, but shall not be effective until each party has executed at least one counterpart. 25.2 ONE AGREEMENT Each counterpart shall constitute an original of this Agreement but all the counterparts shall together constitute one and the same agreement. 26 GOVERNING LAW AND JURISDICTION 26.1 GOVERNING LAW This Agreement shall be governed by and construed in accordance with the law of England. 26.2 JURISDICTION The parties hereto submit to the non-exclusive jurisdiction of the Courts of England as regards any claim, dispute or matter arising out of or relating to this Agreement and its implementation or effect. 27 SPECIFIC INDEMNITY Without restricting the rights of Bluestone or Europe to claim damages on any basis available to either of them in the event of any breach or non-fulfilment of any of Fundamental Representations and/or the Warranties, the Warrantors undertake with each of Bluestone and Europe (each contracting for itself and as trustee for the Company and the Subsidiary) to indemnify and keep indemnified Bluestone, Europe, the Company and the Subsidiary on demand from and against any and all losses, claims, damages, costs, charges, expenses, liabilities, demands, proceedings and actions (together the "LIABILITIES") which Bluestone, Europe the Company or the Subsidiary may sustain or incur or which may be brought or established against any of them by any person which in any case arises out of or in relation to or by reason of the provision by the Company to X-idra Systems GmbH ("X-IDRA") of a copy of the JTS Arjuna software pursuant to a verbal development license or otherwise and the failure of the Company to enter into a formal written development license establishing with X-idra the terms of such license and in particular protecting the Company's full and unencumbered right, title and interest in the Intellectual Property in the JTS Arjuna software and any taxation payable by Bluestone, Europe, the Company or the Subsidiary on or in respect of any payment under this clause 27 PROVIDED THAT no claim shall be made under this clause 27 unless and until the Liabilities shall 25 have exceeded L2,000 (in which case only the excess over L2,000 shall be payable by the Warrantors). EXECUTED as a deed in three originals the day and year first before written. EXECUTED AND DELIVERED AS A DEED by /s/ Stephen Caughey ----------------------------------------- EXECUTED AND DELIVERED AS A DEED by /s/ David Bradley Ingham ----------------------------------------- EXECUTED AND DELIVERED AS A DEED by /s/ Stuart Mark Wheater ----------------------------------------- EXECUTED AND DELIVERED AS A DEED by /s/ Santosh Kumar Shrivastava ----------------------------------------- EXECUTED AND DELIVERED AS A DEED by /s/ Alastair James Green ----------------------------------------- EXECUTED AND DELIVERED AS A DEED by /s/ Grainine Marie Walshe ----------------------------------------- EXECUTED AND DELIVERED AS A DEED by /s/ Hannes Wolfgang Miller ----------------------------------------- EXECUTED as a deed by BLUESTONE SOFTWARE EUROPE LIMITED acting by two directors and the secretary /s/ Paul T. Porrini ----------------------------------------- /s/ S. Craig Huke ----------------------------------------- EXECUTED as a deed by BLUESTONE SOFTWARE, INC. acting by a duly authorised officer /s/ Paul T. Porrini ----------------------------------------- 26 EX-10.1 3 a2030615zex-10_1.txt AGREEMENT EXHIBIT 10.1 This Agreement is made and entered into as of the 18th day of August, 2000, by and among S2 Systems, Inc., a Delaware corporation (the "COMPANY"), those individuals and entities listed on SCHEDULE 2.1 attached hereto ("PURCHASERS") and, for the limited purposes set forth in SECTION 5 and SECTION 6 hereof, Tula Holdings, LLC ("TULA"). Certain capitalized terms used in this Agreement are defined in SECTION 12.1. In consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereby agree as follows: SECTION 1. AUTHORIZATION OF CAPITAL STOCK. The Board of Directors of the Company (the "BOARD") has authorized the filing of the Second Restated Certificate of Incorporation which includes, among other things, the preferences and rights of the Series B Convertible Preferred Stock (the "CERTIFICATE") in the form of EXHIBIT A attached hereto, creating a new series of preferred stock consisting of 1,960,000 shares of Series B Convertible Preferred Stock, par value $.01 per share (the "SERIES B PREFERRED STOCK"). The terms, limitations and relative rights and preferences of the Series B Preferred Stock are set forth in the Certificate. SECTION 2. PURCHASE AND SALE OF STOCK. 2.1. PURCHASERS OF SERIES B PREFERRED STOCK. Subject to the terms and conditions set forth in this Agreement and in reliance upon the representations set forth below, on the Closing Date (as defined below) the Company will sell to Purchasers, and Purchasers will purchase from the Company at a purchase price equal to $6.00 per share, 1,000,000 shares of Series B Preferred Stock for an aggregate purchase price of $6,000,000. Such sale and purchase shall be effected on the Closing Date by the Company executing and delivering to Purchasers, duly registered in Purchasers' name, duly executed stock certificates evidencing the Series B Preferred Stock to be purchased under this Agreement, against delivery at Closing by Purchasers to the Company of an aggregate of $6,000,000 payable by Purchasers. Each Purchaser will purchase the number of shares of Series B Preferred Stock set forth on SCHEDULE 2.1 beside such Purchaser's name. At Closing, each Purchaser will pay the amount set forth on SCHEDULE 2.1 beside such Purchaser's name by transfer of such amount to the account of the Company by wire transfer of immediately available funds. As soon as practicable following Closing, the Company will deliver to each Purchaser a certificate registered in the Purchaser's name evidencing the number of shares of Series B Preferred Stock set forth opposite the Purchaser's name on SCHEDULE 2.1 dated as of the Closing Date. 2.2. CLOSING. The closing of the sale and purchase referred to in Section 2.1 (the "CLOSING") shall take place at 10:00 A.M., Central Standard time, on August 18, 2000 or such other date as Purchasers and the Company may mutually agree in writing (the "CLOSING DATE"), at the offices of S2 Systems, Inc., 4695 Preston Park Boulevard, 8th Floor, Plano, Texas 75093 or such other location as Purchasers and the Company shall mutually select. 2.3. ADDITIONAL CLOSINGS. The Purchasers hereby acknowledge and agree that the Company may issue up to an additional 960,000 shares of Series B Preferred Stock at a per share purchase price of not less than $6.00 to other purchasers not a party to this Agreement, provided that the closing of the transactions contemplated by the agreement for sale occurs not later than 15 business days after the Closing Date. Any such purchaser shall become a party to this Agreement. The Company confirms to each Purchaser that the Company will not grant any purchaser of such additional shares of Series B Preferred Stock rights which are greater than or in any respect different from the rights granted to the Purchasers under this Agreement or the Certificate. As soon as practicable after 15 business days after the Closing Date, the Company agrees to take all reasonable action necessary to amend its certificate of incorporation to provide that the Company is authorized to issue only such number of shares of Series B Preferred Stock as have been purchased pursuant to this Agreement. The Purchasers hereby waive any preemptive rights they may have with respect to any issuance of Series B Preferred Stock in accordance with this SECTION 2.3. SECTION 3. AMENDMENT TO SERIES B RIGHTS. 3.1. AUTOMATIC AMENDMENT. Until March 31, 2001, if the Company issues equity securities pursuant to a subsequent round of preferred stock financing (the "SUBSEQUENT ROUND") with rights or preferences equal or superior to the rights or preferences of the Series B Preferred Stock, determined as set forth below, all of the 1 rights under the Series B Preferred Stock shall, subject to the limitations set forth below, be amended to conform to the rights granted to the securities issued in the Subsequent Round (the "RIGHTS AMENDMENT"). Notwithstanding the preceding sentence, the Rights Amendment will not automatically occur unless holders of a majority of the Series B Preferred Stock determine, in their reasonable judgment that (i) at a minimum, each of the conversion, anti-dilution and liquidation rights and preferences of the Subsequent Round, measured independently of each other and all other rights, are equal or superior to each of such comparable rights of the Series B Preferred Stock, and (ii) all other material rights, including without limitation, dividend, registration, co-sale, drag along, first refusal and the restrictive covenants, are, when viewed as a whole, equal or superior to the rights of the Series B Preferred Stock. When making the determination of whether the rights and preferences of the securities issued in the Subsequent Round are equal or superior, the holders of the Series B Preferred Stock shall not consider or compare the redemption rights and preferences of the Series B Preferred Stock to those of the securities issued in the Subsequent Round. 3.2. VOLUNTARY AMENDMENT. If the rights of the securities issued in the Subsequent Round are not equal or superior to the Series B Preferred Stock, as determined pursuant to the provisions of Section 3.1, the holders of a majority of the Series B Preferred Stock may nevertheless elect to effect the Rights Amendment in the same way as contemplated by the automatic amendment provisions above. 3.3. DIVIDENDS. Subsequent to the effectiveness of the Rights Amendment, dividends, if any, applicable to the securities issued in the Subsequent Round shall be converted into a percentage amount and be applied to the Series B Preferred Stock commencing with the effective date of the filing of the certificate of incorporation relating to the Subsequent Round. 3.4. AMENDMENT PROCEDURE. (a) Until the earlier to occur of March 31, 2001 or the closing of the Subsequent Round, if the Company makes an offering of a Subsequent Round, it shall notify the holders of the Series B Preferred Stock of the commencement of such offering and shall promptly provide the holders of the Series B Preferred Stock with the offering memorandum (if any) and other offering documents utilized for such offering. The Company shall notify the holders of the Series B Preferred Stock of the anticipated closing date of the Subsequent Round and give such holders at least 15 days written notice prior to the closing date of the Subsequent Round. At least 5 days prior to the closing date of the Subsequent Round the holders of a majority of the Series B Preferred Stock shall deliver written notice to the Company that, in their reasonable judgment, either (i) the rights of the securities to be issued in the Subsequent Round are equal or superior to those of the Series B Preferred Stock, or (ii) such rights are inferior. If the holders determine such rights are inferior, such holders shall deliver to the Company with such written notice a list all of the rights the holders deem to be inferior and provide a written explanation, in reasonable detail, setting forth the rationale for determining that such rights are inferior. (b) If the rights of the securities to be issued in the Subsequent Round are determined by a majority of the holders of the Series B Preferred Stock to be equal or superior, or if determined to be inferior but a majority of the holders of the Series B Preferred Stock elect to amend the rights of the Series B Preferred Stock under the voluntary amendment provisions set forth above, then all of the rights of the Series B Preferred Stock will be amended and evidenced in appropriate certificates, agreements, instruments or other documents so as to become as identical to the rights of the securities issued in the Subsequent Round as is practicable. The Rights Amendment will become effective upon the effectiveness of the certificate of incorporation respecting the securities issued in the Subsequent Round filed with the Secretary of State of the state of Delaware. (c) If the rights of the securities to be issued in the Subsequent Round are determined by a majority of the holders of the Series B Preferred Stock to be inferior to the rights of the Series B Preferred Stock and such holders notify the Company that they do not elect to invoke the voluntary amendment provisions set forth above, then the rights of the Series B Preferred Stock will remain in full force and effect and shall be set forth in full without amendment in the Certificate. Notwithstanding the preceding sentence, if the Company disagrees with the determination by the majority of the Series B Preferred Stock regarding the inferiority of the rights of the securities to be issued in the Subsequent Round, then the Company and a majority of the holders of the Series B Preferred Stock shall select a mutually agreeable third party to make an independent determination, at the Company's expense, as to whether the rights of the securities to be issued in the Subsequent Round are equal or superior to those of the Series B Preferred Stock. The independent third party shall use the criteria set forth in SECTION 3.1 to make its determination. The determination of the third party shall be binding upon the parties hereto and, if such third party determines that the rights of the securities to be issued in the Subsequent Round are equal or superior, then the Rights Amendment shall be effectuated and the rights of the Series B Preferred 2 Stock shall be amended as set forth above. If such third party determines that the rights are inferior, then the rights of the Series B Preferred Stock shall remain unchanged. 3.5. FURTHER ACTIONS. The parties hereto agree to take all actions and execute all documents that may be necessary or desirable to consummate the Rights Amendment. SECTION 4. VOTING. 4.1. VOTING AS A GROUP. Subsequent to the effectiveness of the Rights Amendment, if any item is put to a vote which may or is required to be made separately by each series or class of equity securities, to the extent permitted by applicable law, the Series B Preferred Stock shall vote with and be considered a part of the series or class of securities issued in the Subsequent Round. The voting of shares pursuant to this Agreement may be effected in person, by proxy, by written consent, or in any other manner permitted by applicable law, the Company's certificate of incorporation and the Company's bylaws. 4.2. VOTING AS A SERIES. (a) If, subsequent to the effectiveness of the Rights Amendment, the holders of the Series B Preferred Stock are required by law to vote on any matter as a separate class or series of securities, such holders agree that the Company shall exercise the proxies granted the Company in SECTION 4.2(b) below to vote the shares of Series B Preferred Stock in favor of the item put to a vote in the same ratio as the holders of the series or class of securities issued in the Subsequent Round, as adjusted and determined as follows: (i) for purposes of determining the total number of votes to be used in the denominator, the number of votes represented by the voting rights of the Series B Preferred Stock shall be added to the number of votes represented by the voting rights of the series or class of securities issued in the Subsequent Round, which votes were actually cast in the vote taken by the holders of the securities issued in the Subsequent Round; (ii) the numerator shall equal the number of votes actually cast by the holders of the securities issued in the Subsequent Round in favor of the item plus the number of votes represented by the voting rights of the Series B Preferred Stock that the holders of the Series B Preferred Stock have determined to vote in favor of the item; and (iii) the numerator determined pursuant to subsection (ii) above shall be divided by the denominator determined pursuant to subsection (i) above to determine the ratio in which the shares of Series B Preferred Stock must be voted in favor of the item submitted to a vote of the holders of the Series B Preferred Stock. (b) The Purchasers and any Permitted Transferees hereby constitute and appoint the Company as the Purchasers' and any Permitted Transferees' true and lawful proxy, agent, and attorney-in-fact, with full power of substitution to vote the shares of Series B Preferred Stock, solely in the event that the holders of the Series B Preferred Stock are required by law to vote on any matter as a separate class or series of securities subsequent to the effectiveness of the Rights Amendment, pursuant to the provisions contained in this SECTION 4. The Purchasers and any Permitted Transferees acknowledge that such proxies shall be deemed coupled with an interest and are irrevocable for so long as any shares of the Series B Preferred Stock remain outstanding. Except as set forth in this SECTION 4, no proxy shall be deemed to be given by the holders of the Series B Preferred Stock by virtue of this Agreement. 4.3. LEGEND. Concurrently with the execution of this Agreement, there shall be imprinted or otherwise placed on certificates representing the shares of the Series B Preferred Stock the restrictive legend (the "LEGEND") set forth in SECTION 11.3(c) of this Agreement. The Company agrees that during the term of this Agreement (i) it will not remove the Legend, and will not permit such Legend to be removed (upon registration of transfer, reissuance or otherwise), from any such certificate and (ii) it will place the Legend on any new certificate issued to represent the shares of Series B Preferred Stock theretofore represented by a certificate carrying the Legend. 4.4. BINDING ON SUCCESSORS. The provisions of this SECTION 4 shall be binding upon the successors in interest to any of the shares of Series B Preferred Stock. The Company shall not permit the transfer of any of the shares of Series B Preferred Stock on its books or issue a new certificate representing any of the shares of Series B Preferred Stock unless and until the person to whom such security is to be transferred shall have executed a written agreement pursuant to which such person becomes a party to this Agreement and agrees to be bound by all the provisions hereof as if such person were a Purchaser. 3 4.5. SPECIFIC PERFORMANCE. The parties hereto hereby declare that it is impossible to measure in money the damages which will accrue to a party hereto or to their heirs, personal representatives, or assigns by reason of a failure to perform any of the obligations under this SECTION 4 of the Agreement and agree that the terms of this SECTION 4 of the Agreement shall be specifically enforceable. If a party hereto or their heirs, personal representatives, or assigns institutes any action or proceeding to specifically enforce the provisions hereof, any person against whom such action or proceeding is brought hereby waives the claim or defense therein that such party or such personal representative has an adequate remedy at law, and such person shall not offer in any such action or proceeding the claim or defense that such remedy at law exists. SECTION 5. REGISTRATION RIGHTS. If and to the extent the holders of shares of Series A Preferred Stock of the Company receive registration rights with respect to their shares of Common Stock of the Company, the holders of the Series B Preferred Stock shall be granted piggyback registration rights with respect to the shares of Common Stock of the Company into which the Series B Preferred Stock is convertible if the Corporation registers for sale under the Act, some or all of the shares of its Common Stock held by the holders of the Series A Preferred Stock pursuant to the registration rights granted the holders of the shares of Series A Preferred Stock. The amount of shares of Common Stock which may be registered on behalf of the holders of Series B Preferred Stock relative to the total amount of shares of Common Stock determined on a fully converted basis held by such holders shall be in the same proportion as the amount of shares of Common Stock determined on a fully converted basis registered on behalf of the holders of Series A Preferred Stock bears to the total amount of Common Stock determined on a fully converted basis held by the holders of the Series A Preferred Stock. Any underwriter cutback shall be applied to maintain the proportion set forth in the previous sentence. SECTION 6. TRANSFER RESTRICTIONS. 6.1. GENERAL PROHIBITION ON TRANSFERS; PERMITTED TRANSFERS. (a) Except as otherwise permitted hereby, each Purchaser shall not directly or indirectly sell, assign, pledge or encumber or otherwise transfer to any person (a "TRANSFEREE") any shares of Series B Preferred Stock (or any shares of Common Stock received on conversion of the shares of Series B Preferred Stock) (the "STOCK") unless such Purchaser has complied with all of the terms of this Agreement. Any purported sale, assignment, pledge, encumbrance or other transfer in violation of any provision of this Agreement shall be null and void and shall not operate to transfer any interest or title to the purported Transferee. (b) The restrictions contained in this Agreement with respect to transfers by each Purchaser of shares of Stock shall not apply to: (i) a transfer to an Affiliate of the Purchaser; and (ii) any transfer of Stock by the Purchaser (A) pursuant to a merger or consolidation of the Purchaser with or into another corporation or corporations, (B) pursuant to the winding up and dissolution of the Purchaser, or (C) in, and pursuant to, the Initial Public Offering (as defined in the Certificate); provided, however, that in clause (i), each transferee shall, as a condition precedent to such transfer, agree in writing to be bound by the provisions of this Agreement, and shall have all of the rights and obligations of the Purchaser hereunder; provided, further, that in each of the cases of (A) and (B) of clause (ii) hereon, the Purchaser's shareholders of record as constituted immediately prior to such event will, immediately after such event, hold less than a majority of the voting power of the surviving or acquiring entity. (c) Under no circumstances will any Purchaser be permitted to sell shares of Stock to any competitor of the Company or to any entity that owns in excess of 5% of the equity of a competitor of the Company. 6.2. RIGHT OF FIRST REFUSAL. (a) Except as otherwise permitted in SECTION 6.1(b), transfers of share of Stock by each Purchaser shall not be permitted unless a Purchaser has complied with this SECTION 6.2. If the Purchaser (the "PROPOSED SELLER") intends to sell any of its shares of Stock pursuant to a bona-fide offer from an unaffiliated third party (the "PROPOSED TRANSFEREE"), it shall give written notice (the "SELLER'S NOTICE") to the Company and each of the holders of shares of Series A Preferred Stock (collectively, the "HOLDERS") stating that the Proposed Seller intends to make such a sale or transfer, identifying the Proposed Transferee, specifying the number of shares of Stock proposed to be purchased or acquired pursuant to the offer (the "FIRST REFUSAL SHARES"), and specifying the per share purchase price that the Proposed Transferee has offered to pay for the First Refusal Shares (the "SALE PRICE"). Such Seller's Notice shall constitute an irrevocable offer to sell such First Refusal Shares. A 4 copy of the offer, if available, and a statement of the number of shares held by each of the Holders shall be attached to the Seller's Notice. (1) Upon receipt of the Seller's Notice, the Company shall have the exclusive option to purchase, upon delivery to the Proposed Seller within ten days of its receipt of the Seller's Notice, all or any portion of the First Refusal Shares. The Company shall deliver a notice (the "COMPANY NOTICE") to the Proposed Seller and each of the Holders of its election to purchase or not to purchase such First Refusal Shares within such ten-day period, together with payment to the Proposed Seller of the Sale Price for such First Refusal Shares. If the Company fails to deliver the Company Notice within such ten-day period, the Company will be deemed to have elected not to purchase such First Refusal Shares. To the extent that the Company does not elect to purchase all of the First Refusal Shares, the Holders shall have the irrevocable and exclusive option to purchase all, but not less than all, of the remaining First Refusal Shares at the Sale Price. Each Holder, upon delivery to the Proposed Seller within twenty days of its receipt of the Company's Notice, shall have the option to purchase up to that number of the remaining First Refusal Shares equal to the product of (A) the number of remaining First Refusal Shares multiplied by (B) a fraction, the numerator of which shall be the number of shares of Common Stock owned by such Holder (assuming full conversion and exercise of all convertible and exercisable securities into Common Stock) and the denominator of which shall be the number of shares of Common Stock owned by all of the Holders (assuming full conversion and exercise of all convertible and exercisable securities into Common Stock) (the "PROPORTIONATE SHARE"). Each Holder shall deliver to the Proposed Seller a written notice within such twenty-day period stating whether it elects to exercise its option under this SECTION 6.2(b) and the maximum number of shares (up to all of such Holder's Proportionate Share) that it is willing to purchase. Such notice shall constitute an irrevocable commitment to purchase such shares. If the Holders do not purchase all of the remaining First Refusal Shares, the Company shall have no right to purchase less than all of the First Refusal Shares. (2) If a Holder does not elect to purchase its full Proportionate Share, the Proposed Seller shall deliver another written notice to each Holder that has elected to purchase its full Proportionate Share (a "FULLY EXERCISING HOLDER") stating the number of unpurchased shares. Each Fully Exercising Holder shall be entitled, by delivering written notice to the Proposed Seller within five days following the delivery of such notice, to purchase up to all of the remaining shares at the Sale Price. In the event of an oversubscription, the oversubscribed amount shall be allocated among such Fully Exercising Holders pro-rata based on the number of shares of Common Stock owned by each of them (assuming full conversion and exercise of all convertible and exercisable securities into Common Stock). The delivery of the notice of election under this paragraph shall constitute an irrevocable commitment to purchase such shares. (3) Each Holder shall be entitled to assign its rights under this SECTION 6.2 to any of its Affiliates. (4) If all of the First Refusal Shares are not elected to be purchased pursuant to this SECTION 6.2, then, the Proposed Seller shall be free, for a period of 90 days from the date of the Seller's Notice, to sell the First Refusal Shares to the Proposed Transferee, at a price equal to or greater than the Sale Price and upon terms no more favorable to the Proposed Transferee than those specified in the Seller's Notice. Any transfer of the remaining First Refusal Shares by the Proposed Seller after the end of such 90-day period or any change in the terms of the sale set forth in the Seller's Notice that are more favorable to the Proposed Transferee shall require the delivery of a new notice of intent to transfer to the Company and each of the Holders and shall give rise anew to the rights provided in the preceding paragraphs of ARTICLE 6. (b) If the Company or the Holders elect to purchase all of the First Refusal Shares mentioned in the Seller's Notice, the Company or such Holder shall have the right to purchase the First Refusal Shares for cash consideration whether or not part or all of the consideration specified in the Seller's Notice is other than cash. If part or all of the consideration to be paid for the First Refusal Shares as stated in the Seller's Notice is other than cash, the price stated in such Seller's Notice shall be deemed to be the sum of the cash consideration, if any, specified in such Seller's Notice, plus the fair market value of the non-cash consideration. The fair market value of the non-cash consideration shall be determined by agreement of the Company and the Proposed Seller. If such persons are unable to agree on a fair market value, the Company and the Proposed Seller shall select a mutually agreeable third party to make an independent determination, and its judgment as to the fair market value of such non-cash consideration shall be binding upon the Proposed Seller, the Company and the Holders. 5 6.3. DRAG-ALONG RIGHTS. (a) At any time after the Closing Date, the parties agree that in the event holders of at least 50% of the Company's outstanding shares of capital stock determined on a fully converted basis (the "DESIGNATED HOLDERS") shall at any time propose to sell a minimum of 50% of the shares of capital stock in the Company determined on a fully converted basis (collectively, the "EQUITY SECURITIES"), owned by such Designated Holders, whether by sale, merger, consolidation or otherwise, to an unaffiliated third party or group of unaffiliated third parties for cash, cash equivalents or marketable securities in a privately negotiated transaction, then the Designated Holders shall have the right to require all of the Purchasers to participate in such transfer, and such Purchasers shall be obligated to participate in the transfer with respect to all of their capital stock in the Company, at the same consideration per share, based upon the number of shares of Common Stock into which each series of Preferred Stock may be converted, and on the same terms and conditions as the Designated Holders. (b) If the Designated Holders elect to exercise their drag-along rights under this Section 6.3, they shall do so by delivering a written notice of such proposed transfer (a "DRAG-ALONG NOTICE") to each Purchaser no later than 30 days prior to the proposed closing thereof. Such notice shall make reference to the obligations of the Purchasers hereunder and shall describe in reasonable detail (i) the Equity Securities to be transferred by the Designated Holders, (ii) the percentage ownership of Equity Securities then outstanding owned by the Designated Holders, (iii) the person to whom such Equity Securities are proposed to be transferred, (iv) the terms and conditions of the transfer, including the consideration to be paid therefor and (v) the proposed date and location of the closing of the transfer. (c) Each Purchaser participating in the transfer shall execute and deliver such agreement, instruments and certificates as may be reasonably requested by the proposed purchaser. At the closing of the transfer described in the Drag-Along Notice, and pursuant to the terms and conditions thereof, each Purchaser shall thereupon deliver at such closing the certificate or certificates representing all of the Equity Securities held by it, duly endorsed for transfer, and shall receive the net proceeds (after deduction of transfer taxes and fees and other expenses directly attributable to the sale of such Equity Securities by the Purchasers) allocable to the transfer thereof. 6.4. TAG-ALONG RIGHTS. (a) At any time after the Closing Date, the parties agree that in the event Designated Holders shall at any time propose to sell a minimum of 50% of the Equity Securities, owned by such Designated Holders, whether by sale, merger, consolidation or otherwise, to an unaffiliated third party or group of unaffiliated third parties for cash, cash equivalents or marketable securities in a privately negotiated transaction, then the Purchasers shall have the right to participate in such transfer with respect to all of their capital stock in the Company, at the same consideration per share, based upon the number of shares of Common Stock into which each series of Preferred Stock may be converted, and on the same terms and conditions as the Designated Holders. If the Designated Holders elect to sell a minimum of 50% of their Equity Securities, they shall deliver a written notice of such proposed transfer (a "TAG-ALONG NOTICE") to each Purchaser no later than 30 days prior to the proposed closing thereof. Such notice shall make reference to the rights of the Purchasers hereunder and shall describe in reasonable detail (i) the Equity Securities to be transferred by the Designated Holders, (ii) the percentage ownership of Equity Securities then outstanding owned by the Designated Holders, (iii) the person to whom such Equity Securities are proposed to be transferred, (iv) the terms and conditions of the transfer, including the consideration to be paid therefor and (v) the proposed date and location of the closing of the transfer. (b) If the Purchasers elect to exercise their tag-along rights under this Section 6.4, they shall do so by delivering a written notice of such election (a "TAG-ALONG EXERCISE NOTICE") to each Designated Holder no later than 15 days prior to the proposed closing thereof. Such notice shall make reference to the rights of the Purchasers hereunder and shall describe in reasonable detail (i) the Equity Securities to be transferred by the Purchasers and (ii) the percentage ownership of Equity Securities then outstanding owned by the Purchasers. To the extent one or more of the Purchasers exercises such right of participation in accordance with the terms and conditions set forth in this Section 6.4, the number of shares of Stock that the Designated Holders may sell to the proposed transferee shall be correspondingly reduced. Each of the Purchasers may elect to sell all or any part of that number of shares of Stock of the Company held by such Purchaser equal to the product obtained by multiplying (i) the aggregate number of shares to be sold in the proposed sale by (ii) a fraction the numerator of which is the number of shares of Common Stock at the time owned by such Purchaser (assuming full conversion and exercise of all convertible and exercisable securities into Common Stock) and the denominator of which is 6 the combined number of shares of Common Stock at the time owned by the Designated Holders and all of the Purchasers electing to sell hereunder (assuming full conversion and exercise of all convertible and exercisable securities into Common Stock). If a Purchaser does not elect to exercise its tag-along rights under this Section 6.4, the other Purchasers exercising their tag-along rights shall be entitled to sell, in addition to the number of shares determined above, the number of shares of Stock as the non-exercising Purchasers could have sold on the exercise of their tag-along rights, apportioned among the exercising Purchasers pro rata according to the number of shares of Common Stock at the time owned by such exercising Purchaser (assuming full conversion and exercise of all convertible and exercisable securities into Common Stock). (c) Each Purchaser participating in the transfer shall execute and deliver such agreement, instruments and certificates as may be reasonably requested by the proposed purchaser. At the closing of the transfer described in the Tag-Along Notice, and pursuant to the terms and conditions thereof, each Purchaser shall thereupon deliver at such closing the certificate or certificates representing all of the Equity Securities held by it, duly endorsed for transfer, and shall receive the net proceeds (after deduction of transfer taxes and fees and other expenses directly attributable to the sale of such Equity Securities by the Purchasers) allocable to the transfer thereof. 6.5. LEGEND ON THE SHAREHOLDERS' STOCK. Each certificate representing shares of Series B Preferred Stock now or hereafter owned by each Purchaser or its permitted Transferees pursuant to clauses (i) through (ii) of Section 6.1(b) shall be endorsed with the restrictive legend set forth in Section 11.3(b). SECTION 7. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to Purchasers that: 7.1. ORGANIZATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Company has all requisite corporate power, authority and qualifications and has all necessary governmental approvals, licenses, permits and authorizations to own its properties and to carry on its business as now conducted, except where the failure to have any such approval, license, permit or authorization could not reasonably be expected to have a material adverse effect on the business or financial position of the Company (a "MATERIAL ADVERSE EFFECT"). 7.2. SUBSIDIARIES. The Company does not own, directly or indirectly, any capital stock or other equity securities of any corporation nor does it have any direct or indirect ownership interest in any business except those set forth on Schedule 7.2. The Company is not a participant in any joint venture or partnership. 7.3. CAPITAL STOCK. (a) On the date hereof, the capitalization of the Company is as set forth on Schedule 7.3(a). On the Closing Date, after giving effect to the transactions contemplated hereby, the capitalization of the Company will be as set forth on Schedule 7.3(a). (b) Pursuant to the Company's Stock Option Plan (the "Stock Option Plan"), there are 1,205,000 shares Common Stock reserved for issuance upon the exercise of stock options. As of the date of this Agreement, there are outstanding stock options to purchase an aggregate of 759,000 shares of Common Stock. The Board has authorized the issuance to non-management Board members a total of 125,000 non-qualified stock options, effective July 26, 2000. (c) Schedule 7.3(c) sets forth a complete list of the holders of the Company's outstanding capital stock and warrants to purchase capital stock as of the date of this Agreement and prior to the transactions contemplated by this Agreement. (d) Except as contemplated by the Company's Restated Certificate of Incorporation dated April 7, 1999, as amended September 30, 1999 (the "PRESENT CERTIFICATE"), there is no agreement, restriction or encumbrance (including, without limitation, any right of first refusal, right of first offer or voting trust agreement) with respect to the sale or voting of any shares of the Company's capital stock (whether outstanding or issuable upon conversion or exercise of outstanding securities). (e) The Company has received a certificate executed by the holders of the Series A Preferred Stock of the Company certifying that such holders have elected not to exercise any rights of first refusal granted such holders 7 in the Company's Present Certificate in connection with the issue of the Series B Preferred Stock pursuant to this Agreement. (f) The "Series A Conversion Price" (as defined in the Certificate) is $2.265 per share as of the date of this Agreement and the Series A Conversion Price will be $2.265 per share immediately after the Closing Date. 7.4. AUTHORIZATION. (a) The Board and stockholders of the Company have authorized, where required by the Present Certificate or by law, the execution, delivery and performance of this Agreement and each of the transactions contemplated hereby, including the execution and filing of the Certificate, the issuance and delivery of the shares of Series B Preferred Stock in accordance with this Agreement and the Rights Amendment contemplated by Section 3 of this Agreement. Except for the action by the Board described in the preceding sentence and the stockholder action contemplated by Section 7.4, no other corporate action is necessary to authorize the performance by the Company of its obligations under this Agreement. (b) This Agreement constitutes the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights; and (ii) general principles of equity that restrict the availability of equitable remedies. 7.5. VALID ISSUANCE; NO BROKER. (a) All outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable. Except as set forth in the Present Certificate or pursuant to the Stock Option Plan, there are no shares of capital stock issuable upon conversion of any security of the Company nor are there any rights, options or warrants outstanding or other agreements to acquire shares of capital stock nor is the Company contractually obligated to purchase, redeem or otherwise acquire any of its outstanding shares of capital stock. Except as contemplated in the Present Certificate, the Certificate or this Agreement, no stockholder of the Company is entitled to any preemptive rights, rights of first refusal, or redemption rights. (b) Upon issuance, sale and delivery of the Series B Preferred Stock as contemplated by this Agreement and in accordance with the Certificate, the shares of Series B Preferred Stock to be sold to Purchasers under this Agreement will be duly authorized, validly issued, fully paid and nonassessable and will be free of preemptive rights. (c) All corporate action on the part of the Company, its officers, directors and stockholders necessary for the sale and issuance of the Series B Preferred Stock and the performance by the Company of its obligations under this Agreement has been taken or will be taken prior to the Closing. The Company has or will have prior to the Closing duly reserved an aggregate of not less than 1,960,000 shares of Common Stock for issuance upon conversion of the Series B Preferred Stock. (d) The sale of shares of the Series B Preferred Stock hereby is not being made through a broker or agent and no commissions or brokerage fees will be payable by the Company or the Purchasers as a result of the sale of shares hereby. 7.6. NO CONSENTS REQUIRED; NO VIOLATION OF LAWS. The nature of the business that the Company conducts, any relationship between the Company and any other Person, and the creation, authorization, issuance, offer or sale of the Series B Preferred Stock or the Rights Amendment as contemplated by this Agreement, do not require a consent, approval or authorization of, or filing, registration or qualification with, any Person or any governmental authority on the part of the Company, except for state corporate and state and Federal securities law filings and except as set forth in the Present Certificate and except for consents, approvals, authorizations, filings, registrations or qualifications which would not have a Material Adverse Effect. No vote, consent or approval of the holders of any security of the Company is required as a condition to the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby including the authorization, issuance, offer and sale of the Series B Preferred Stock and the Rights Amendment, except for the consent of the holders of (i) a majority of the outstanding shares of Common Stock of the Company, and (ii) 67% of the Series A Convertible Preferred Stock, each voting as a separate class, on the transactions contemplated by this Agreement. 8 7.7. QUALIFICATION TO DO BUSINESS. The Company is qualified, licensed and authorized to do business as a foreign corporation in each jurisdiction in which it owns or leases any material property or in which the conduct of its business requires it to so qualify or be so licensed, and such jurisdictions constitute the only jurisdictions in which the conduct of the Company's business or the nature of the property owned or leased by it require it to qualify to do business as a foreign corporation, except where the failure to so qualify would not have a Material Adverse Effect. 7.8. ABSENCE OF DEFAULTS, CONFLICTS, ETC. The execution and delivery of this Agreement, the authorization, issuance, offer and sale of the Series B Preferred Stock contemplated by this Agreement, the adoption by the Company of the Certificate and the fulfillment of the terms of such documents by the Company does not (A) result in a breach of any of the terms, conditions or provisions of, or constitute a default under, or permit the acceleration of rights under or termination of, any material indenture, mortgage, deed of trust, credit agreement, note or other evidence of indebtedness, instrument or other agreement of the Company, or (B) violate the Present Certificate or Bylaws of the Company, or any rule, regulation, writ, injunction, judgment, decree, award or other action of any court or Federal or state or other regulatory board or body or administrative agency having jurisdiction over the Company or over its properties or businesses. No event has occurred and no condition exists which, upon notice or the passage of time, or both, would constitute a default under any such agreements and instruments or in any such license, permit, rule, regulation, order or authorization to which the Company is a party or by which it may be bound. 7.9. DISCLOSURE MATERIALS, FINANCIAL STATEMENTS, MATERIAL LIABILITIES. (a) The Company has previously delivered to Purchasers certain materials containing audited financial statements of the Company for the fiscal year ended March 31, 2000 and unaudited financial statements for the quarter ended June 30, 2000 (the "FINANCIAL STATEMENTS"). Such Financial Statements, including the notes thereto (if any), have been prepared from the books and records of the Company, are true and correct and present fairly the financial position and the results of operations and cash flows of the Company as at and for the periods indicated, in each case, except that the unaudited financial statements do not contain footnotes, in conformity with generally accepted accounting principles ("GAAP") consistently applied. The portions of the materials containing financial projections and other forward-looking statements were prepared by the Company in good faith based upon assumptions which the Company believes to be reasonable in light of facts known to the Company. (b) Except as set forth in the Financial Statements, the Company has no material liabilities or obligations, absolute or contingent, except (i) obligations and liabilities incurred in the ordinary course of business since the respective dates of such statements, or (ii) obligations which are not required by GAAP to be reflected in the Financial Statements or such interim statements. 7.10. SECURITY INTERESTS. SCHEDULE 7.10 hereto sets forth (i) any material lien, charge, security interest or encumbrance with respect to any of the Company's indebtedness and (ii) a brief description of each instrument or agreement governing such indebtedness. The Company has provided the Purchaser with a complete and correct copy of each such instrument or agreement (including all amendments, supplements or modifications thereto). No default exists with respect to or under any such indebtedness or any instrument or agreement relating thereto which default would reasonably be expected to have a material adverse effect on the Company. 7.11. ABSENCE OF CERTAIN DEVELOPMENTS. Other than as set forth on SCHEDULE 7.11, since June 30, 2000, there has been no (i) material adverse change in the condition, financial or otherwise, of the Company or in its assets, liabilities, properties or business, taken as a whole, (ii) declaration, setting aside or payment of any dividend or other distribution with respect to the capital stock of the Company or redemption of any share of capital stock of the Company, (iii) material loss, destruction or damage to any property of the Company, whether or not insured, (iv) acceleration or prepayment of any indebtedness for a material amount of borrowed money or the refunding of any such indebtedness, (v) labor trouble involving the Company or any material change in its personnel or the terms and conditions of employment, (vi) waiver of any valuable right which could reasonably be expected to have a material adverse effect on the business or financial position of the Company, (vii) material loan or extension of credit by the Company to any officer or employee of the Company (other than reasonable travel advances) or (viii) acquisition or disposition of any material assets (or any contract or arrangement therefor) otherwise than for fair value in the ordinary course of business, or any other transaction by the Company otherwise than for fair value in the ordinary course of business. 9 7.12. CONTRACTS, AGREEMENTS. All material contracts, agreements and understandings are in full force and effect and neither the Company nor any other party thereto has received any notice of default or is in default, and no condition now exists which, with notice or the lapse of time or both, would render the Company or, to the knowledge of the Company, any other party, in default under any material contracts, understandings or agreements to which the Company is or may be a party. There are no disputes or proceedings relating to any such material contract, understanding or agreement and the Company has not received any notice or indication that any party to any such material contract, understanding or agreement intends to cancel or terminate such contract, understanding or agreement or intends to exercise or not exercise any options under such material contract, understanding or agreement. 7.13. COMPLIANCE WITH LAW. The Company has not been notified of any material violation of any laws, ordinances, governmental rules or regulations to which it is subject, including without limitation laws or regulations relating to the environment or to occupational health and safety, and to its knowledge no material expenditures are or will be required in order to cause its current operations or properties to comply with any such law, ordinances, governmental rules or regulations. 7.14. PENDING ACTIONS. There is no action, suit, investigation or proceeding pending or, to the knowledge of the Company threatened, against the Company or any of its properties or assets by or before any court, arbitrator or governmental authority which questions the validity of the Present Certificate, the Agreement or the Certificate, or any action taken or to be taken pursuant hereto or thereto, or which could reasonably be expected to have a Material Adverse Effect, and the Company is not in default with respect to any judgment, order, writ, injunction, decree or award applicable to it or its business or properties. 7.15. TAX MATTERS. The Company has completed and duly filed all Federal, state, county and local tax returns required to have been filed by it and all taxes which are shown on such returns have been paid (other than taxes contested in good faith by appropriate proceeding). There are in effect no waivers of applicable statutes of limitations with respect to taxes for any year. No tax returns have been audited by taxing authorities. 7.16. EMPLOYEES. Other than as set forth on SCHEDULE 7.16, the Company does not have any employment contract with any of its employees (other than severance or employment agreements terminable by the Company without premium or penalty on notice of 30 days or less), or any collective bargaining agreements covering any of its employees, nor has the Company been subject to any labor organization activity. There are no material controversies or labor troubles pending or, to the knowledge of the Company threatened, between the Company and any of its employees. The Company has complied in all material respects with all applicable federal and state laws and regulations respecting employment and employment practices, terms and conditions of employment, wages and hours and other laws related to employment. No key employee or consultant of the Company has within the prior three months given any written notice to the Company that he or she intends to leave the employ of the Company and, during such period, no such employee or consultant has been terminated. 7.17. EMPLOYEE BENEFIT PLANS. Other than as set forth in SCHEDULE 7.17, the Company has not established, sponsored, maintained, made any contributions to or been obligated by law to establish, maintain, sponsor or make any contributions to any "employee pension benefit plan" or "employee welfare benefit plan" (as such terms are defined in the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), including, without limitation, any "multi-employer plan." Any such plans have been established and are being operated in compliance with ERISA, and there exist no unfunded obligations of the Company with respect to any such plan, except as could not reasonably be expected to have a Material Adverse Effect. The Company has complied in all material respects with all applicable laws relating to the employment of labor, including provisions relating to wages, hours, equal opportunity, collective bargaining and the payment of Social Security and other taxes, and with ERISA except to the extent that noncompliance would not reasonably be expected to have a material adverse effect on the Company, and the Company is not aware of any pending or threatened claim against the Company with respect to the foregoing. 7.18. INTELLECTUAL PROPERTY RIGHTS. (a) The Company owns, free and clear of all encumbrances, restrictions, liens, security interests and charges, and has good and marketable title to, or holds adequate licenses or otherwise possesses all such rights (or such rights are in the public domain) as are necessary to use all patents (and applications therefor), patent disclosures, trademarks, service marks, trade names, copyrights (and applications therefor), inventions, discoveries, processes, know-how, scientific, technical, engineering and marketing data, software code, formulae and techniques used or proposed to be used, in or necessary for the conduct of its business as now conducted or as 10 proposed to be conducted, except where the failure to have such rights would not have a Material Adverse Effect. (b) The Company has not received written notice of any conflict or alleged conflict with the rights of others pertaining to any of its tangible and intangible assets. To the Company's knowledge, the Company's business, as presently conducted, does not infringe upon or violate any intellectual property rights or trade secrets of others in any material respect. To the Company's knowledge, the Company has the right to use, free and clear of any rights or claims of others, all intellectual property and trade secrets, processes, customer lists and other rights to the extent reasonably necessary for the conduct of the Company's business as presently conducted. (c) The Company is not currently obligated or under any existing liability to make royalty or other payments to any owner of, licensor of, or other claimant to, any patent, trademark, service name, trade name, copyright, or other intangible asset, with respect to the use thereof or in connection with the conduct of its business as now conducted, except where the failure to make any such payments would not have a material adverse effect on the business or financial position of the Company. To the Company's knowledge, no employee of the Company is subject to any employment agreement or proprietary information agreement which he or she had with a previous employer or any intellectual property policy of such employer, which affects the rights of the Company to use the technologies, patents, trademarks, trade secrets, service names, trade names, copyrights, licenses and the like currently employed by the Company, or is a party to or threatened by any litigation concerning any patents, trademarks, trade secrets, service names, trade names, copyrights, licenses and the like. 7.19. TITLE TO TANGIBLE ASSETS; LEASEHOLD INTERESTS. Other than as set forth in SCHEDULE 7.10, the Company has good and marketable title to its tangible properties and assets and good title to all its leasehold estates, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than, or resulting from, taxes which have not yet become delinquent and minor liens and encumbrances which do not in any case materially detract from the value of the property subject thereto or materially impair the operations of the Company. The Company does not own any real property. Certain real property used by the Company in the conduct of its business is held under lease, and the Company is not aware of any pending or threatened claim or action by any lessor of any such property to terminate or materially alter any such lease. Each lease or agreement to which the Company is a party and pursuant to which the Company holds properties and assets is a valid and subsisting agreement without any material default of the Company thereunder and, to the best of the Company's knowledge, without any material default thereunder of any other party thereto. No event has occurred and is continuing which, with due notice or lapse of time or both, would constitute a default or event of default by the Company under any such lease or, to the best of the Company's knowledge, by any party thereto, except for such defaults that would not individually or in the aggregate have a Material Adverse Effect. The Company's possession of such property has not been disturbed and, to the best of the Company's knowledge, no claim adverse to its rights in such leasehold interests has been asserted against it. 7.20. INSURANCE. The Company holds valid policies with reputable insurers covering insurance in the amounts and type that the Company reasonably believes is appropriate and customary for entities in the same or similar businesses to that of the Company or that are otherwise required to be maintained by it and with such deductibles or coinsurance as is customary, and such policies are in full force and effect. The Company has timely filed claims with its insurers with respect to all material matters and occurrences for which it believes it has coverage. No notice of any termination or threatened termination of any of such policies has been received by the Company and such policies are in full force and effect. 7.21. TRANSACTIONS WITH RELATED PARTIES. Except as disclosed on SCHEDULE 7.21, the Company is not a party to any agreement in excess of $100,000 with any of its officers, stockholders or directors or any Affiliate of any of the foregoing under which it: (i) leases any real or personal property (either to or from such person), (ii) has incurred any debt for borrowed money or under which it has lent money (other than routine travel advances), (iii) licenses technology (either to or from such person), (iv) is obligated to purchase any tangible or intangible asset from or sell such asset to such person, or (v) purchases products or services from such person. 7.22. INTEREST IN COMPETITORS. Neither the Company nor to its knowledge any of its officers, has any interest, either by way of contract or by way of investment (other than as holder of not more than 5% of the outstanding capital stock of a publicly traded Person) or otherwise, directly or indirectly, in any Person other than the Company that (i) provides any services or designs, produces or sells any product or product lines or engages in any activity similar to or competitive with any activity currently conducted or proposed to be conducted by the Company or (ii) has any direct or indirect interest in any asset or property, real or personal, tangible or intangible, of the Company. 11 7.23. REGISTRATION RIGHTS. Except for the contingent piggyback rights set forth in this Agreement, the Company is not under any obligation to register any of its securities under the Act. 7.24. DISCLOSURE MATERIALS. The due diligence materials submitted to Purchasers, when taken together with this Agreement and the Schedules hereto, do not contain an untrue statement of a material fact or omit a material fact necessary to make the statements contained therein not misleading. Any disclosure on any Schedule attached hereto shall be deemed to constitute a disclosure on all other Schedules to the extent applicable, unless such disclosure could not reasonably be included on other Schedules from the context of the disclosure. 7.25. USE OF PROCEEDS. The net proceeds received by the Company from the sale of shares of Series B Preferred Stock pursuant to this Agreement will be used by the Company for general corporate purposes. SECTION 8. REPRESENTATIONS AND WARRANTIES OF PURCHASERS. Each Purchaser represents and warrants, severally and jointly, to the Company that: 8.1. AUTHORIZATION. The Purchaser has all requisite power, authority and legal right to execute, deliver, enter into, consummate and perform this Agreement. This Agreement constitutes the valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms. The execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of Purchaser and all consents of any third parties that may be required to be obtained by Purchaser for the consummation of the transactions contemplated by this Agreement have been obtained. 8.2. INVESTMENT FOR OWN ACCOUNT. Purchaser is acquiring the Series B Preferred Stock purchased under this Agreement (and will acquire the Common Stock upon conversion of the Series B Preferred Stock) for its own account for investment and not with a view towards the resale, transfer or distribution thereof. Such Purchaser has no present intention of distributing such Series B Preferred Stock (or the shares of the Common Stock acquired upon conversion of the Series B Preferred Stock). No other Person has any right with respect to or interest in the Series B Preferred Stock to be purchased by Purchaser, nor has Purchaser agreed to give any Person any such interest or right in the future. 8.3. OFFERING EXEMPTION. Purchaser understands that the shares of the Series B Preferred Stock being purchased under this Agreement have not been registered under the Act, nor qualified under any state securities laws, and that the shares of Series B Preferred Stock are being offered and sold pursuant to an exemption from such registration pursuant to Section 4(2) and Rule 506 promulgated under the Act and qualification based in part upon the representations of such Purchaser contained herein. 8.4. KNOWLEDGE AND EXPERIENCE; ABILITY TO BEAR ECONOMIC RISKS. Purchaser has substantial knowledge and experience in financial and business matters, is capable of evaluating the merits and risks of the investment contemplated by this Agreement, and is able to bear the economic risk of its investment in the Company (including a complete loss of its investment). Purchaser represents that it is an accredited investor within the meaning of Regulation D under the Act. Purchaser represents that it received due diligence materials and has had an opportunity to discuss the Company's business management and financial affairs with directors, officers and management of the Company. Purchaser has also had the opportunity to ask questions of, and receive answers from, the Company and its management regarding the terms and conditions of this investment. 8.5. LIMITATIONS ON DISPOSITION. Purchaser recognizes that no public market exists for the Series B Preferred Stock to be sold hereunder and the Common Stock issuable upon conversion thereof, and no representation has been made to Purchaser that any such public market will exist in the future. Purchaser understands that it must bear the economic risk of this investment indefinitely unless the Series B Preferred Stock (or the Common Stock issuable upon conversion thereof) is registered pursuant to the Act or an exemption from such registration is available, and unless the disposition of the Series B Preferred Stock (or the Common Stock issuable upon conversion thereof) is qualified under applicable state securities laws or an exemption from such qualification is available (and evidence reasonably satisfactory to the Company is provided by such Purchaser of the availability of such exemptions, including the delivery, upon request, to the Company of an opinion of counsel to such Purchaser, which opinion and counsel are reasonably satisfactory to the Company), and that, except as provided herein, the Company has no obligation or present intention of so registering the Series B Preferred Stock (or the Common Stock issuable upon conversion thereof). Purchaser understands that there is no assurance that any exemption from the Act will be available, or, if available, that such exemption will allow it to dispose of or 12 otherwise transfer any or all of the Series B Preferred Stock or the Common Stock issuable on conversion of the Series B Preferred Stock in the amounts or at the times Purchaser might desire. Purchaser understands that at the present time Rule 144 promulgated under the Act by the Securities and Exchange Commission ("RULE 144") is not applicable to sales of the shares of Series B Preferred Stock because such shares are not registered under Section 12 of the Securities Exchange Act of 1934 (the "EXCHANGE ACT"), and there is not publicly available the information concerning the Company specified in Rule 144. Purchaser acknowledges that the Company is not presently under any obligation to register under Section 12 of the Exchange Act or to make publicly available the information specified in Rule 144 and that except as provided herein, is not otherwise required to do so. 8.6. NO GENERAL SOLICITATION. The Purchaser represents that at no time was the Purchaser presented with or solicited by or through any leaflet, public promotional meeting, advertisement or any other form of general or public advertising or solicitation. In addition, the Purchaser acknowledges that there has never been any representation, guaranty or warranty made by the Company or any agent or representative of the Company as to the amount of or type of consideration or profit, if any, to be realized as a result of any investment by the Purchaser in the Series B Preferred Stock or the Common Stock issuable upon conversion of the Series B Preferred Stock. 8.7. PURCHASER INFORMATION. The Purchaser has discussed with his/her or its legal, tax and financial advisors the suitability of an investment in the Company for his/her or its particular tax and financial situation. All information which he, she or it has provided to the Company concerning his, her or its financial position is correct and complete as of the date of this Agreement, and if there should be any material change in such information prior to the Closing Date, the Purchaser agrees immediately to provide such information to the Company and the Agent. 8.8. RESIDENCE. If Purchaser is an individual, then the Purchaser resides in the state or province identified in the address of Purchaser set forth on SCHEDULE 2.1. If Purchaser is a partnership, corporation, limited liability company or other entity, then the office or offices of Purchaser in which its investment decision was made is located at the address or addresses of Purchaser set forth on SCHEDULE 2.1. If the Purchaser is not a resident of the United States, he, she or it understands that it is his/her or its responsibility to satisfy himself as to the full observance of the laws of any relevant territory outside the United States relating to his/her or its purchase of the shares of Series B Preferred Stock, including obtaining any required governmental or other consents or observing any other applicable formalities. SECTION 9. PURCHASERS' CLOSING CONDITIONS. The obligation of Purchasers to purchase the Series B Preferred Stock to be sold pursuant to this Agreement on the Closing Date is subject to the following conditions: 9.1. REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained in this Agreement shall be true on and as of the Closing Date in all material respects as though such representations and warranties were made at and as of such date, except as otherwise affected by the transactions contemplated hereby. 9.2. COMPLIANCE WITH AGREEMENT. The Company shall have performed and complied in all material respects with all agreements, covenants and conditions contained in this Agreement which are required to be performed or complied with by the Company prior to or on the Closing Date. 9.3. CERTIFICATE; STOCKHOLDER ACTION. (a) The Certificate shall have been filed with the Secretary of State of the State of Delaware and shall be duly authorized and effective under Delaware law. (b) All action required to be taken by the Company's stockholders in connection with the transactions contemplated by this Agreement shall have been duly taken by such holders. 9.4. OTHER AGREEMENTS. The Company and the Purchasers shall have entered into such other agreements as are necessary to effectuate this Agreement and the transactions contemplated hereby. 9.5. LEGAL OPINION. Company Counsel shall have delivered an opinion letter to the Purchasers. 13 9.6. INJUNCTION. There shall be no effective injunction, writ, preliminary restraining order or any order of any nature issued by a court of competent jurisdiction directing that the transactions provided for herein or any of them not be consummated as herein provided. 9.7. LEGAL INVESTMENT. On the Closing Date, the sale and issuance of the shares of Series B Preferred Stock and the issuance of the shares of Common Stock upon conversion thereof shall be legally permitted by all laws and regulations to which Purchasers and the Company are subject. SECTION 10. COMPANY'S CLOSING CONDITIONS. The obligation of the Company to sell the Series B Preferred Stock to be sold pursuant to this Agreement on the Closing Date is subject to the following conditions: 10.1. REPRESENTATIONS AND WARRANTIES. The representations and warranties of Purchasers contained in this Agreement shall be true on and as of the Closing Date in all material respects as though such representations and warranties were made at and as of such date, except as otherwise affected by the transactions contemplated hereby. 10.2. COMPLIANCE WITH AGREEMENT. Purchasers shall have performed and complied in all material respects with all agreements, covenants and conditions contained in this Agreement which are required to be performed or complied with by Purchasers prior to or on the Closing Date. 10.3. OTHER AGREEMENTS. The Company and Purchasers shall have entered into such other agreements as are necessary to effectuate this Agreement and the transactions contemplated hereby. 10.4. INJUNCTION. There shall be no effective injunction, writ, preliminary restraining order or any order of any nature issued by a court of competent jurisdiction directing that the transactions provided for herein or any of them not be consummated as herein provided. 10.5. LEGAL INVESTMENT. On the Closing Date, the sale and issuance of the shares of Series B Preferred Stock and the issuance of the shares of Common Stock upon conversion thereof shall be legally permitted by all laws and regulations to which Purchasers and the Company are subject. SECTION 11. COVENANTS. 11.1. FINANCIAL AND BUSINESS INFORMATION. From and after the date hereof and until the Initial Public Offering (as defined in the Certificate), the Company shall deliver to Purchasers so long as Purchasers hold shares of Series B Preferred: (a) QUARTERLY STATEMENTS. As soon as reasonably practicable after the close of each of the first three fiscal quarters of each fiscal year of the Company, and in any event within 45 days thereafter, a balance sheet, statement of income and statement of cash flows of the Company as at the close of such quarter and covering operations for such quarter, and the portion of the Company's fiscal year ending on the last day of such month or quarter, all in reasonable detail and prepared in accordance with generally accepted accounting principles, consistently applied, subject to audit and year-end adjustments, setting forth in each case in comparative form the figures for the comparable period of the previous fiscal year and accompanied by a narrative description of the Company's business and results of operations for such quarter. (b) ANNUAL STATEMENTS. As soon as practicable after the end of each fiscal year of the Company, and in any event within 120 days thereafter, copies of: (1) consolidated balance sheets of the Company and its subsidiaries at the end of such year; and (2) consolidated statements of income, stockholders' equity and cash flows of the Company and its subsidiaries for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and accompanied by an opinion of a firm of independent certified public accountants of recognized national standing selected by the Company stating that such financial statements fairly present the financial position of the Company and its subsidiaries on a consolidated basis, as applicable, and have been prepared in accordance with generally accepted accounting principles consistently applied (except for changes in application in which such accountants concur) and that the examination of such accountants in connection 14 with such financial statements has been made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as were considered necessary in the circumstances. CONFIDENTIALITY. (a) Each Purchaser covenants for itself, and, as applicable, for its directors, officers, affiliates and partners, that it will use due care to prevent its officers, directors, partners, employees, counsel, accountants and other representatives from disclosing any information and other material furnished under or in connection with this Agreement to persons other than their respective authorized employees, counsel, accountants, stockholders, partners, limited partners and other authorized representatives. Notwithstanding the foregoing, if Purchasers are advised by such counsel that such disclosure or delivery is required by law, regulation or judicial or administrative order, then they may disclose or deliver such information after giving written notice to the Company of such requirements. To the extent practicable, Purchasers shall provide notice to the Company prior to disclosure or delivery required by law, regulation or judicial or administrative order. For purposes of this SECTION 11.2(a), "DUE CARE" means at least the same level of care that Purchasers would use to protect the confidentiality of its own sensitive or proprietary information, and this obligation shall survive termination of this Agreement. (b) From and after the consummation of an initial public offering of securities of the Company, to the extent that any of the information furnished pursuant to Section 9.1 hereof would constitute material, nonpublic information for purposes of the Exchange Act, Purchasers agree not to engage in any purchase or sale of securities while in possession of such information and prior to the time that such information is made generally known to the public and Purchasers agree to use due care to prevent their officers, directors, partners, employees, counsel and other representatives, who have been given access to such material, nonpublic information, from engaging in any such purchase or sale during such period. (c) Subject to the following sentence, any public disclosures, including press releases, regarding this transaction or the investment by Bluestone in the capital stock of the Company shall be mutually agreed upon by Bluestone and the Company. Bluestone may, in its reasonable discretion, disclose such information about the transactions contemplated hereby without prior approval of the Company if, in the opinion of Bluestone's counsel, disclosure of such information is required by law or rules of the Nasdaq Stock Market. Bluestone shall use all reasonable efforts to give the Company prior notice of such disclosure. Both parties may make such disclosures as appear reasonably necessary to employees, agents, representatives, and service providers assisting it or otherwise involved in this transaction who are covered by non-disclosure agreements and who are on a "need to know" basis. 11.3. RESALE OF SECURITIES. (a) Each Purchaser covenants that it will not sell or otherwise transfer the Series B Preferred Stock (or any shares of Common Stock acquired upon the conversion of shares of Series B Preferred Stock) except pursuant to an effective registration under the Act or in a transaction which, in the opinion of counsel reasonably satisfactory to the Company, qualifies as an exempt transaction under the Act and the rules and regulations promulgated thereunder and any applicable state securities laws, and such Purchaser will deliver to the Company evidence reasonably satisfactory to the Company of the availability of such exemptions, including the delivery, upon request, to the Company of an opinion of counsel to such Purchaser. (b) The certificates evidencing the shares of Series B Preferred Stock and the shares of Common Stock acquired upon conversion thereof shall bear a legend substantially to the following effect: THIS CERTIFICATE AND THE SHARES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF EXCEPT IN CONFORMITY WITH THE TERMS OF THAT CERTAIN STOCK PURCHASE AND INVESTOR RIGHTS AGREEMENT, AS AMENDED FROM TIME TO TIME, BY AND AMONG THE HOLDER (OR THE PREDECESSOR IN INTEREST TO THE SHARES), THE COMPANY AND CERTAIN OTHER SHAREHOLDERS OF THE CORPORATION. THE COMPANY WILL, UPON WRITTEN REQUEST, FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE. THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY 15 NOT BE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION UNDER THE ACT OR IN A TRANSACTION WHICH, IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY, QUALIFIES AS AN EXEMPT TRANSACTION UNDER THE ACT AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER. (c) The certificates evidencing the shares of Series B Preferred Stock shall also bear a legend substantially to the following effect: THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF CERTAIN VOTING AGREEMENTS AMONG THE STOCKHOLDER, THE COMPANY AND CERTAIN OTHER HOLDERS OF STOCK OF THE COMPANY. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY. 11.4. REGULATION D FILING. The Company will file on a timely basis a Form D "Notice of Sale of Securities Pursuant to Regulation D" and any amendments thereto required to be filed with the Securities and Exchange Commission pursuant to Regulation D under the Act, and all notices, filings and registrations, and amendments to any thereof as shall be required under any state securities or "Blue Sky" law or any regulation thereunder, and will simultaneously furnish copies of such Form D or amendment thereto and each such notice, filing registration or amendment thereof to the agent and counsel to the Purchasers on behalf of Purchasers. 11.5. FURTHER ASSURANCES. Each of the parties shall execute such documents and other papers and take such further actions as may be reasonably required or desirable to carry out the provisions hereof and the transactions contemplated hereby, including the Rights Amendment. Each such party shall use its reasonably best efforts to fulfill or obtain the fulfillment of the conditions to the Closing as promptly as practicable. SECTION 12. INTERPRETATION OF THIS AGREEMENT 12.1. DEFINED TERMS. As used in this Agreement, the following terms have the respective meanings set forth below: "ACT" means the Securities Act of 1933, as amended. "AFFILIATE" means with respect to any Person, any other Person which directly or indirectly, by itself or through one or more intermediaries, controls, or is controlled by, or is under direct or indirect common control with, such Person. The term "control" means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. The term "BUSINESS DAY" means any day which is not a Saturday, Sunday or day on which banks are authorized by law to be closed in the State of Delaware. "CODE" means the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder. "EXCHANGE ACT" means the Securities Exchange Act of 1934. "PERMITTED TRANSFEREE" means any Person receiving a transfer of shares of Series B Stock in compliance with the provisions of this Agreement. "PERSON" means an individual, partnership, joint-stock company, corporation, trust or unincorporated organization, and a government or agency or political subdivision thereof. DIRECTLY OR INDIRECTLY. Where any provision in this Agreement refers to action to be taken by, or prohibited to be taken by, any Person, such provision shall be applicable whether such action is taken directly or indirectly by such Person. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. 16 SECTION HEADINGS. The headings of the sections and subsections of this Agreement are for convenience only and shall not be deemed to constitute a part of this Agreement. SECTION 13. MISCELLANEOUS. 13.1. NOTICES. All notices, instructions or other communications required or permitted to be given hereunder or necessary in connection herewith shall be in writing and shall be deemed to have been duly delivered upon the delivery thereof, if delivered personally, upon the transmission thereof, if sent by facsimile transmission with confirmed receipt, on the second business day after delivery to an air courier company for express delivery, or on the seventh business day after mailing, if mailed, postage prepaid, registered or certified mail, as follows: (i) if to Purchasers, at the address shown on SCHEDULE 2.1, marked for attention as there indicated, or at such other address as Purchasers may have furnished to the Company in writing: (ii) if to the Company, at the address shown below, or at such other address as the Company may have furnished to Purchasers in writing: S2 Systems, Inc. Two Preston Park South 4695 Preston Park Boulevard, 8th Floor Plano, Texas 75093 Attn: General Counsel Telecopier: (972) 599-5607 13.2. EXPENSES. Each party shall be responsible for the fees and disbursements of its legal counsel, incurred in connection with the negotiation, execution and delivery of this Agreement, and the closing of the transactions contemplated thereby. 13.3. REPRODUCTION OF DOCUMENTS. (a) This Agreement and all documents relating hereto, including, without limitation, (a) consents, waivers and modifications which may hereafter be executed, (b) documents received by Purchasers pursuant hereto (except for certificates evidencing the Series B Preferred Stock), and (c) financial statements, certificates and other information previously or hereafter furnished to Purchasers, may be reproduced by Purchasers or the Company by any photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and Purchasers or the Company may destroy any original document so reproduced, provided, however, that a true and complete copy of such reproduction is delivered to the other party to this Agreement. The parties hereto agree and stipulate that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (except if the original is in existence and whether or not such reproduction was made by Purchasers or the Company in the regular course of business) and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. (b) Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of any share certificate representing shares of Series B Preferred Stock and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory to the Company, or in the case of any such mutilation, upon surrender of such share certificate (which surrendered share certificate shall be canceled by the Company), the Company will issue a new share certificate of like tenor in lieu of such lost, stolen, destroyed or mutilated share certificate as if the lost, stolen, destroyed or mutilated share certificate were then surrendered for exchange. 13.4. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. Except to the extent otherwise provided for herein, neither this Agreement nor the rights of the parties hereunder may be assigned without the written consent of the nonassigning party. 13.5. ENTIRE AGREEMENT; DISCLOSURE SCHEDULES; AMENDMENT AND WAIVER. This Agreement (including the Exhibits and Schedules attached to this Agreement) constitutes the entire understanding of the parties hereto and supersedes all prior term sheets, letters of intent, agreements or understandings among such parties relating to the subject matter hereof. A disclosure on any Schedule to this Agreement will be deemed to be a disclosure for all other Schedules to this Agreement and for all other representations and warranties made in this Agreement. 17 This Agreement may be amended, and the observance of any term of this Agreement may be waived, with (and only with) the written consent of the Company and Purchasers. 13.6. COUNTERPARTS. This Agreement may be executed by omnibus signature page and/or in any number of counterparts, each of which when so executed and delivered shall be deemed an original, and such counterparts together shall constitute only one instrument. 13.7. SURVIVAL. The representations, warranties, covenants and agreements made in this Agreement or in any certificate or instrument delivered in connection with this Agreement shall survive the execution and delivery of this Agreement and the closing of the transactions contemplated by this Agreement. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement in connection with the transactions contemplated by this Agreement shall be deemed to be representations and warranties by the Company solely as of the date of such certificate or instrument. [SIGNATURE PAGE FOLLOWS] 18 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date above first written. S2 Systems, Inc. By: /s/ Stephen Clark ---------------------- Stephen Clark President PURCHASERS: Bluestone Software, Inc. Dated: August 18, 2000 By: /s/ Paul T. Porrini ------------------------ Paul T. Porrini Senior Vice President and General Counsel For the limited purposes set forth in SECTION 5 and SECTION 6 of this Agreement: TULA HOLDINGS, LLC By: BAKER COMMUNICATIONS FUND, L.P., a Delaware limited partnership By: Baker Capital Partners, LLC Its General Partner By: /s/ Lawrence A. Bettino - --------------------------- Lawrence A. Bettino Manager By: /s/ Gerald Baron - --------------------------- Gerald Baron 19 EX-10.2 4 a2030615zex-10_2.txt AGREEMENT EXHIBIT 10.2 THIS AGREEMENT, made this 9th day of August, A. D., Two Thousand (2000) between PARKERS CREEK, II, L.L.C., a New Jersey Limited Liability Company, with offices at 365-B New Albany Road, Moorestown, New Jersey, 08057-1117, Party of the First Part, hereinafter called "Landlord", and BLUESTONE SOFTWARE, INC., a Delaware Corporation licensed to do business in the State of New Jersey, with Corporate Offices located at Airport Business Park, 300 Stevens Drive, Lester, Pennsylvania, 19029, Party of the Second Part, hereinafter called "Tenant". WITNESSETH, that in consideration of the covenants herein contained, the Landlord does hereby demise, lease and let to the Tenant, and the Tenant does hereby hire and rent from the Landlord, premises located at Briggs Road Industrial Park, 6000 Irwin Road, Mount Laurel, New Jersey, 08054, consisting of approximately 46,250 square feet. More particularly described on Exhibit "A" attached hereto and made a part hereof. For a term of Seven (7) Years commencing November 1, 2000 (See Item Twenty-Fifth) and expiring on October 31, 2007, at the base monthly rental as follows: FORTY-EIGHT THOUSAND NINE HUNDRED FORTY-SEVEN AND 92/100 DOLLARS ($48,947.92) per month ($12.70 per square foot) for the period November 1, 2000, through October 31, 2007; plus 1/12th of the estimated annual taxes and insurance, sewer and water, sprinkler standby and inspection fees, landscaping and yard maintenance, parking lot cleaning, striping and maintenance, etc., hereinafter called escrow expense, on the premises, monthly, currently estimated to be $9,635.42 per month ($2.50 per square foot). (SEE ITEM TWENTIETH). There shall be a late charge of $500.00 for each payment that shall not have been received within ten (10) days of the due date. Rent is payable monthly, in advance, on the first day of each and every month (except the first month's rent as Tenant agrees to pay the first month's rent in advance upon execution hereof) to Parkers Creek, II, L.L.C., at 365-B New Albany Road, Moorestown, New Jersey, 08057-1117. As security for the faithful performance by Tenant of all the terms and conditions upon the Tenant's part to be performed, Tenant will deposit an amount equal to one month's rent and escrow expense equal to FIFTY-FIVE THOUSAND AND 00/100 DOLLARS ($55,000.00), which sum shall be returned to Tenant, without interest, on the day set forth for the expiration of the term herein or any extension herein provided, however, that Tenant has fully and faithfully carried out all of the material terms, covenants, and conditions on its part to be performed. Landlord shall have the right to apply any part of said deposit to cure any default of Tenant and, if Landlord does so, Tenant shall deposit with Landlord the amount so applied so that the Landlord shall have the full deposit on hand at all times during the term of this Lease or any extension hereof. This Lease shall continue after the initial term unless and until terminated by either party, which termination may be effected by either party giving to the other party written notice thereof on or before ninety (90) days prior to the termination of the Lease. In default of such notice, this Lease, with all the conditions and covenants thereof, shall continue for the further period of one (1) year, at a monthly rate equal to 115% of the last month's rent payable hereunder, and shall continue so on from year to year unless and until terminated by either party giving to the other party at least ninety (90) days written notice of its intention to terminate said Lease prior to the expiration of the current term. Provided, however, that if the Landlord shall have given such written notice ninety (90) days prior to the expiration of any term hereby created of its intention to change the terms and conditions of this Lease, and Tenant shall hold over after the expiration of the time mentioned in such notice, Tenant shall be considered Tenant under the terms and conditions mentioned in such notice for such further period as Tenant may remain in possession of the demised premises or until similar subsequent notice is given by Landlord, again changing the said terms and conditions. FIRST. Landlord covenants to deliver possession of the demised premises to Tenant on or before the beginning of the term substantially ready for occupancy by Tenant free and clear of all tenancies and occupancies and to provide Tenant with a copy of the current temporary or final Certificate of Occupancy ("Certificate") issued by the appropriate municipal authorities evidencing Tenant's right to lawfully occupy the demised premises. Tenant agrees not to occupy the premises until such time as a temporary or final Certificate is issued. In the event that the demised premises and temporary Certificate have not been so delivered to Tenant at the beginning of the term of this Lease as herein provided, then the obligation of Tenant to pay rent shall abate until the demised premises and temporary Certificate are so delivered to Tenant. In the event a temporary 1 Certificate is issued, Landlord, at its expense, shall complete all work and fulfill all requirements necessary for the municipality to issue a permanent Certificate prior to the expiration of the temporary Certificate. Tenant hereby covenants to pay upon due date thereof all rents or any changes herein included as rent. If at any time the rent payable herein shall remain unpaid for a period of ten (10) days after written notice is given by Landlord as herein provided, or should the Tenant be declared insolvent or bankrupt, make an assignment for the benefit of creditors, or if a receiver is appointed for all or substantially all of Tenant's assets; then, at the option of the Landlord, the rent for the balance of the term shall thereupon become due and payable and the Landlord shall have the full power and authority to institute any action at law or equity for the collection of said rent and the Landlord may declare the said term ended and re-enter the demised premises. Tenant agrees that if at any time during the continuance of this Lease, Tenant removes or attempts to remove Tenant's goods or property out of or from the demised premises excepting in the ordinary course of business without first having paid and satisfied Landlord in full for all rent which may become due during the entire term of this Lease then, and in such case, such removal or attempt to remove shall require that the whole rent for the said term then remaining unpaid shall, at the option of the Landlord, be taken to be thereupon due and payable and in arrears and Landlord shall have full power and authority to institute any action at law or in equity for the collection of rents due or to become due or to proceed by distress or any other process of law to collect the same or, at the Landlord's option, may declare the said term ended and re-enter the demised premises and every part thereof, and remove all persons or things therefrom, or to proceed by action for the recovery thereof or otherwise. All in accordance with the laws of the State of New Jersey. SECOND. Tenant shall not do, suffer to be done, keep, or suffer to be kept anything in, upon or about the demised premises which will contravene Landlord's policies insuring against loss or damage by fire or other hazards including, but not limited to, public liability policies, or which will prevent Landlord from procuring such policies in responsible companies licensed in New Jersey. If anything be done, omitted to be done or suffered to be done by Tenant, kept or suffered by Tenant to be kept in, upon or about the demised premises which shall cause an increase in the rate of fire or other insurance from responsible insurance company on the demised premises or adjacent premises of which the demised premises is a part, then Tenant shall be responsible for the total of such increase resulting from its use and/or occupancy. Landlord shall purchase and maintain hazard insurance on the building comprising the demised premises ("Building") in an amount not less than the full replacement cost of the Building. All proceeds of such insurance shall be payable directly and solely to Landlord, its assigns or mortgages, and Tenant shall have no interest therein or rights with respect thereto. THIRD. The Tenant shall pay all sums for electric and gas and the accounts covering those utilities shall be placed in Tenant's name prior to occupancy. In the event such utilities have not been transferred prior to occupancy, Tenant shall reimburse Landlord for its pro rata share of same. Unless Tenant is occupying entire building, Tenant shall use, in common, the parking facilities as provided for by Landlord, subject to such reasonable rules and regulations for parking as Landlord may promulgate for all Tenants and which Tenant is made aware. Tenant shall at all times comply with and fulfill any requirements promulgated by any state, county, municipal authorities or insurance carriers with respect to the use and/or occupancy of the demised premises. No overnight parking of any unlicensed or unregistered vehicles. Landlord reserves the right to restrict Tenant's parking to a maximum of approximately 185 spaces. (See Item Thirty-Seventh). FOURTH. Tenant shall be permitted to make alterations to the demised premises with the prior consent of Landlord, which shall not be unreasonably withheld. All alterations shall: (a) be performed in a good and workmanlike manner in conformity with all laws, regulations, rules, ordinances and other requirements of all governmental authorities having jurisdiction; (b) be commenced only after all required municipal and other governmental permits, authorizations and approvals shall have been obtained by Tenant, at its own cost and expense, provided that Landlord will promptly execute and return any documents necessary to be signed by Landlord to obtain any such permits, authorizations and approvals; (c) be of such a character as to not reduce the value of the demised premises; (d) not impair or otherwise jeopardize, in any way, the structural integrity of the Building; (e) not adversely affect the structural components of the Building and (f) not adversely affect any of the plumbing, electrical and HVAC systems within the Building. Tenant, with Landlord's written approval, shall have the right to erect in and about the demised premises such signs as may be reasonably necessary to identify and advertise its occupancy and its business. The consent of the Landlord to the foregoing shall not be unreasonably withheld. 2 FIFTH. The Tenant shall pay all personal property taxes and other taxes and assessments pertaining to its goods and chattels located in or upon the demised premises. SIXTH. In the event that the demised premises is totally destroyed by fire or other casualty, or if such part of the demised premises is destroyed by fire or other casualty that the remainder is not reasonably usable for the Tenant's purposes as determined by a licensed architect or engineer mutually acceptable to Landlord and Tenant, then, in either such event, this Lease shall terminate and the unearned portion of the rent theretofore paid shall be returned to the Tenant, unless the demised premises is repaired by the Landlord and made fit and usable within ninety (90) working days from the happening of said damage, in which event no rent shall accrue or be payable hereunder between the period of the occurrence of such damage and the completion of such repairs. In the event that the demised premises is partially destroyed by fire or other casualty and the remaining shall be reasonably usable as determined by a licensed architect or engineer mutually acceptable to Landlord and Tenant, then there shall be an abatement of rent measured by the loss of use suffered by the Tenant based upon the area of land or building or both so damaged and Landlord shall commence to repair or restore the demised premises, at its sole cost and expense, within ninety (90) working days following the date of such damage and within fifteen (15) days after necessary approvals are granted to start restoration. Landlord will use its best efforts to expeditiously complete said repair or restoration. SEVENTH. The Tenant shall be responsible for and shall maintain the interior of the demised premises in a good and orderly manner including, but not limited to: the heating, air conditioning and plumbing systems and interior lighting including ballasts and light bulbs. Landlord shall make such systems operate properly at the inception of this Lease. Tenant agrees to maintain adequate heat in the premises to prevent freezing of pipes, plumbing and other fixtures. Tenant shall notify Landlord of any problems with the roof or exterior structural walls if such problems are noticeable to Tenant. Landlord shall be responsible for maintenance, repair or replacement, if necessary, of the roof and roof membrane, the foundation and other structural components of the building of which the demised premises is a part. Landlord shall not be liable for any damage or injury which may be sustained by the Tenant or any other person as a consequence of any roof leaks or of the failure, breakage, leakage or obstruction of the water, plumbing, steam, sewer, waste or soil pipes, drains, leaders, valleys, downspouts or the like, or interruption of the electrical, gas, power, conveyer, refrigeration, sprinkler, air conditioning or heating systems; or by reason of the elements; or resulting from the carelessness, negligence or improper conduct on the part of any other tenant of Landlord, or of the Tenant, or any other tenant's agents, employees, guests, licensees, invitees, subtenants, assignees or successors; or attributable to any interference with, interruption of, or failure beyond the control of the Landlord, of any service to be furnished or supplied by the Landlord. However, notwithstanding the foregoing, Landlord shall be liable for damages or injuries related to the foregoing if due to the gross negligence of Landlord. EIGHTH. If all or substantially all of the demised premises shall be taken under any condemnation or eminent domain proceedings or a deed given in lieu of such condemnation, or if such part of the demised premises is so taken that the remainder is not reasonably usable for the Tenant's purposes as determined by an independent third party mutually acceptable to Landlord and Tenant then, in either such event, this Lease and the term created pursuant hereto shall end immediately and the rent shall be apportioned accordingly and shall be immediately returned to Tenant. If a part of the demised premises shall be taken under condemnation or eminent domain proceedings and the remaining premises shall be reasonably usable for the Tenant's purposes herein specified as determined by an independent third party mutually acceptable to Landlord and Tenant, then there shall be an abatement of rent measured by the loss of use suffered by the Tenant based upon the area of land or building or both so taken. NINTH. The Tenant, at any time during the term of this Lease, after reasonable notice, shall permit inspection of the demised premises during usual business hours by the Landlord and by, and on behalf of, prospective purchasers, and during the four (4) months preceding the expiration of this Lease, shall permit inspection thereof by, or on behalf of, prospective tenants provided that such inspection does not interfere with the conduct of the Tenant's business. The Tenant shall permit during the four (4) months preceding the expiration of this Lease signs and notices indicating that the demised premises is to let or for sale to be posted and remain upon the demised premises. TENTH. Upon reasonable prior notice, the Landlord shall have the right to enter into and upon the demised premises during the usual business hours for the purpose of inspection or making such repairs or 3 alterations as may be necessary for the safety and preservation thereon, provided the same does not interfere with the conduct of Tenant's business. ELEVENTH. Tenant, at its expense, shall replace any and all broken glass in and about the demised premises, except glass broken by the Landlord, its agents, servants, or employees after occupancy by Tenant. TWELFTH. Landlord hereby covenants that Tenant, upon paying the rents and keeping the covenants of this Lease, shall lawfully, peaceably and quietly hold, occupy and enjoy the demised premises for the term aforesaid. It is further understood and agreed that the covenants and agreements herein contained are binding on the parties hereto and their legal representatives, successors and assigns. THIRTEENTH. Any notices, demand or communication under or in connection with this Lease shall be served upon the Landlord or the Tenant by mailing the same by certified mail to the appropriate party at the address hereinabove mentioned or at such other address as may be designated in writing by the Landlord or Tenant FOURTEENTH. The Tenant will use and occupy the demised premises for general office purposes only for Tenant's business. FIFTEENTH. Tenant hereby agrees to carry public liability insurance in the amount of $2,000,000.00 in case of bodily injury or death, and at least $500,000.00 in case of property damage, protecting both the Landlord and Tenant. Tenant further agrees to furnish Landlord with a certificate of same showing the Landlord as an additional named insured. SIXTEENTH. Tenant shall not permit any property to be stored outside of the demised structure except dumpsters. SEVENTEENTH. Tenant may sublease premises, with Landlord's written approval, which approval shall not be unreasonably withheld. Such subleasing shall not relieve Tenant of its liability hereunder. Notwithstanding the foregoing, Tenant may assign or sublet all or part of its interest in this Lease or all or part of the demised premises to the following types of entities without the consent of the Landlord: (1) to any entity which owns or controls, is owned or controlled by, or under common control with, the Tenant; (2) any corporation, limited partnership, limited liability partnership, limited liability company or other business entity in which the Tenant or its corporate successors or assigns is merged or consolidated so long as the Tenant's obligations are assumed by the entity surviving such merger or created by such consolidation; and (3) any corporation, limited partnership, limited liability partnership, limited liability company or other business entity acquiring all or substantially all of the Tenant's assets. Tenant shall give timely notice to Landlord of any change. EIGHTEENTH. Tenant's North American Industry Classification System (NAICS) Code Number is 541511. If the leased premises are used by the Tenant as a manufacturing facility or for warehousing of certain hazardous substances as defined in the Environmental Cleanup Responsibility Act or any modification or amendment thereof, the Tenant will (a) comply with all of the requirements of the New Jersey Environmental Protection Agency and, specifically, the Environmental Cleanup Responsibility Act (ECRA) and/or the Industrial Site Recovery Act (ISRA), if such acts are applicable, prior to the termination of this Lease; (b) supply the Landlord with a Letter of Exemption or a Letter of Nonapplicability, or an Approved Negative Declaration, or an Approved Completed Cleanup Plan from the New Jersey Environmental Protection Agency and pay the cost incurred in fulfilling the requirements of this act and does hereby indemnify and save Landlord harmless from any liability or costs resulting from Tenant's failure to fulfill the requirements of this act that might be imposed on the property owner by virtue of Tenant's use or occupancy of the leased premises. The Tenant shall pay rent until the Landlord is supplied with a Letter of Exemption or a Letter of Nonapplicability or an Approved Negative Declaration, or an Approved Completed Cleanup Plan from the New Jersey Environmental Protection Agency; The Tenant shall, at its own expense, in connection with its operations at the demised premises, and only for that which Tenant has caused to be done during the term of this Lease and renewal terms as it relates to 4 Tenant's operation, comply with all applicable federal, state and local environmental statutes, regulations and ordinances including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. Section 9601, et seq.) ("CERCLA"), the Hazardous Materials Transportation Act, as amended (49 U.S.C. Section 1801, et seq.) ("HMTA"), the Resource Conservation and Recovery Act, as amended (42 U.S.C. Section 6901, et seq.) ("RCRA"), Federal Clean Water Act, as amended (33 U.S.C. Section 1251, et seq.) ("Clean Water Act"), and the Federal Clean Air Act, as amended (42 U.S.C. Section 7401, et seq.) ("Clean Air Act"), the New Jersey Environmental Cleanup Responsibility Act, as amended (N.J.S.A. 13:1k-6, et seq.) ("ECRA"), the Industrial Site Recovery Act (Sections 3 - 11):S-1070 (ISRA), the New Jersey Spill Compensation and Control Act, as amended (N.J.S.A. 58:10-23-11, et seq.) ("Spill Act"), (N.J.S.A. 58:10A-23.11, et seq.), as amended ("NJ Tank Registration Act"), and the New Jersey Water Pollution Control Act, as amended (N.J.S.A. 58:10A-1, et seq.) ("NJ Water Pollution Act"), OSHA, and in the regulations adopted pursuant thereto, except as they relate to the condition of the demised premises at the inception of the Lease term. At no expense to the Landlord, the Tenant shall promptly provide all information concerning its operations and occurrences at the demised premises requested by the Landlord for preparation of any documentation, which may be required in connection with compliance with ISRA, including any affidavits which may be required and shall promptly sign such affidavits when requested by the Landlord. The Tenant agrees to make the demised premises available for any inspections which may be requested by the Landlord in connection with any applicable environmental law or regulation. Should the Tenant cause or permit any intentional or unintentional action or omission which results in the releasing, spilling, leaking, pumping, pouring, emitting, emptying or dumping of "Hazardous Substances," as such term is defined in N.J.S.A. 58:10-23.11b(k), into waters or onto lands of the state or into waters outside the jurisdiction of the state resulting in damage to the lands, waters, fish, shellfish, wildlife, biota, air or other resources owned, managed or held in trust or otherwise controlled by the state, without having a permit issued by the appropriate governmental authorities, the Tenant shall promptly clean up the same in accordance with the provisions of the New Jersey Spill Compensation and Control Act or other applicable statute. The Tenant shall defend, indemnify and save harmless the Landlord from all fines, suits, procedures, claims, actions and reasonable costs, including reasonable attorney's fees and reasonable expenses, of any kind arising out of or in any way connected with any spills of, discharges of, or release of hazardous substances at the demised premises caused by Tenant or its employees, invitees, agents, servants or suppliers which first occur during the term of this Lease or any renewals thereof (or, in the event of reoccurrence during the term of the Lease of such an incident which first occurred prior to the commencement of the Lease term, the Tenant's obligations and liabilities hereunder shall pertain only to the extent the reoccurrence caused a worsening of a pre-existing condition) or otherwise result from the Tenant's operations at the demised premises; and from all fines, suits, procedures, claims and actions of any kind arising out of the Tenant's failure to provide all information, make all submissions and take all actions required by any municipal, state or federal regulatory, administrative or quasi-administrative authority, bureau or entity, by any court or competent jurisdiction or by any other enforcement agency. The Tenant shall defend, indemnify and save harmless the Landlord from and against all loss, damage, liability and reasonable expenses (including reasonable attorney's fees and expenses) which the Landlord may sustain as a result of or on account of any lien imposed on the demised premises pursuant to N.J.S.A. 58:10-23.11, et seq. in connection with the Tenant's operations at the demised premises, the Spill Compensation and Control Act or any amendments thereto, or the failure of the Tenant to comply with the Environmental Cleanup Responsibility Act as modified or amended or the Tenant's breach of any of the covenants contained herein or failure to comply with any of the rules, regulations, statutes and acts referred to herein. The Tenant's obligations and the indemnifications, relating specifically to environmental issues contained in this Lease shall survive the termination of this Lease and shall continue in full force and effect for the duration of the existence of any and all violations of environmental laws, rules, regulations and/or statutes attributable to the Tenant's occupancy of and/or actions at the demised premises and until the Tenant, at its sole cost and expense, causes all such violations to be remedied and the environmental condition to be corrected as required by applicable rules, regulations, statutes or acts. Landlord represents that to the best of its knowledge: 5 (a) The Building and land surrounding the demised premises that is owned by Landlord ("Property") has not been used for the generation, manufacture, storage or disposal of, and there has not been transported to or from the Property, any Hazardous Substances, there are no Hazardous Substances present on the Property, there has been no use of the Property that may, under any federal, state or local law or regulation, require any closure or cessation of any use of the Property or impose upon Landlord or its successors any monetary obligations. The Landlord has not been identified in any litigation, proceeding or investigation as a responsible party or potentially responsible party for any liability for disposal or release of any Hazardous Substance, no lien or superlien has been recorded, asserted or threatened against the Property for any liability in connection with any environmental contamination and the Property is in compliance with all federal, state or local laws and regulations relating to environmental matters. (b) The Building, when completed, will be structurally sound and comply with all applicable fire, zoning, building, safety and other governmental laws, regulations and codes including the Americans With Disabilities Act. Landlord shall indemnify, defend and hold Tenant harmless from and against all claims, costs, liabilities, including but not limited to reasonable attorney's fees, costs of remedial action, response costs, personal injury and property damage, directly or indirectly arising out of or attributable to the untruth or inaccuracy of any of Landlord's representations set forth herein, the gross negligence of Landlord or any of Landlord's agents, contractors, servants, employees, sublicensees, licensees or invitees, or the use, generation, deposit, storage, release, threatened release, discharge, disposal, burial, dumping, spilling, leaking or other presence of Hazardous Substances on, under or above the demised premises caused by Landlord, its agents, servants or employees. This indemnity shall survive termination of this Lease for any reason. Tenant represents and warrants that it will indemnify and defend and hold Landlord harmless from and against any and all claims, costs, liabilities including but not limited to reasonable attorney's fees, costs of remedial action, response costs, personal injury and property damage directly or indirectly arising out of or attributable to the gross negligence of Tenant or any of Tenant's agents, contractors, servants, employees, sublicensees, licensees or invitees, or the use, generation, deposit, storage, release, threatened release, discharge, disposal, burial, dumping, spilling, leaking or other presence of Hazardous Substances brought onto or allowed on the demised premises as a result of Tenant, its agents, servants or employees. This indemnity shall survive termination of this Lease for any reason. NINETEENTH. Tenant agrees not to paint or erect or cause or permit to be painted or erected any signs on the exterior of the demised premises without the express written approval of the Landlord which approval shall not be unreasonably withheld. No signs are to be attached to the building's outside metal facade or masonry. In the event of any signs being painted or erected with the approval of the Landlord, Tenant agrees to remove said signs if erected and to restore said premises to its former condition prior to the expiration of this Lease or any extension or renewal thereof. Tenant may, without permission from Landlord, put vinyl letters on Tenant's entrance door. (Such letters and wording shall be done professionally and be in good taste). The sign frames, if provided by the Landlord, shall remain a part of the building and the sole property of the Landlord. Any signage must have Township and Landlord approvals. TWENTIETH. Tenant agrees to pay as additional rent an escrow expense of $2.50 per square foot per year, payable monthly, in advance, on the first day of each and every month. This amount shall be adjusted at the end of each Calendar Year and shall include the following items, which Landlord shall pay for and provide and include in the Tenant's monthly escrow charges: All direct and indirect costs of operating the building and related grounds, but not limited to the following: Water and sewer charges, including fire protection and sprinkler system inspection and monitoring charges, if any; insurance premiums; real estate taxes, assessments or other governmental charges relating to the premises; routine maintenance and routine roof repairs; lawn and shrubbery care; landscaping; maintenance and general repairs. Included in the escrow expense shall be not more than 3% for accounting and not more than 10% for Landlord's overhead expense in administering the escrow expense. The aforesaid amount shall be adjusted annually to reflect the Landlord's estimate of anticipated annual costs. Any deficiency or overpayment shall be credited to or paid by Tenant after the end of each Calendar Year based on actual costs or repaid to Tenant if the Lease has been terminated. Tenant's proportionate share shall be apportioned based on square footage or other equitable basis and shall be prorated for a partial year's occupancy. 6 (Tenant shall be responsible for excessive costs created by Tenant's excessive usage). Tenant's share of escrow expense is estimated at $9,635.42 per month ($2.50 per square foot) and shall be annually adjusted as above. Since the Tenant is occupying the entire premises, the total costs applicable to this premises shall be Tenants' responsibility. Escrow expenses shall NOT include any of the following: (a) Repairs or other work occasioned by fire, windstorm or other insured casualty or by the exercise of the right of eminent domain to the extent of insurance proceeds or condemnation awards received therefor; (b) Leasing commissions, accountants', consultants', auditors' or attorneys' fees, costs and disbursements or other expenses incurred in connection with negotiations or disputes with other tenants or prospective tenants or other occupants, or associated with the enforcement of any other leases or the defense of Landlord's title to or interest in the real property or any part thereof; (c) Costs incurred by Landlord in connection with construction of the Building and related facilities or the correction of latent defects in construction of the Building (as hereinafter defined); (d) Costs (including without limitation permit, licenses and inspection fees) incurred in renovating or otherwise improving or decorating, painting, or redecorating the Building or space for other tenants or other occupants or vacant space; (e) Costs of any items or services sold or provided to tenants (including Tenant) for which Landlord otherwise is reimbursed by such tenants; (f) Depreciation and amortization; (g) Costs incurred due to a breach by Landlord or any other tenant of the terms and conditions of any lease; (h) Interest on debt or amortization payments on any mortgage or deeds of trust or any other borrowings and any ground rent; (i) Ground rents or rentals payable by Landlord pursuant to any over-lease; (j) Expenses resulting from the gross negligence or willful misconduct of Landlord; (k) Any fines or fees for Landlord's failure to comply with governmental, quasi-governmental, or regulatory agencies' rules and regulations; and (l) Legal, accounting and other expenses related to Landlord's financing, re-financing, mortgaging or selling the Building. Capital expenditures and capital repairs and replacements shall be included as escrow expenses SOLELY to the extent of the amortized costs of same over the useful life of the improvement in accordance with generally accepted accounting principles. TWENTY-FIRST. This Lease is conditioned upon the Township of Mount Laurel granting a Certificate of Occupancy to Tenant prior to occupancy. The Tenant shall be responsible to make application to and pay all required fees, if any, to the Township of Mount Laurel to secure and maintain all necessary permits for its business, such as use, mercantile and occupancy permits, etc. The Landlord shall use its best efforts to assist the Tenant, as necessary, in the application and permitting process. TWENTY-SECOND. Exhibits "A" and "B" are attached hereto and made a part hereof. TWENTY-THIRD. No pets shall be permitted in or on the leased premises at any time during the lease term. TWENTY-FOURTH. Landlord shall install the initial required interior exit lights and fire extinguishers. Tenant is responsible for the annual upkeep and maintenance of said items during its tenancy. Upon vacation of the leased premises by the Tenant, the interior exit lights and the fire extinguishers shall remain the property of the Landlord. 7 TWENTY-FIFTH. Tenant shall be responsible for any and all utilities immediately after Tenant is given right of possession of the demised premises. Tenant agrees to accept possession of the demised premises upon issuance of a temporary Certificate of Occupancy. In the event that a permanent or temporary Certificate of Occupancy is issued and the Lease commences on any day other than the first day of any calendar month, and the Landlord's Work is complete and the office is substantially completed, the rental payment shall commence and shall be prorated on a daily basis of $1,952.78 (base monthly rental of $48,947.92 plus monthly escrow expense of $9,635.42 - totaling $58,583.34 - divided by 30 days). TWENTY-SIXTH. At the end of the original Lease term or any renewals or extensions thereof, Tenant shall surrender the leased premises to Landlord in the same condition and state of repair as they were at the beginning of the original lease term, ordinary wear and tear and damage from fire or other casualty covered by insurance excepted, including Tenant constructed offices, if any. TWENTY-SEVENTH. Should the Tenant change the locks to the leased premises at any time during its tenancy, Tenant shall provide Landlord with an entrance key to the building immediately after making said change (to be used for emergency access only). TWENTY-EIGHTH. The normal maintenance of and repairs to the heating, air conditioning and plumbing shall be the Tenant's responsibility. Landlord shall make such systems operate properly at the inception of this Lease. Tenant shall maintain an annual contract with a qualified Heating and Air Conditioning Contractor to service and maintain the heating and air conditioning equipment. Tenant shall provide Landlord with proof of said contract each year of the lease term. Tenant shall be given the benefit of any new installation warranties on any HVAC equipment. TWENTY-NINTH. Provided Tenant is not in default, or has not been in material default for over thirty (30) days hereunder, Tenant herein is hereby given an option to renew this Lease for an additional term of Five (5) Years beginning November 1, 2007, and expiring October 31, 2012, on the same terms and conditions as set forth herein except that the base monthly rental during the option period shall be the greater of $57,758.00 or the: Consumer Price Index for all Urban Consumers (CPI-U) for the States of New York, New Jersey, Connecticut and Pennsylvania (with base years of 1982 through 1984 = 100) as issued by the United States Department of Labor for June 2005, divided by the same index for June 2000, multiplied by the average base monthly rental of $48,947.92. Tenant may exercise this option by giving written notice to Landlord at least one hundred thirty-five (135) days prior to the end of the then current Lease term. In the event said index is no longer published, another index indicating inflation with similar content to the aforesaid index shall be used. The minimum CPI adjustment shall reflect a 2-1/2% per year increase. THIRTIETH. Landlord shall be responsible for a brokerage commission as set forth in a separate Agreement to Insignia/ESG, Inc., 1002 E. Lincoln Drive West, Marlton, New Jersey, 08053. Tenant and Landlord represent and warrant, each to the other, that they have not created any other brokerage obligations nor discussed this premises with any other broker and shall indemnify the other from any liability resulting therefrom. THIRTY-FIRST. Tenant agrees to furnish from time to time, within ten (10) business days after requested by Landlord or any successor to Landlord or by the holder of any mortgage covering the land and building or any interest of Landlord therein, a certificate signed by Tenant to the effect that this Lease is then presently in full force and effect and specifying any modifications and the following, if true; that the term of this Lease has commenced and the full rental is then accruing hereunder; that Tenant has accepted possession of the premises and that any improvements required by the terms of this Lease to be made by Landlord have been completed to the satisfaction of Tenant; that no rent under this Lease has been paid more than thirty (30) days in advance of its due date; that the address for notices to be sent to Tenant is as set forth in this Lease; that Tenant, as of the date of such certificate, has no charge, lien or claim of offset under this Lease or otherwise against rents or other charges due or to become due hereunder; and that to the knowledge of Tenant, Landlord is not then in default under this Lease. Tenant, upon reasonable request of Landlord (not more often than annually), shall furnish a current statement of the financial condition of Tenant prepared by an independent Certified Public Accountant or provide Landlord with its current published financial statement. 8 THIRTY-SECOND. This Lease and all rights of the Tenant hereunder are subject and subordinate to any mortgages or other instruments of security which do now or may hereafter cover the building and the land or any interest of Landlord therein, and to any and all advances made on the security thereof, and to any and all increases, renewals, modifications, consolidations, replacements and extension of any of such mortgages or instruments of security. This provision is hereby declared by Landlord and Tenant to be self-operative and no further instrument shall be required to effect such subordination to this Lease. Tenant shall, however, from time to time, within ten (10) days, execute, acknowledge and deliver to Landlord a commercially reasonable subordination agreement; provided that such agreement provides that so long as Tenant is not in default of this Lease the rights of Tenant under this Lease shall not be disturbed or terminated. THIRTY-THIRD. Tenant is hereby given permission to install a 24" Satellite Dish on the roof on the following conditions: (1) Prior to placement of the Satellite Dish on the roof of building, Tenant shall consult with Landlord's representative as to specific location of the Dish and method of installation. (2) The installation, maintenance and removal of the Satellite Dish shall be the sole responsibility of Tenant. Tenant shall place, remove and maintain at its own risk the Satellite Dish on the roof of the building. Any insurance deemed advisable for such Satellite Dish shall be purchased by Tenant at Tenant's sole cost and expense. Neither Landlord nor Landlord's agents, employees or contractors shall be liable for the theft or misappropriation thereof, nor for any damage or injury to the Satellite Dish caused by wind, water, snow, frost, heat, cold or by the act or neglect of any other tenants or occupants of the building whatsoever, unless the same shall solely and proximately result from the sole negligence of Landlord or Landlord's agents or employees. Tenant shall indemnify and hold Landlord harmless from and against any and all claims, judgments, causes of action, losses, costs or damages arising from any act, failure to act or other occurrence causing death or injury to any person or damage to property due directly or indirectly to the installation, use, maintenance or removal of the Satellite Dish. (3) Upon termination of the Lease, Tenant shall remove at its sole expense the Satellite Dish from the roof of the building and restore the roof to its condition immediately prior to placement of the Satellite Dish on the roof. (4) The Tenant shall obtain all necessary state and governmental approvals, licenses, permits, etc. with respect to the Satellite Dish and supply Landlord with copies of same. THIRTY-FOURTH. Upon execution of this Lease, complete and final sealed construction plans are to be developed at the Tenant's expense by Styer & Associates, East Lancaster Avenue, Plaza 16, Ardmore, Pennsylvania, 19003, ("Plans") or other designated architectural design firm selected by the Tenant. Landlord agrees to coordinate, administrate and assist in the interior fit-out expenses in an initial "base" amount of $20.00 per square foot which is included within the base rental hereunder ("Tenant Work"). The Tenant will be responsible to pay for all fit-out expenses exceeding the "base" amount defined as the "overage" which may be paid as follows: (a) The Tenant may elect to pay the "overage" by increasing the rent during the term hereof by .13(cent) per square foot for each $1.00 per square foot of "overage" cost in excess of the "base" $20.00 per square foot of fit-out (amortization of the "overage" costs) or, (b) the Tenant may reimburse the Landlord at Lease commencement for fit-out costs in excess of $20.00 per square foot. In any event, all fit-out costs in excess of $25.00 per square foot shall be reimbursed at Lease commencement and not amortized. Reimbursement to the Landlord for any excess shall take place within thirty (30) days of the Township's issuance of the temporary Certificate of Occupancy. Prior to commencement of Tenant Work and within twenty (20) days following execution of this Lease, the Landlord shall provide Tenant with a budget (as prepared by Kay Construction) of the estimated costs of the Tenant Work based on the then current available plans. In the event Tenant reasonably believes that the amount proposed by Kay Construction for the interior fit-out is excessive, then Tenant may seek alternative bids or estimates for construction of the Tenant Work by any responsible, bondable third party, general contractor or sub-contractor. Any delay in the estimated time of completion of the building as a result of the extended bidding process, finalizing contracts, obtaining building permits, or contractor delays as a result of a successful bidder other than Kay Construction will not delay the commencement date of the rent payment. 9 Landlord shall not commence the Tenant Work until approval of the proposed budget by Tenant, which approval shall not be unreasonably withheld. Landlord's Work (as hereinafter defined) includes completion of all exterior site work, landscaping, paving, site lighting, including completion of exterior entrance doors and windows in front and rear walls, concrete slab, roof, three (3) overhead doors, underground electric service to the building (Primary 800 AMP), secondary power terminated at electric meter, telephone conduit to utility room, domestic water, fire sprinkler, installation of sprinkler drops to ceiling height, fire sprinkler standby service water main to sprinkler room, roof-top heating and air conditioning equipment and distribution duct work excluding dedicated computer room special HVAC equipment, all at Landlord's expense. Any additional windows or openings in either of the existing side (end) walls shall be included within the Tenant Work. The balance of all Tenant required interior work including sheetrock walls, floor covering, ceiling, mechanical and electrical systems, etc. are all part of Landlord's fit-out allowance and the Tenant Work. The Landlord fit-out allowance and Tenant Work do not include cubicles, artwork, decorating, etc. which shall be done separately by Tenant. Within ten (10) days from execution hereof, Tenant will provide and maintain either an irrevocable letter of credit, bond, guaranty or other negotiable instrument acceptable to Landlord in the amount of any unreimbursed interior fit-out expenses. The face amount of said instrument shall reduce by approximately one-seventh (1/7th) annually. THIRTY-FIFTH. Upon execution of this Lease, the Tenant and Landlord will commence to prepare a complete set of construction documents for the interior fit-out of the space. The Landlord anticipates a Tenant fit-out construction sequence of approximately 12 weeks from the receipt of the Mt. Laurel Township approved construction plans and permits. The Landlord and Tenant hereby agree to execute a Lease Modification Agreement following Tenant's occupancy reflecting the actual occupancy date if different from November 1, 2000 and Lease shall be modified to reflect the actual date premises is available for Tenants' occupancy. Landlord shall perform, at its expense, subject to the limitations set forth in Item Thirty-Fourth above, all of the work relating to the construction and finishing of the demised premises in accordance with the Plans that are to be approved and agreed to in writing by Tenant and Landlord ("Landlord's Work"). Landlord represents to Tenant that for a period of one (1) year after the commencement date that the Landlord's Work, the demised premises, and the systems and equipment which are part of Landlord's Work, shall be in good working order and condition and free from any and all defects. Tenant shall give written notice to Landlord within such one (1) year period of any condition of the demised premises which Tenant reasonably determines to be defective or other than as represented by Landlord herein. Landlord will, within ten (10) days after receipt of such notice from Tenant, repair any such defective condition at Landlord's sole cost and expense. In addition, Landlord shall assign to Tenant all warranties and/or guaranties with respect to the Landlord's Work. On the commencement date, Landlord and Tenant shall inspect the demised premises and prepare a list of minor and insubstantial construction items to be completed ("Punch List Items"). The Punch List Items shall be completed by the Landlord, at its sole cost and expense, within thirty (30) days following the commencement date. Notwithstanding anything to the contrary contained in this Lease, in the event Landlord has not obtained the building permits and other zoning and/or land development improvement approvals from all state and local governmental authorities and/or instrumentalities necessary to commence construction of Landlord's Work in accordance with the Plans within sixty (60) days following execution of this Lease by both parties and delivery of Tenant's plans to Landlord to be complete for approval by construction official in accordance with municipal requirements, then either Landlord or Tenant shall have the right to terminate this Lease upon written notice to the other, whereupon this Lease shall become NULL AND VOID and neither party shall have any further obligations hereunder. THIRTY-SIXTH. Provided Tenant is not and has not been in material default for over thirty (30) days hereunder, and shall have formally notified Landlord of its need for additional space in this area, Landlord shall first offer any vacant space owned by Landlord in the immediate vicinity of leased premises to Tenant herein 10 prior to entering into a lease with a third party. If an existing tenant in the building has a prior option to expand into adjacent space, this right of first refusal shall be subject to the prior option. After notice to Tenant of available space, Tenant shall have five (5) days to exercise its right hereunder or this right of first refusal for additional space shall terminate. THIRTY-SEVENTH. The base design of the Site Plan for the proposed building contained approximately 185 parking spaces as originally designed. The Tenant has a future need for additional parking and upon the request of Tenant, Landlord agrees to expand the parking lot to the area shown on Exhibit "A" (Concept Site Plan) as "future parking and aisle area". The parties agree that the Landlord will complete that area, which will provide not less than 75 additional parking spaces. Said work is to be done either concurrent with completion of the fit-out or immediately after, whichever is the most expeditious way to handle with Township officials, but in no event shall construction of the additional parking commence later than thirty (30) days following receipt of all required governmental approvals. Landlord agrees that the additional cost of said parking area shall not exceed the estimated cost of approximately $75,000.00. The cost of said work is to be divided equally between the Landlord and Tenant. Landlord and Tenant agree that Tenant shall reimburse Landlord for one-half (1/2) of the total cost of said work (not more than $37,500.00) immediately upon completion and acceptance by the Township of said parking area. In the event that the fit-out costs for the interior of the building are less than $20.00 per square foot, the Tenant's share of the parking lot cost may be included as part of the interior fit-out cost. THIRTY-EIGHTH. The final Lease execution by all parties to this Agreement is contingent upon approval of the Business Grant by the New Jersey Economic Development Authority. The Tenant hereunder is responsible for the application. The Landlord shall not commence any portion of the plans, permits or Tenant fit-out until such time as this contingency is satisfied or waived by the Tenant. THIRTY-NINTH. This Lease sets forth all the covenants, promises, agreements, conditions and understandings between the Landlord and the Tenant concerning the leased premises and there are no covenants, promises, agreements, conditions or understandings, either oral or written, between the parties other than those set forth herein. Except as otherwise provided, no subsequent alterations, amendments, changes or additions to this Lease Agreement shall be binding upon the Landlord or Tenant unless reduced to writing and agreed to and signed by an authorized representative of Landlord and an authorized officer of Tenant. If any term or provision of this Lease Agreement is to any extent invalid or unenforceable, the remaining terms and provisions of this Lease Agreement will not be affected thereby, but each term and provision of this Lease Agreement will be valid and be enforceable to the fullest extent permitted by law. IN WITNESS WHEREOF, the parties hereto have caused these presents to be signed by their corporate officers and caused the proper corporate seals to be affixed, the day and year first above written. PARKERS CREEK, II, L.L.C. BLUESTONE SOFTWARE, INC. BY: /s/ Warren W. Stevens BY: /s/ S. Craig Huke - ----------------------------- ---------------------- Warren W. Stevens S. Craig Huke President CFO WITNESS: ATTEST: /s/ Timothy A. Stevens /s/ Mary Gatto - ------------------------------ --------------------------- Timothy A. Stevens Mary Gatto Secretary Director of Corporate Real Estate 11 EXHIBIT "A" - SITE PLAN Attached hereto and made a part of the Lease Agreement between PARKERS CREEK, II, L.L.C. and BLUESTONE SOFTWARE, INC. 12 PARKERS CREEK, II, L.L.C. BLUESTONE SOFTWARE, INC. BY: /s/ Warren W. Stevens BY: /s/ S. Craig Huke - ----------------------------- ------------------------ Warren W. Stevens S. Craig Huke President CFO WITNESS: ATTEST: /s/ Timothy A. Stevens /s/ Mary Gatto - ------------------------------ --------------------------- Timothy A. Stevens Mary Gatto Secretary Director of Corporate Real Estate 13 EXHIBIT "B" - ARCHITECTURAL PLAN Attached hereto and made a part of the Lease Agreement between PARKERS CREEK, II, L.L.C. and BLUESTONE SOFTWARE, INC. 14 PARKERS CREEK, II, L.L.C. BLUESTONE SOFTWARE, INC. BY: /s/ Warren W. Stevens BY: /s/ S. Craig Huke - ----------------------------- ----------------------- Warren W. Stevens S. Craig Huke President CFO WITNESS: ATTEST: /s/ Timothy A. Stevens /s/ Mary Gatto - ------------------------------ --------------------------- Timothy A. Stevens Mary Gatto Secretary Director of Corporate Real Estate 15 EX-10.3 5 a2030615zex-10_3.txt LICENCE AGREEMENT EXHIBIT 10.3 LICENCE AGREEMENT Agreement Date: February 7, 2000 1a. Operator - Registered Address: Regus (UK) LTD - Trafalgar Division 1 Northumberland Avenue Trafalger Square London WC2N 5BW 1b. Operator - Location Regus Marble Arch Tower 55 Bryanston Street Marble Arch London W1H 8AA Bank Details: National Westminister Bank 2a. User - Registered Address Company Name: Bluestone Software Inc. Contact/Title: Mr. Steven Bale Address: 300 Stevens Drive Philadelphia, PA 3. User's Suite Room No.(s): 509 & 603 or such other room within the accommodation as allocated by the Operator in substitution from time to time Deposit Receipt L6113.00 In respect of the agreed accommodation on behalf of Regus UK Ltd. Standard Facility Fee L1702.00 per calendar month VAT L297.85 Term Commencement Date: February 28, 2000 Termination Date: August 8, 2000 Comments: contract to start February 28th and 8% discount Office 509 List 1850 + vat per month - 8% = L1702.00 + vat per Month. Client will move to office 603 on April 4, 2000 and the monthly rental will then be List price L4795.00 - 8% + L4411.40 + vat per month for the next 5 months bringing total contract to six months. Should there be a break in the contract or late start to occupying Office 603 then the discount will be reduced to 5% per month. Regus terms normally 2 months deposit per office, will accept One month rent fee for office 509 and one month rent fee for Office 603. Total deposit due to secure both offices = L6113.00. Once occupying office 603 should facility bills match deposit held extra deposit will be required i.e. L4411.40. This License Agreement (hereafter LA) is made between the User whose name appears in 2 above (hereafter "User") and the Operator whose registered name and address appear in 1a (hereafter "Operator"). The Accommodation is the 2nd, 3rd, 4th, 5th, 6th and 7th floors of Marble Arch Tower, 55 Bryanston Street, Marble Arch, London, W1H 8AA (hereafter "Accommodation"). The User hereby confirms that the User has read and understood the terms and conditions overleaf and agrees to be bound thereby and The Operator agrees to provide the services and facilities as mentioned overleaf. For and on behalf of The Operator For and on behalf of The User Name (printed): Kelly Dean Name (printed): S. Craig Huke Title: Area Sales Manager Title: Senior Vice President and CFO Signature: /s/ Kelly Dean Signature: /s/ S. Craig Huke - --------------------------------- ------------------------------------ 1 TERMS & CONDITIONS 1. FACILITIES AND SERVICES PROVIDED UNDER THIS AGREEMENT a) In consideration of the payment by the Client of the standard facility fee specified in box 3 overleaf each month, the Operator provides the Client with access to and use of fully furnished office accommodation ("the Accommodation") as specified overleaf in box 3 and public areas such as reception, kitchen, sanitary facilities and photocopying areas during the normal opening hours of 8.30 hrs and 18.00 hrs. from Mondays to Fridays and with express permission from the Operator outside these hours. The standard facility fee includes all rates (except where specifically agreed between Client and Operator). In addition, the standard facility fee includes: - 4 hours free use of the conference room for every complete calendar month of this Agreement, subject to availability - three days office usage at any Regus center world-wide, subject to availability, free of charge for every complete calendar month of this Agreement. - personalized telephone answering - receptionist to greet visitors b) The following service and facilities are made available, for an additional service charge, either directly or through third parties: - secretarial services - photocopying - messaging - courier services - facsimile - travel arrangements - office supplies - translations - meeting rooms - food and beverage services - mail handling - voicemail* - Videoconferencing* - car parking* (*subject to availability) 2. DURATION AND TERMINATION OF THE AGREEMENT a) This Agreement is concluded for the duration specified in section 3 overleaf. Unless terminated in writing by either party giving three months notice (two months if the original duration is three months or less) it will be automatically extended by further periods of three months until three months notice of termination is received to the end of an extension period. b) Extraordinary termination of the Agreement and of the right of access to the business centre i. The Operator may terminate the Agreement or refuse an extension of the Agreement for just cause, including breach of any part of this Agreement. Equally, if the Client, being a company, enters into liquidation whether compulsory or voluntary (save for the purpose of reconstruction or amalgamation) or, being an individual, has a receiving order made against him or becomes bankrupt, the Operator will have the right to terminate all of the Client's rights under the Agreement or such other rights as the Operator will have the right to terminate all of the Client's rights under the Agreement or such other rights as the Operator designates with or without notice to the Client and in addition to and not in lieu of other remedies available. Upon such action by the Operator, the Client will remain liable for all obligations which have previously accrued and will to pay an indemnity equal to 3 months standard facility fee or the total facility fee of the unexpired term whichever is greater. ii. In case of termination of the contract between the Operator and the building owner, the Operator is entitled to terminate the Agreement with the Client by giving the Client at east three months notice to the end of a calendar month. 2 c) Extension of stay beyond the normal period of the Agreement Should the Client require the use of the Accommodation once his agreement his agreement period has terminated and has not been renewed under the general provisions of this Agreement, it is at the Operator's discretion to permit such an extension and it is subject to a surcharge on the standard facility fee. 3. PAYMENT OF THE STANDARD FACILITY FEE AND SERVICES CHARGES a) Standard facility fee The standard facility fee plus applicable VAT as listed in section 3 overleaf is payable in advance on the first working of each month. b) Service charges All service charges for additional services and facilities used plus applicable VAT are invoiced in arrears and are payable within seven days of receipt of invoice. The Operator reserves the right to change the cost of any or all of the service charges at any time during the term of the Agreement by giving 30 days notice to the Client. c) Deposit Prior to being given access to the Accommodation, the Client will pay a deposit specified overleaf as security against all obligations entered into by the Client in this Agreement, including any damage to the Client's Accommodation and furnishings and fittings therein. This deposit will be returned to the Client within 60 days of the Client vacating the premises, subject to the deduction of any outstanding standard facility fee or service charges or other fees outstanding and the cost of returning the Accommodation to the condition it was found in at the commencement of the term, reasonable wear and tear expected. The Operator reserves the right to increase the deposit should the Client's outstanding facility fee and service charges exceed the deposit amount held or if the Client is repeatedly in arrears with payment or invoices. d) Penalties upon late payment The Operator reserves the right to terminate the Agreement and ask the Client to vacate the Accommodation immediately if the standard facility fee is not paid or the service charges for the additional services are not paid by the end of the day they are due. Any invoiced amounts left outstanding after their due date will be subject to interest at the rate of 4% above the prevailing base rate. e) Payment of disputed invoiced items Should part of an invoice issued by the Operator be in dispute, the Client will be obliged to pay by the deadlines mentioned above the part of the invoice which is not in dispute while the disputed amount is being settled between the Operator and the Client without prejudice to paragraph 3(d) above. 4. THE CLIENT'S RIGHTS AND RESPONSIBILITIES a) The Client will be entitled to carry on his business in the Accommodation specified in box 3 overleaf. The Operator reserves the right to request the Client to move to another Accommodation of similar size and equipment within the business centre should this become necessary for business reasons. b) During the term of this Agreement and subject to timely payment of the standard facility fee, the Client is entitled to use the address of the business centre as his business address. Upon termination of the Agreement for whatever reason, it is the Client's responsibly to notify all parties of the change of address. Subsequent mail sent to the address will be returned to sender. c) The Client may only conduct business from the Accommodation in the name of the Client specified overleaf or such other business name as may be agreed in writing with the Operator. d) Upon being given access to the Accommodation, an inventory list will be drawn up in which the Client confirms receipt of keys or entry cards, the condition of the Accommodation and furniture and fittings at the start of the Agreement. e) The keys and entry cards remain the property of the Operator and shall nor be duplicated or transferred to third parties without the express written permission of the Operator. The loss of keys must be reported to the Operator immediately. The cost of lost keys or cards as well as the cost of changing locks will be borne by the Client. Should the Client use the premises outside normal working hours he is responsible for locking all doors used. f) The Client may not alter the Accommodation allocated to him in any way or install any furniture, equipment or telecommunication connections without the prior written consent of the Operator. The granting of this consent is entirely at the discretion of the Operator. 3 g) The Client will conduct his business in a way which does not interfere with the Operator or any other Client of the business centre and will comply with all laws, permits, licensing laws, taxes and any other requirement regulating the conduct of his business. h) The Client may not bring animals into the centre or play loud music or use amplification equipment. i) The Client may not mount name signs or any type of advertising boards visible from outside his immediate Accommodation. If a house directory is available in the business centre, the Client will be included in this. Any costs incurred in doing so will be paid for by the Client. j) The Client may not use the Accommodation for any activities or actions which could be damaging to the Operator or the building owner or which could lead to an increase in the insurance premiums to be paid by the Operator. k) The Client may not offer employment to or hire any of the employees of the Operator. This applies to the entire duration of the Agreement and six months following its termination. If the Client contravenes this provision, the Operator will be entitled to compensation in the sum of the total annual remuneration of the employee(s) in question. l) The Client will remain solely responsible for the safety of its property and personnel and is responsible for arranging contents and third party liability insurance for his equipment and belongings and for his actions and actions of his employees. The Client shall defend, indemnify and hold the Operator harmless from any and all claims, liability or loss arising out of or incident to (i) any injury to or death of persons occurring on or near the Accommodation, (ii) the provision of, or use by the Client of any facilities (including occupancy of the Accommodation) or services hereunder. m) The Client shall take such steps as are necessary to comply with its health and safety obligations and shall comply with such reasonable requirements of the Operator in this regard or in the management of the business centre generally as are necessary from time to time. n) The Client will use the premises for general office purposes only and for no other purposes (i.e. retail or a service open to the general public), and will not use the premises to provide to others services provided by Regus to Regus Clients and will not in any way whatsoever use or combine the Regus name, in whole or in part, for the purpose of trading activities. o) The Client shall vacate the Accommodation on the day of expiry of this Agreement leaving the Accommodation in the same condition as it was found save fair wear and tear. The Operator does not accept responsibility for any belongings of the Client left in the Accommodation and has the right to dispose of such property. p) Joint and several liability Should the Client be more than one person, all parties to the Agreement are liable jointly and severally for all obligations arising from the Agreement. 5. THE OPERATOR'S RIGHTS AND RESPONSIBILITIES a) The Operator is responsible for: - general maintenance of the business centre and the Client's Accommodation - cleaning of the entire business centre - adequate lighting during normal opening hours - maintenance, checks and renewals of equipment in the business centre b) The Operator has the right to enter the Client's Accommodation, upon giving reasonable notice, to inspect them, undertake repairs and maintenance work and to show the Accommodation to prospective Client. c) The Operator will not be liable for any loss sustained as a result of the Operator failing to provide any of the services as set in this Agreement as a result of any mechanical breakdown, strike, delay or failure of any staff, manager or caretaker to perform their duties unless acting with gross negligence and intent. d) If the Client cannot be given access to the Accommodation or services temporarily the Operator's liability will be limited to forfeiting the standard facility fee chargeable for that period. e) If the Operator is unable to deliver permission of any part of the Accommodation to be provided at the commencement of the term, the Operator will not be liable for any resulting damage nor will he have any liability except that the Client will not have to pay the standard facility fee for the period concerned and may withdraw from the Agreement. 6. OTHER PROVISIONS a) This Agreement represents a contractual agreement between the Client and the Operator for the provisions of services by the Operator to the Client. The Operator and the Client acknowledge by their execution hereof that no tenancy or lease rights are created in favour of the Client. 4 b) This Agreement is not assignable by the Client without the express written permission of the Operator. c) This agreement may be transferred to another Regus centre world-wide with 60 days notice. d) All notices by the Client or the Operator to the other must be in writing and delivered to an officer or authorized representative of the party concerned or sent by registered mail to the respective address shown overleaf. e) The invalidity or unenforceability of any provision herein will not affect or impair the validity of any other provision. No waiver of any default of the Client will be implied from any failure by the Operator to take action with respect to such default. f) This Agreement supersedes any prior agreement and embodies all the contractual stipulations between the Client and the Operator relative to its subject matter. g) Venue and jurisdiction. This Agreement is interpreted and enforced in accordance with the laws of the country in which the Regus centre in question is registered, as specified in box 1, a overleaf. 5 EX-10.4 6 a2030615zex-10_4.txt LICENCE AGREEMENT EXHIBIT 10.4 LICENCE AGREEMENT FOR THE SUPPLY OF OFFICE FACILITIES PARTICULARS DATE "THE LICENSOR" citibase plc whose registered office is at: Mount Manor House 16 The Mount Guildford Surrey GU2 5HS whose company registration number is: 2767719 "THE LICENSEE" Arjuna Solutions Ltd. whose registered address is: Scottish Provident House 31 Mosley Street Newcastle upon Tyne NE1 1HX whose company registration number is: 3657462 "THE SURIETY" Mr. Steve Caughey whose address is: 37 Rothwell Road Gosforth Newcastle upon Tyne NE3 1TY "THE BUILDING" The Licensor's complex at: Churchill House 12 Mosley Street Newcastle NE1 1DE "THE SUITE" Allocated Suite Number M.5 at The Building or such other suite within The Building as is from time allocated to the Licensee "THE COMMENCEMENT DATE" 15th day of September 200 "THE PERIOD" 6 months from The Commencement Date "THE FEE" 3000.00 (excluding VAT) per calendar month for The Period commencing on the 15th day of September 2000 to the 14th day of December 2000 and then 3230.00 (excluding VAT) per calendar month for The Period commencing on the 15th day of December 2000 to the 14th day of March 2001 1 "THE STANDARD TERMS" The terms and conditions set out in the attached document headed "Standard Terms and Conditions" which are inserted into this document "THE DEPOSIT" 6460.00 pounds "PERMITTED BUSINESS" The Licensee's business is Selling of Software Products 1. The Licensor and the Licensee agree that the Licensor shall make available to the Licensee the Suite for the Period on payment of the Fee on the terms of the Standard Terms. 2. Words defined in this Agreement shall bear the same meaning in the Standard Terms. 3. The Surety agrees with the Licensor at the request of the Licensee in the terms of clause 6 of the Standard Terms. As WITNESS the hand of the parties hereto: SIGNED BY SIGNED BY /s/ David Ingham -------------------------------- duly authorized on duly authorized on behalf of the LICENSOR behalf of LICENSEE Print Name Print Name David Ingham in the presence of: in the presence of: /s/ A. Davis -------------------------------- (the Witness) (the Witness) A. Davis Address Address SIGNED BY /s/ S. Caughey -------------------------------- the Surety Print Name Steve Caughey 2 STANDARD TERMS AND CONDITIONS THIS AGREEMENT is BETWEEN The Licensor and the Licensee 1.1 The Licensee has licence for The Period space (unless determined earlier pursuant to the provisions of this Agreement) to use The Suite and to use the Licensors furniture and fittings therein. 1.2 The Licensor also agrees to make available to the Licensee the office facilities from time to time available to the occupiers of the Building which facilities and the current rates of charge therefore are from time to time set out in the latest issue of the Facilities Sheet or otherwise notified by the Licensor to the Licensee ("The Facilities") 1.3 The Licensor will also make available adequate lavatories and washrooms for use by the occupiers of the Building. 1.4 The Suite shall be available at all times and the Facilities shall be available during usual office hours between 8:30am and 6:00pm Mondays to Fridays (other than Public and Bank Holidays). 2.1 During the continuance of this Licence the Licensee shall pay to the Licensor the fee for each calendar month (together with such value added tax as may be payable thereon) by Standing Order to the Licensors bank account each month for the use of the Suite and for the services set out in Clause 4 (which are included in The Fee) and which shall be payable monthly in advance the first of such payments or a proper proportion of the same in respect of the calendar month or part thereof commencing on the date hereof to be made on the signing hereof and subsequent payments to be received by the 1st day of each month of this Licensee until all Licence Fees due during the currency of this Licence shall have been paid (and in the event of any overpayment the same shall be returnable to the Licensee and shall not be deemed to be referable to any other or additional Licence Period). 2.2 On signing this Agreement the Licensee will pay to the Licensor The Deposit. 2.3 After Expiry or termination of this Licensee there shall be refunded to the Licensee any unexpired licence fees paid in advance and the deposit less in each case any sums due to the Licensor from the Licensee under the provision of this Agreement or otherwise. 3.0 The Licensee hereby agrees: 3.1 Not to use the Suite other than the Licensee's Permitted Business and to conduct such business from the Suite in a way which does not interfere with the Licensor or with other occupiers of the Building. 3.2 To Pay (in addition to the fee) to the Licensor the cost of the Facilities used by the Licensee which shall invoiced at the end of every month and shall be paid by the Licensee within seven days save that the Licensor may invoice telephone services at such more frequent intervals as the Licensor shall decide and the same shall be paid by the Licensee within two working days (failing which services may be withdrawn until payment is made). 3.3 Not to permit the Suite to be occupied by more than one person for every fifty square feet of the Suite. 3.4 Not to impede or interfere with the Licensors right of possession and control over the accommodation. 3.5 To give all reasonable assistance and facilities to the Licensor for the purpose of the inspection cleaning and repairing of the Suite and for other reasonable purposes. 3.6 Not to install any furniture or equipment nor alter the Suite or its internal layout without the prior written approval of the Licensor. 3 3.7 Not to interfere with the conduct of the Licensor's business. 3.8 Not to damage or remove any of the decorations, fixtures and fittings or other equipment within the Suite or the Building or permit the same to occur and to pay to the Licensor the cost of any repairs or replacement that shall become necessary as a result of any breach of this provision. 3.9 Not to affix or display anything in the windows or doorways of the Suite without the consent in writing of the Licensor. 3.10 Not to withhold nor demand nor receive refund or credit of any payment due hereunder as a result of the Licensor failing to provide any of the services specified in this agreement or any of the Facilities or as a result of any mechanical breakdown strike delay or failure of any staff manager or caretaker to perform their duties. 3.11 To observe and perform all the rules and regulations from time to time made by the Licensor for the management of the Suite or of The Building generally. 3.12 To vacate the Suite on the expiry or termination of this Agreement the Licensor not being responsible for any item of furniture personal effects or other belongings left in the Suite by having the right to dispose of such property. 3.13 To occupy the Suite personally and not to purport to assign or novate or dispose of the benefit of this Agreement or otherwise share or allow others to occupy the Suite. 3.14 Not during or for a period of six months after expiry or terminations of this Licence to employ any person who has been in the employment of the Licensor at The Building provided that if notwithstanding this agreement such employment is agreed or made and accepted the Licensee shall pay a liquidated damages to the Licensor a fee equivalent to forty percent of the annual salary that such employee was receiving from the Licensor (together with value added tax). 3.15 To pay to the Licensor interest at three per cent per annum above the Royal Bank of Scotland Base Rate for the time on the sums not paid to the Licensor on the due date until the date such sums are paid. 4.0 The Licensor will at no additional charge (the cost of these items being included in the Fee): 4.1 Provide (during the like hours that the Facilities are available as stated in Clause 1) receptionist and telephone answering (if available) and message taking services. 4.2 Provide electrical power and heating and lighting facilities for The Building. 4.3 Provide cleaning of the Suite and common parts and lavatories and washrooms and kitchens. 4.4 Provide hot and cold water soap and towels in the lavatories washrooms of The Building. 4.5 Pay general and water rates for the Suite. 4.6 Provide a suitable sign in the entrance hall of The Building exhibiting the name of the occupies of The Building including that of the Licensee. 4.7 Effect insurance sufficient to meet the requirements of the Employer's Liability (Compulsory Insurance) Act 1969 in respect of the Licensor's employees and also covering property belonging to or provided by the Licensor. 5.0 The parties hereby mutually agree: 5.1 The Licensor shall not be liable to the Licensee or its employees invitees or any other persons for any accident, loss, damage, nuisance or inconvenience caused: 4 5.1.1 By the failure, stoppage, leaking, bursting or defect or any soil, gas, water, electricity, hot or cold water, sanitary or other apparatus or supply or 5.1.2 By reason of the breakdown of defect of the Facilities or of any plant and machinery mechanical or electrical equipment in the Suite or in The Building or any adjoining or nearby premises or 5.1.3 By the failure to clean, repair or light any adjoining or nearby premises. 5.1.4 By the misconduct or negligent act or failure by the Licensor and its employees, agents, contractors and those authorized or directed by the Licensor or any visitor lawful or unlawful to or on any adjoining or nearby premises to carry out his or their duties. 5.1.5 By the failure of the Licensor to provide any of the Facilities available to the Licensee because of their use by any other occupier of the Building. 5.1.6 By the temporary inability of the Licensee to gain access to the Suite. 5.1.7 And the Licensee shall indemnify the Licensor against any claims which may be made against the Licensor by any of the Licensee, its employees, invitees or others or any third party arising in any way from the Licensee's occupation or use of the Suite. 5.2 That the Licensor shall not be responsible to effect any insurance save that expressly provided in this Agreement and the Licensee shall be responsible for effecting its own cover in respect of any other risks including without limitation in relation to the Licensee's own contents and the Licensee's liability to the public and employees. 5.3 That this Licence may be terminated (without prejudice to accrued rights and obligations) by either the Licensor or the Licensee at any time on not less than 3 months written notice to the other and for the avoidance of doubt where this Agreement is entered into prior to that date that occupation is due to commence it is agreed that such termination notice may be given at any time after the date hereof (whether before or after the date that such occupation is due to commence). 5.4 That this Licence may be terminated (without prejudice to accrued rights and obligations) by the Licensor giving to the Licensee one weeks notice in writing in the event of the Licensee committing any breach of his obligations hereunder and without limitation if any money due from the Licensee to the Licensor is not paid within 7 days of the due date (whether demanded or not) the Licensor may treat this as a breach entitling the Licensor to serve a notice of termination. 5.5 That this Agreement grants only a licence to occupy and no rights of exclusive possession tenancy or lease and none shall come in existence between the parties unless so created in writing. 6.0 The Surety agrees with the Licensor for himself and to bind his personal representatives that the Licensee will throughout the Period pay the Fee and observe and perform all his obligations of the Licensee under this Agreement and in default the Surety agrees to pay the Fee and observe such obligations as primary obligations. 5 EX-27 7 a2030615zex-27.txt FDS
5 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 149,084 37,677 10,141 565 0 198,615 6,185 2,708 217,231 13,445 0 0 0 21 203,765 217,231 21,249 28,255 746 8,966 46,080 571 63 (18,873) 0 (18,873) 0 0 0 (18,873) (.94) (.94)
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